The synergy between Islamic finance and venture capital in context of Türkiye: A new paradigm for growth

Venture capital (VC) is an asset-based financial instrument that provides funding and professional support to young, innovative and high-growth companies. Although VC is expressed in different conceptual frameworks today and in the past, it is basically a mechanism that enables capital owners and entrepreneurs to partner on a business. This mechanism has served as a catalyst for the growth and institutionalization of companies, turning many innovative ideas into concrete projects in the different sectors. Historically, VC was a model built on individual efforts and relationships, but in today's economy, it has become an ecosystem that is actively used in many techno-hubs, especially in Silicon Valley, and is fed by professional funds, investment partnerships and intermediary institutions. VC offers an investment strategy in line with the spirit of Islamic finance, as it promises a partnership and asset-based ecosystem rather than a financial tool based on interest and debt. Moreover, the VC investment path is a process that operates within the framework of a program quite similar to some partnership based Islamic financial instruments such as mudarabah and musharakah (m&m). In the context of Türkiye, VC operates within a framework where foreign funds and investors have notably played a prominent role in recent years. Also domestic investors become part of the ecosystem through VC funds (VCIFs), VC investment trusts (VCITs), crowdfunding platforms, and angel investor networks. Türkiye's VC ecosystem has witnessed a significant surge in recent years, positioning itself as one of the fastest-growing investment areas in Europe. The impact of substantial foreign investments, particularly in ventures like Getir, Dream Games, and Insider, has been observed during this growth phase. There has also been a sharp increase in VCIFs and VCITs in terms of Turkish Lira in recent years. Despite the currency shocks in recent years, these investment instruments have been observed to maintain their potentials in USD terms. A detailed examination of domestic investments has revealed diversification into traditional sectors such as health, energy, and communication, in addition to information technologies (IT).. In the context of Islamic financial institutions (IFIs), participation banks (PBs) cannot be involved in VC investment processes due to the internal conditions of the banking sector. Considering these internal conditions, firstly, VC is not a banking instrument but a capital market tool. Therefore, the legal and administrative framework governing the banking system in Turkiye diverges from the capital market ecosystem in terms of applicable laws and regulatory bodies. Secondly, while the banking sector has a short-term deposit structure, the VC ecosystem consists of long-term funds. As a result, directing short-term deposits from the banking sector to long-term investments leads to financial risks such as maturity mismatch and distortion of financial ratios. Thirdly, the VC ecosystem, mostly comprised of risky investments, can pose a reputation risk for banks in the event of potential unsuccessful investments. On the other hand, participation banks have started contributing to the ecosystem through project-based applications using instruments such as temporary musharakah. Long-term venture capital investments, funded by participation banking capital, take place within portfolio management companies established as subsidiaries of participation banks. In this thesis, four different contexts were studied and analyzed comparatively: VC-world economy, VC-Islamic economy, VC-Türkiye economy, VC- IFIs in Türkiye. These contexts are supported by data from open sources and also fed by surveys and interviews with industry stakeholders. In accordance with the objectives and research questions of the thesis, the findings of this study have been analyzed and assessed at its conclusion. Finally, a number of policy recommendations are presented for researchers and respective sector stakeholders. Key terms: Venture capital, Start-up, Islamic finance, Mudarabah, Musharakah,