One of Acumen’s portfolio companies in Kenya is currently going through a capital restructuring. The entrepreneur is Muslim and at some point during the negotiations, the request to explore sharia-compliant financing came up. Not knowing much about Islamic banking, I did a bit of research. What I learned really impressed me. Sharia forbids of all forms of riba, or interest, on monetary loans—and the reasoning behind this is quite profound.
The Islamic financial model works on the basis of profit sharing, in which investors and investees share the risks of an investment and divide any profits or losses between them. This participatory arrangement reflects the Islamic view that the borrower must not bear all the costs of a failure, which is intended to lead to a more balanced distribution of income and a more open economy. I am accustomed to a lending system in which the distribution of risk among the haves and have-nots is disproportional: those with less money, the more vulnerable, have greater risk. Sharia financing shifts the risk across the strata of society.
Unlike conventional banking, Islamic banking selects projects on the basis of profitability and not creditworthiness, which further leads to an emphasis on stability and growth. When investors are more concerned with interest rates and guaranteed returns than they are with operations and the use of funds, they lose out on the opportunity to add value and provide much-needed guidance to the investee.
At Acumen, we invest for impact. Islamic banking therefore seems to fit our approach of treating the entrepreneurs as partners, and being concerned with the success of the company as a whole. We’re not just interested in whether we can recover our investment. We invest to help ensure that our portfolio companies grow and are able to reach more of the world’s poor.
This diagram on Islamic banking refers to Musharakah (joint venture), which more closely resembles Acumen Fund’s investment approach.
Nicolás Argüello is an Agriculture Portfolio Associate in Acumen’s East Africa office.