Venture capital can be used as a financial tool for development, within the range of small and medium enterprises (SME) finance, by playing a key role in business start-ups, existing small and medium enterprises and overall growth in developing economies. Venture capital acts most directly by being a source of job creation, facilitating access to finance for small and growing companies which otherwise would not qualify for receiving loans in a bank, and improving the corporate governance and accounting standards of the companies.

Venture capital (VC) is funding invested, or available for investment, in an enterprise that offers the probability of profit along with the possibility of loss.

One way to define traditional "venture capital," involved: -

* New technology, new marketing concepts, and new product application possibilities;
* A significant, although not necessarily controlling, participation by the investors in the company's management;
* Investment in ventures staffed by people of outstanding competence and integrity (herein the rule often referred to in venture capital as "bet the jockey, not the horse");
* Products or processes which have passed through at least the early prototype stage and are adequately protected by patents, copyrights, or trade-secret agreements (the latter rule is often referred to as investing in situations where the information is "proprietary" (proprietary information));
* Situations which show promise to mature within a few years to the point of an initial public offering or a sale of the entire company (commonly referred to as the "exit strategy");

For more than six years, there has been a rapid global evolution and expansion of the Islamic financial services industry. Islamic finance has become an increasingly significant part of the international financial system, witnessing exceptional growth not only in the Muslim world, but also in non-Muslim nations.

Alternative sources of financing have been developed and have become progressively more important. Venture capital is an area that can benefit from enhanced focus given that its structure is consistent with the concept of Musharakah (profit sharing via a joint venture), making it an appropriate Islamic financing and investment option. To promote the venture capital industry, the Malaysian Government has set up the Malaysian Venture Capital Development Council which provides strategic direction and coordinates the implementation of policies to develop the industry. The Government has announced the allocation of RM1.6 billion under the 9MP to support the venture capital industry. To accelerate the development of this industry, the Government has granted tax exemptions to venture capital companies that invest at least 50% of their funds in the form of seed capital. Even so, the Islamic venture capital industry is still very small.

Norwen Shahreedha Mohd Ghazali
Azmi & Associates
Corporate Practice
14th Floor, Menara Keck Seng,
203 Jalan Bukit Bintang,
55100 Kuala Lumpur, Malaysia.
Phone: +603- 2118 5000
Fax: +603- 2118 5111
E-mail: norwen@azmilaw.com