Faith-based business models: How Islamic values guides impact
Umar Munshi, Managing Partner at Hasan VC chats about Islamic investing, camelicorns, and why Islamic values are applicable even for non-Muslims.
Around the time when I was recording podcast episode number three, I came across the concept of degrowth. As per Wikipedia, it’s a term coined in opposition to gross domestic product (GDP) as a measure of human and economic development. Because an infinite expansion of the economy cannot be sustained, given the finite material resources on the planet.
Hence, degrowth is to abandon GDP as a policy objective, and to focus on improving human living standards, as well as ecological preservation. Another related concept is post-growth, which addresses the same problem but by evolving rather than abandoning current policies.
I’m grossly oversimplifying. You can Google them to find out more.
The point is this. Many of us have come to terms with the limits of the capitalist economy and we know that the existing extractive global economy is driving the impending extinction of mankind. Hence, the search for an alternative economic model.
There are two assumptions to unpack here. First, that time is linear and second, that the story of human progress always unfolds from the past, to the present, and to the future.
Rather than heading down the academic rabbit hole in search of what lies ‘after growth’, I thought I’d tap on some ancient wisdom that’s been passed down the ages.
In this series on faith-based business models, I speak to folks in the startup world who have successfully integrated their religious views into their everyday lives. This includes making business decisions based on religious ethics, in addition to seeking profits and growth.
My guest for this podcast is Umar Munshi, Managing Partner at Hasan VC, a venture capital fund that invests in and supports startups that comply with halal standards. He’s got a preference for “camel startups” — check out his LinkedIn post to see if you qualify.
Besides Hasan VC, Munshi is also the co-founder of Ethis Group, a crowdfunding platform that facilitates impact investments and which is also guided by Islamic ethics. For more on the Islamic values that guide Hasan VC, read this article.
Munshi wasn’t always so… Islamic. After dropping out of the National University of Singapore 18 years ago, he founded a health tech startup which took off in Indonesia. Six years later, his company collapsed after a supplier absconded with the company’s funds, leaving him in debt at 26 years old.
Most of the debt was from a loan that he had taken to buy a sports car (“never a good idea unless you’re really really wealthy,” he says), which he then had to service. He eventually paid off the debt with no-cost loans from his family.
But the experience of being chased for interest and penalty charges drove him to delve deeper into the world of Islamic finance, where collecting interest isn’t permitted.
This post showcases the highlights from our conversation. The transcript has been edited for clarity and flow. If you’re keen to find out more about how Islamic values can guide ethical business decisions, do listen to Munshi do a more thorough explanation on Regen Supply.
Han: Is Islamic Finance only for Muslims?
Munshi: The whole idea or concept of Islamic finance is not something for Muslims exclusively. It’s just like halal food, anyone can eat halal food. It’s just that the halal food is prepared and has ingredients that conform with Islamic guidelines.
Islamic finance or Islamic business is the same. It’s something that’s meant to be universal, for humanity.
I’m a Muslim. But I wasn’t aware that Islamic finance existed until my business collapsed and my college buddy, who’s a lawyer in Singapore, introduced me to it.
Han: How do you make money from Islamic finance if you can’t get interest out of the loan, and you can’t collect penalties?
Munshi: You cannot make money from loans, but you are encouraged to profit from business. So when it comes to investment or providing loans, it is not considered a loan in Islamic finance when you are doing an actual sort of participatory kind of investment.
Broadly speaking there are two types. One is a trade transaction where you have a profit from a trade and as the financier of that trade I am allowed to take a share of the profit from the activity. The other is when I provide funds to a business that’s providing a service or running some kind of operation, I can then get a share of the profits realized. Of course the percentage of the profits needs to be agreed upon.
Either way I cannot make money purely by lending money. I can provide funding for trade or can provide funding for business in exchange for a share of the profit.
Han: Is there anything else that is different in Islamic finance compared to traditional finance?
Munshi: In a traditional loan, the financier gets his or her interest, plus the capital, regardless of what happens to the business. But in Islamic finance, the financier only gets back his or her money if the business or the activity works out and if there are profits to be shared.
The difference is in the traditional model, the risk is completely transferred from the financier. But in Islamic finance, both the lender and the lendee share the risk.
The other component of Islamic finance is the nature of the activity. Whatever I’m funding or investing in must be halal. Halal just means not haram and haram just means things that are prohibited in the Quran and the teachings of our Prophet Muhammad.
But from a general point of view, haram things are those that are deemed to be bad for society. So alcohol is something that’s prohibited, gambling is prohibited, interest is prohibited.
This means that if DBS Bank wants to give me a share of DBS Bank, I can’t take it because it’s not halal to me. So in Islamic finance, you cannot invest in conventional banking instruments or banks because there’s interest there. We also cannot invest in, say, a bar because there’s alcohol.
Han: In your experience, what kind of businesses usually tap on Islamic finance?
