Healthcare case study

WHAT IS A VENTURE CAPITAL TRUST?

A venture capital trust (VCT) is essentially an investment company. In the UK the government introduced VCTs in 1995 as a way of ensuring that investors could invest in start-up companies. The government was keen to encourage investment in entrepreneurial businesses by offering tax relief to investors. Recently there has been discussion and debate about whether VCTs are halal or haram.

For new businesses, VCTs are a great way of raising investment, and for investors they are an opportunity to invest in upcoming businesses.

For anyone looking for Sharia compliant investing, VCTs can be a good opportunity to invest in a halal way. Investing in VCTs can be halal, but you have to ensure that the VCT you invest in complies with Sharia rules about investment and financial transactions.

In recent years, as the Islamic finance market has expanded so too has the desire for Sharia compliant VCTs. The Islamic VCT market is innovative and presents a viable alternative to conventional investment models which are not always acceptable to Muslims who want to invest in line with Sharia rules.

Whilst it is always a personal choice as to where investors want to invest, for Muslims there are additional considerations that require them to be mindful of Islamic laws.

Let's have a look at how VCTs work and how they can operate in a halal way.

HOW DO VENTURE CAPITAL TRUSTS WORK?

VCTs work by raising money and then using the funds to invest in new and innovative companies. Usually these companies are innovative and privately owned. The idea is that the investment raised is then used to generate a profit and solid return for the investment.

The company can be dealing in products and services, offering employment opportunities, and/or meeting a need in the economy. The number of companies seeking investment is never-ending.

As an investor in a VCT, the investor becomes a shareholder of the trust. It is important to note that the investor does not become a shareholder of each individual company, rather the investor becomes a shareholder of the trust in its entirety.

Most VCTs will invest in different companies. This enables the VCT to keep its investment portfolio options diverse and spreads the risk. It is always important to ensure you have all the information you need about the VCT before investing.

When the companies within the trust return a profit, this is paid over to the shareholders.

WHAT DO VENTURE CAPITAL TRUSTS INVEST IN?

Most VCTs will invest in new, small, and entrepreneurial companies across a wide variety of sectors. These can include tech companies, retail, clothing brands, food outlets and many more.

Many of these companies will be privately owned, and some of them are quoted on the Alternative Investment Market or the London Stock Exchange.

Different Types Of Venture Capital Trusts

There are some different types of VCTs. What differentiates them from each other is the investment focus and area:

• specialist VCTs : these are VCTs that remain focused on a specific interest and sector. For example, there are VCTs that only invest in healthcare, or retail. Due to the lack of choice and sector diversification, this often means that they can carry more risk.
• Generalist VCTs : these types of VCT are wide-ranging when it comes to investment. They invest in companies across different sectors. The value to the investor is that there is diversification and less risk.
• AIM VCTs : the Alternative Index Market (AIM) VCTs invest in shares issued by AIM quoted companies. The AIM was set up by the London Stock Exchange in 1995 to ensure that there was a market for companies who can't (or won't) meet the demanding requirements for listing on the London Stock Exchange.

Venture Capital Trusts And Tax Advantages

One of the main reasons VCTs are popular is that they offer tax incentives. Investors can take advantage of:

• tax free dividends
• up to 30% income tax relief
• tax free growth
• capital gains tax exemptions and deferrals

WHAT IS VENTURE CAPITAL TRUST TAX RELIEF?

VCT tax relief can be claimed when an income tax return is filed with HMRC.

What this means for investors is that they can end up with a lower income tax bill, or even a refund if they have already paid their tax.

Islamic Finance And Venture Capital Trusts

Remember, one of the most critical elements of ensuring compliance with Sharia law when investing in venture capital trusts is that you need to work with a Sharia aware, and Sharia compliant, financial advisor.

This will ensure that the investment contract AND investment models are both compliant with Islamic finance rules.

Islamic Venture Capital Trusts Vs Conventional Capital Trusts

The main difference between conventional VCTs and Islamic VCTs is that Islamic VCTs must comply with Islamic finance rules relating to finance and financial transactions.

Islamic VCTs need to stay away from any form of investment in non-permissible, or haram, industries.

A very simple example of this would be as follows: a conventional VCT could invest in brewery shares. However, an Islamic VCT should stay away from any alcohol related industry.

Going further, anyone looking to invest in Sharia compliant VCTs should do additional due diligence and ask questions about the company they invest in. Does it operate ethically? Does it have conventional debts on its book that is interest-based? If so, then the VCT is not considered to be halal.

