6. Islamic Finance Models

Foundations (Waqf) Endowment of property or assets, where the benefits are distributed for public welfare. Instead of seeking profits for shareholders, a Waqf supports societal needs such as education, healthcare, angel investment, etc. A more systematic way to infaq while creating long term economic value for society. They can’t be sold, bought, and they are responsible for the maintenance of any assets they receive. People giving can also provide an investment thesis to the Waqf, which outlines the cause, or where the money should be invested in what way, and the Waqf is responsible to distribute accordingly. Bird healing, dowry for poor girls, children who lose their money their mothers given them for shopping are some niche Waqf examples of Ottomans as society already took care of the need-to-haves. Private Equity & Venture Capital. Fixed Investors provide capital to businesses in exchange for shared ownership, adhering to Islamic principles such as the prohibition of interest (riba) and avoiding investments in haram industries (e.g., alcohol, gambling). These investments typically focus on ventures that produce tangible goods and services, ensuring that the business generates real economic value rather than relying on speculative or interest-based financial activities. Each investment promotes transparency, accountability, and ethical business practices, ensuring contributions have a positive societal impact. Naturally, this is only possible with a due diligence process focusing on the business's activities rather than just its equity. However, when there is an increased production of fractional reserve money floating in the market and causing inflation, VC funds often throw money away without proper due diligence, as they don't want to hold cash but also don’t have the time for long-term thinking: – After the 2020 COVID-19 pandemic, global VC investment surged from $294 billion in 2020 to $621 billion in 2021. – SoftBank’s Vision Fund invested $4.4 billion in WeWork, only to see its valuation plummet from $47 billion to $8 billion in a matter of months. – Quibi, a short-form video streaming service, raised $1.75 billion from prominent investors but shut down just six months after launching. Activity Funding (Mudaraba) One party provides capital, and the other manages the business. Profits are shared based on a pre-agreed ratio, while losses are borne by the capital provider. Investors contribute to financing activities, such as buying raw materials like cacao. The company processes the cacao, sells the chocolate, and profits are distributed among all involved. This model allows for transparent investment in specific activities, preventing issues like greenwashing or fraud. Ultimately, it enables people to invest in activities they genuinely believe in and want to support, rather than simply lending money or buying stocks. In a sense, investment is becoming hyper-personalised and activity-based, making it faster and more accessible. “Until you make the effort to get to know someone or something, you don’t know anything.” ― Ben Horowitz, The Hard Thing About Hard Things Joint Venture Partnerships (Musharaka) Two or more parties jointly contributing capital and expertise to a project. Profits and losses are shared according to each party's contribution. Collective ownership, as seen in Web 3.0, open innovation ecosystems, corporate partnerships, or joint ventures, is a common practice. Debt 2.0 (Sadaqa) While debt in the conventional sense is interest-bearing in today's fractional reserve banking system, Sadaqa refers to voluntary charity or almsgiving in Islam. In the context of finance, a Sadaqa-based model could involve interest-free loans, where the lender expects no return other than the repayment of the principal. This model serves the underserved by providing essential funding without exploiting financial vulnerability, encouraging the ethical redistribution of wealth.

It’s common practice even today in Turkiye, where people go to local supermarkets in rural areas and buy out ‘the shop ledger’ from the owner, which records debts from people who bought food but haven't yet paid. When these individuals return to pay, the shop owner tells them the ledger has been cleared by an anonymous person. Participatory Design This approach involves co-creating solutions with the community or stakeholders who will be directly affected by the project. It involves not only designing a solution (alpha phase) but also generating evidence to determine if people actually have a problem and would want a solution (discovery phase). Participatory design takes the form of shared ownership in housing projects or infrastructure, where local communities have a direct stake in the outcomes. Shoutout to RCA alumni Kristof van der Fluit’s project studio. Participatory design is a way of working to develop new solutions. Crowdfunding Public Projects (Sukuk) Sukuk refers to Islamic bonds, which are asset-backed securities that allow individuals to invest in public projects. Instead of earning interest, investors receive a share of the profit generated by the underlying asset. Crowdfunding through Sukuk allows communities to pool resources to fund large-scale projects like schools, hospitals, or renewable energy initiatives, with the assurance that their investment will have a tangible societal impact. Thank you. Sources Tevhid Ocagi, Islam ve Ekonomi Youtube Channel Seyyid Muhammed Ruhi Youtube Channel The Thinking Muslim: Is Islamic Banking Really Islamic? Episode