Munshi: Historically, Muslims tend to come to us because they’re looking at it from a faith perspective. However, in Malaysia especially, a lot of non-Muslim business owners or individuals take Islamic financing because it’s widely available, and they like the features of the financing.
For example, it is more participatory than a traditional loan model. So become almost like a shareholder or partner in your business activity or your company.
Han: But in terms of industry or sector, for example, would a tech startup be an ideal applicant for Islamic finance?
Munshi: Our space is alternative finance or impact investments. There’s also equity investments. Startups are risky, because only one or two out of 10 will make it.
When you invest in startups from the conventional lens, it’s a gamble. You’re putting money into any startups and you hope one or two of them make it, and give you your 10x or 20x. The rest either fail or they stay stuck in a certain zone.
The world view in Islam is that our wealth, success, or even our journey in this world is already fixed by God. But we can, within that destiny, influence some outcomes through our efforts and prayers. So there’s this concept of trusting in God.
We invest in businesses that we believe are doing good, and we are trusting in God that some of them will make it. So it’s the same thing, not different, but very different in terms of the mindset.
Han: You wrote a very popular post about the difference between a camel startup versus a unicorn startup versus a cockroach type of startup. I love the analogy.
Munshi: A camel, I think, is a much better representation of a resilient startup compared to a cockroach. I know camels don’t cross our minds much, but they have very unique characteristics that make them very resilient and make them one of the few mammals that can survive in the desert and they can travel long distances and create a lot of good.
For example, when there’s water, camels can drink lots of water in one go, and store that water in their body because the opportunity is there. And normally they’ll move quite slowly, but when there’s danger, camels can run very fast as well.
So I find that to be a very powerful analogy because the days of easy money or big money from VCs are gone. Startups today need to figure out how to survive and be sustainable, and not be dependent on subsidies for their business model, which is essentially what happened in the past.
Han: There was a guy on your LinkedIn comments thread that said we should be looking at a Camelicon. That’s a hybrid between a camel and a unicorn. Would you invest in it and what kind of business would a Camelicon look like?
Munshi: I guess if you’re talking about a billion dollar camel. The Silicon Valley unicorn mindset is: go big or go bust. If you’re not a billion dollars, you’re nothing. So the VCs and the startup founders will push their company to the breaking point to hit that valuation by scaling for hypergrowth, or taking too much risk.
I’m not really in tune with that approach. For us to get an exit for our fund, we need super high growth companies. But there’s also that middle group of good companies that VCs are not looking at because they’re not in the hyper growth stage.
So for us, we will try to push that layer of good companies to first be sustainable within a reasonable time frame, depending on the product, the sector, the market opportunity, and so on. They will still need investment but they are growing based on a business model that works and can scale. So that’s what we’re looking for.
Han: In your experience in this world of Islamic investing, are entrepreneurs more motivated by the material or the spiritual components of Islam?
Munshi: I can’t generalise, but what I’ll say is, in this modern world, we are all brainwashed to be capitalist. We grew up in that environment, right? I’m not saying capitalism is all bad, but capitalism without ethics is prevalent and celebrated, to some extent.
We are trying to firstly practise it ourselves by embedding it within our own business and trying to spread it to others.
Islam and Muslims are different. Islam is the religion, it’s perfect. Muslims are not. Some of them care, some don’t care, some practice, some don’t. Some practice in the right way, some learn the wrong things. So when it comes to Muslims, those who are practising and those who are aware, being ethical is very important for them.
Those who are not so practising or not so aware, that’s where it becomes my responsibility or our shared responsibility to help them become aware. So that’s where the system goes full circle. Because a good practising Muslim is not just implementing ethical business principles, at the same time, he or she has the responsibility and a duty to also help others become more ethical as well.
Han: Do you have any last words for, I guess, any potential founders that are looking to tap on Islamic values for their business?
Munshi: I think especially for non-Muslims, it may seem a little bit strange to learn about another religion if you’re not into that. But Islam is a way of life. Let’s say we put aside the spiritual faith element and we just talk about logic. There’s a lot of logic in Islam.
During the golden period of Islam, the Islamic Empire was the largest empire in the world. Society was good. There was no poverty, inequality was low, things were working. After that, things changed. And until today, it’s very difficult to know whether things are getting better or not.
But those ethics proved to have led to an ideal society. In my view, these are universal ethical principles. And the challenge with trying to think purely from a logical or ethical point of view is that ethics change over time.
What was unethical 10 years ago may be accepted today because humans are attracted by what they like and what’s convenient. But in Islam, the ethics and the fundamentals don’t change. The application and the context changes. And there’s room for that.
But the principles are the same and they have been the same ever since the Quran came out. They’ve been the same even before that because in Islam we believe that the previous Abrahamic religions are all one path, the same path.
So the ethics for humanity from the start of humanity until today, we believe, is there in Islam. So please explore and see what may align with your own values and what resonates with you.