Advantages Of Investing In Venture Capital Trusts For Muslims

As long as the VCT is Sharia compliant, Muslim investors offer a diverse range of investment options. Muslim investors can take advantage of investing in other Muslim businesses and industries.

There are numerous ethical investment opportunities with halal VCTs that are attractive to Muslims. Socially responsible investing is a core principle of Islamic finance and there are VCTs out there that are ethical and socially responsible.

Halal VCTs also offer the potential for job creation with early stage companies. Supporting these businesses mean Muslims can indirectly be helping struggling economies and economic development. This aligns with the Islamic finance principles that relate to promoting economic wellbeing and financial inclusion.

WHAT IS WAKALA?

Wakala is a popular model Islamic VCTs when it comes to raising capital.

Wakala permits the asset manager of the trust (on behalf of the investor) to act on their behalf based on agreed conditions and terms.

Both parties then share the profits generated, and take on the risk of any losses together. This kind of profit and loss sharing arrangement aligns with Islamic finance principles.

Mudaraba And Venture Capital Trusts

When it comes to investing in start up companies, mudaraba is a common model that is used. The mudaraba contract is a contract that enables one party to the contract to bring assets in and for the other party to bring in effort and experience.

This means that investor provides the financing, and the entrepreneur takes responsibility for the day to day management of the trust. The contract outlines the respective responsibilities of each party and the profit sharing arrangement.

As already mentioned, despite the many advantages of halal VCTs, investors need to work with Sharia compliant advisors who can direct them to halal VCTs.

Consulting with knowledgeable advisors means you have specific guidance and adherence to Sharia rules.

The United Kingdom, and in particular London, has become one of the leading voices and stages for the development of Islamic finance. As the global Islamic finance industry has grown, London has emerged as one of the leading Western markets offering and improving Islamic finance services and products.

One of the key reasons for the investment and development of the Islamic finance market in London is to ensure that the finance markets and industry is able to keep pace with the emerging and dynamic markets in the Muslim centred Middle East region (Dubai and the UAE included).

The Islamic Finance Industry

There are other reasons Islamic finance has really surged ahead in London, and they include the importance of financial inclusion and providing access to funding and finance to those looking to invest in the economy without compromising their beliefs.

The UK is not the only country that is fast developing its Islamic finance reputation, regulation, and provision. Most European countries also offer Islamic finance products and services to individuals and companies.

What has become clear is that Islamic finance has enabled many people from diverse backgrounds to trade, invest and operate a business in the West. This can only be a good thing for the economy and when it comes to financial inclusion.

Interest, Profit Sharing And Risk Management

Many Muslims only use the Islamic finance system so that they do not have to pay interest and can trade and deal with any income, savings, investment strategy, and asset they own in a Sharia compliant way.

The result is that the Islamic finance industry is booming and entering the mainstream finance industry.

Islamic finance has opened up and increased the scope of investment options for investors wanting to raise or build capital, property and other assets.

In addition, the profit and risk sharing element of Islamic finance transactions and contracts are growing in appeal to a much wider audience. The first Islamic finance bank launched in the UK in 1982 - the Al Baraka Bank. Since then the Sharia compliant market has seen growth on a huge scale with Islamic finance products available in trade finance, project finance and real estate.

The Islamic sukuk (bond) market in the UK started around 2007 and has continued to grow. In 2014, the UK government was the first to issue sovereign sukuk.

Understanding Islamic Finance - Knowledge Matters

Many financial experts and researchers have become knowledgeable about Islamic finance and how it operates. In order to offer financial services and products that are Islamic finance and Sharia compliant, there needs to be a good depth of understanding relating to Islam and its principles and rules.

Islamic finance has proven to yield competitive and attractive rewards, and Islam's core underlying principle relating to social justice and equity is becoming more attractive to Muslim and non-Muslim customers alike.

The focus on risk sharing and collaboration between the parties means transactions are more transparent and fair. This in turn creates more stable investment options in volatile markets and economies.

Uk Leading Western Islamic Finance Centre

A recent report from The City UK has stated that the UK is the leading Western centre for Islamic finance. In 2021, the Islamic finance banking asset market was said to be worth approximately $7.5bn.

In addition to general Islamic finance products, Islamic fintech is also growing rapidly in the UK and Europe. The strong regulatory support from the UK government has led to an increasing number of Sharia compliant fintech services.

The UK has also been able to reach attract a large number of professionals with Islamic finance knowledge and expertise.

The growing Muslim population in the UK, the vast majority of whom are young professionals with capital, further strengthens the UK's resolve to continue developing its Islamic financial services market.

London Stock Exchange

The London Stock Exchange (LSE) is one of the leading exchanges for sukuk listings.

In addition, The UK has become one of the world's biggest providers of Islamic finance education. There has been a recent surge in the number of Islamic finance courses and qualifications available to those wanting to expand their knowledge and work in this field.

What is driving this demand for Islamic finance services is private sector initiatives. This coupled with support from government policy and compliance rules has provided a solution for those investors and businesses looking for financial services that are compliant with Islamic finance rules.

Investment

If the UK wants to continue to strengthen its position and status as a leading international centre for Islamic finance then it needs to continue to invest in the Islamic finance market.

This will require the development and progression of the right financial infrastructure and ecosystem to support the industry. It is forecasted that the Islamic finance assets under management are likely to double over the next decade.

The UK is well placed to grow its Islamic finance market and offerings. However, this must be done in line with Sharia rules relating to finance without cutting corners and innovation which could lead to non-compliance. More investment needs to be made in research relating to how Islamic finance operates so that any investor is reassured that their Islamic values are not being compromised during financial transactions.

The growing confidence in the Islamic finance market in the UK has attracted investments in regeneration projects and infrastructure - thereby directly benefiting society as a whole.

Cryptocurrency is a form of virtual currency that is based on blockchain technology. Cryptocurrency is a digital asset, and the vast majority of cryptocurrencies are based on decentralised networks. This means that the currencies exist outside of centralised structures such as governments and banks.

The blockchain technology makes it virtually impossible for the system to be duplicated, hacked, or cheated, and acts as a centralised ledger of the currency. Digital assets such as bitcoin are still relatively new assets on the global financial markets. Many Muslims are seeking clarity as to whether cryptocurrency is deemed to be halal and Sharia compliant from an Islamic perspective.

The mathematical value calculation of cryptocurrency coins is based on the algorithm of the blockchain itself. Blockchain technology is seen as being an efficient, safe, and undeletable system. This lends credence and transparency to the cryptocurrency market. The question of whether bitcoin and other digital assets are halal is one that has been discussed and debated in recent years.

The former Sharia adviser to Blossom Finance, Mufti Muhammad Abu-Bakr, compiled a report in 2019 that stated that cryptocurrencies, including bitcoin, should be deemed to be halal and permissible under Sharia law. Mufti Abu-Bakr's decision was made on the basis that all traditional (and permissible) currencies tend to have a speculative element and cryptocurrencies should therefore be permissible in Islam. Since his report, Muslims have considered investing, trading, and exploring bitcoin as a new way of transacting with others.

Scholars

In 2018, scholars from the Sharia Review Bureau in Bahrain stated that investment in cryptocurrency and coins such as Ethereum and bitcoins were permissible under Sharia law and halal. Their view was that bitcoin could be considered property (maal), and did not contain any form of interest.

Similarly, the Fiqh Council of North America has unanimously decided that bitcoin is permissible. Furthermore, the Sharia Advisory Council branch of Malaysia's security commission has advised that trading and investing in cryptocurrencies is permissible. This means that digital currencies can also be used to make zakat payments.

The Shacklewell Lane Mosque in London was one of the first mosques in the UK to accept cryptocurrency donations from Muslims. Most scholarly interpretations of digital currencies in the last few years have determined that cryptocurrencies are in fact halal.

Whilst many scholars have researched and reviewed the digital currency market, it is important for investors to undertake their own research before investing. In order to consider whether bitcoin is halal, we need to delve into the history of money from an Islamic perspective so that we can revisit the centuries-old Sharia rules relating to finance and investment.

This article will examine the historical perspective and apply the current interpretations in relation to bitcoin.

How Cryptocurrency Works

All cryptocurrency coins are virtual coins that exist in the crypto market, they do not have any physical form. The actual proof of legal ownership of the digital money is recorded on blockchain technology. The blockchain acts as a public record that records the digital growth of the coin, and the value of each coin.

Cryptocurrency works by recording transactions on a ledger and creating blocks. The ledger is available 24/7 and cannot be changed or overwritten. It is virtually impossible to counterfeit crypto, and all the computers that store blockchain technology have to 'agree' to comply with the accurate version of the ledger. When anyone purchases digital currency such as bitcoin they then own a private key that provides them with a code that authorises cryptocurrency transactions.

In the UK there are now cryptocurrency ATMs in London and further down south in areas including Plymouth and Penzance.

What Is A Bitcoin

Bitcoin was first created as a digital currency after the 2008 global market crash caused by the banks. At the time, there was a lot of interest in and demand for a decentralised system of money that was not controlled by banks and governments.Key features of bitcoin include the following:

• It is decentralised - there is no central power controlling it, instead is it based on sophisticated computer programmes
• It is transparent - everyone on the ledger can see the transactions undertaken
• It is non-repudiable - a buyer cannot claim they did not receive their coin if they did receive it
• It is easy and simple to set up
• The value of bitcoin is based on demand
• It is a trustable coin
• Anonymity - all bitcoin transactions are stored on a public ledger so there is very little secrecy

Bitcoins are traded through bitcoin exchanges. To send bitcoin to another investor you will need to use your private key to effectively 'sign off' on the transaction. Once the transaction is verified it cannot be reversed or revoked.

Islamic Perspective On The History Of Money

The history of money from an Islamic perspective can be traced back to the beginning of Islam. Islamically and under Sharia law, money is used for exchange rather than speculation or exploitation. This is one of the reasons that riba (interest) is strictly forbidden in Islam as it is seen as making a profit on money. The Islamic perspective of money and business rests on principles of social justice and non-exploitation.

Sharia laws relating to money state that to be used as a means of exchange the money should be safe, stable, and effective. The reason some Muslims are conflicted about the legitimacy of bitcoin and whether it is Sharia law compliant is that when the Quran was written there will obviously have been no mention of digital currencies as technology was not in the advanced stage it is today. This has meant that the permissibility of cryptocurrency has been open to judgement and interpretation by scholars.

Bitcoin And Islamic Finance

The question about whether bitcoin is deemed to be halal Islamically has been raised again and again as Muslims across the globe consider whether to invest in cryptocurrency. Cryptocurrency is based on supply and demand in the way normal currencies often are, and the coins themselves hold value based on the market.

Bitcoin heralded the birth of the free, transparent, global financial market. It is not surprising, therefore, that Muslims began to interact with this market. Islamic finance rules provide boundaries and regulations relating to financial dealings. Whilst cryptocurrency is still a prominent area of news and research for Islamic finance scholars and experts, what is clear is that the majority of scholars and Imams have interpreted that cryptocurrencies do not breach any of the Sharia rules relating to Islamic finance.

Bitcoin And Sharia Finance Rules - Key Principles

The main features of Islamic finance that need to be considered when it comes to bitcoin are:

1. Interest (riba) - interest is prohibited in Islam
2. Speculation (maysir) - speculative investment is deemed to be akin to gambling and is not permissible
3. Profit-loss sharing - parties to a transaction must share the risks and rewards according to Islamic finance
4. No excessive risk (gharar) - Islamic finance dictates that transactions that are uncertain or carry excessive risk are not permissible.
5. Application of trade and commerce (al bai')

Examining the Islamic finance principles mentioned above, it is clear that there is room for digital assets within an Islamic finance portfolio. Bitcoin does not have an interest element, nor does it provide one party with excessive profits or losses, or excessive risk.

As the world of cryptocurrencies continues to evolve, so does the demand for Sharia compliant coins. Recently, the Caizcoin was developed in Germany and marketed as the first fully Sharia compliant digital coin. It is likely that there will be further developments of digital currencies that meet all the requirements of Islamic finance principles.

Interpretations

Although already deemed Sharia compliant by Imams and scholars throughout the world, the Islamic cryptocurrency finance market is evolving to ensure that Muslims are catered for when it comes to investing in cryptocurrency. In January 2021, CoinMENA, the Middle Eastern digital assets exchange was given the go ahead from the Central Bank of Bahrain to become a certified sharia compliant exchange.

Muslims are becoming increasingly involved with the emerging digital currency fintech market, especially younger Muslims who are moving away from traditional forms of investment and entrepreneurship.

Conclusion

Discussions around bitcoin and other forms of cryptocurrency will continue in the years to come. Although many Muslim scholars have determined that investing in cryptocurrencies is halal, there will be some Muslims who will want to adopt a wait and see policy. As long as the bitcoin investment does not include haram activities then bitcoin itself does not contravene any Islamic finance principles that regulate investment, money management and currencies. What seems clear is that conceptually, bitcoin and cryptocurrency as a whole do not appear to be impermissible according to Sharia law rules. The growth of the Islamic cryptocurrency exchanges and coins does mean that there is more clarity and regulation than ever before for Muslims looking to invest in digital currencies.