Intellectual Property and Islamic Finance: Opportunities and Challenges for a New Islamic Intellectual Property Finance Framework – Naim – 2025 – Thunderbird International Business Review

4.1.1 Survey Methodology and Analysis

The purpose of the survey was to gather information on how IP as an asset class can be utilized for Islamic finance (Naim 2020). Currently, there are only a few Islamic finance-approved transactions involving IP as an asset (Routledge handbook of Islam in the West, 2022). Given the growing size of both the Islamic finance and IP industries (Damak 2024; Brown et al. 2024), this research aims to identify the current gaps in the market and demonstrate the need to develop new products and toolkits to support the increased uptake of IP assets in Islamic finance transactions and decision-making.

4.1.2 Target Audience

The survey targeted professionals from a finance or IP background. The aim was not to find experts in both fields, as this would limit the reach of the survey and would not satisfy the main purpose. The reasoning behind targeting professional responses was to inform the development of an IP-Islamic finance framework. Professionals from a finance background could reflect on the potential feasibility of expanding the Islamic finance sector into the IP industry more consistently and, most importantly, at a legislative and policy level. Similarly, IP experts could also reflect on the impact of Islamic law and Islamic finance on IP rights. The survey was targeted at 100 participants and the period of the survey was from September 2023 to January 2024.

4.1.3 Survey Themes and Objectives

These themes were carefully selected to provide a comprehensive understanding of the current landscape, potential challenges, and opportunities for integrating IP assets into Islamic finance. The survey questions were designed to elicit insights from professionals in both the finance and IP sectors, allowing for a well-rounded analysis of the feasibility and viability of this emerging asset class within the Islamic finance framework.

95% of the participants surveyed, identified as having average or above knowledge of Islamic finance (Figure 2).

IP as an asset class for use in Islamic finance lacks legislative and policy frameworks and guidance (Naim 2020). As a result, the understanding of IP in Islamic finance is limited and requires legal procedures to create a benchmark that can be used nationally and internationally (Elmahjub 2019) (Figure 3).

The results highlight the strength of Shariah compliance and their value to IBs’ and IFIs’. Only 4% disagreed with importance of Shariah compliance, with over 80% agreeing or strongly agreeing. The relevance is significant; any IP and Islamic finance products created require both legal and Islamic Sharia ruling approval (Manto 2023) (Figure 4).

The results show 92% of participants found Sharia board approval is essential for an Islamic finance product to be offered to the market. The Sharia board approval must take place first as an initial level approval for IP and Islamic finance, once the approval is granted, the Islamic finance products can be offered to the market (Bank Negara Malaysia 2019). The approval is at two stages: the legal structure at a jurisdictional level and the Sharia approval from the Shariah standard-setting bodies.

Although the overall response on whether Sharia board approval is essential before an Islamic finance investment product can be offered was an overwhelming yes, there were relevant aspects of the qualitative feedback that have been identified. There was a strong consensus regarding Sharia board approval as an absolute minimum for a product to be acceptable to Islamic investors who take their religion seriously. Sharia board improvements were raised as an area for development. For example, independent Sharia boards and flexibility were also raised as development issues. Uniform laws are lacking for Sharia boards at an international level (Bank Negara Malaysia 2019). The decision of one Sharia board is not binding on another and, therefore, can lead to different outcomes depending on which Sharia board a country follows (Figure 5).

Most participants found the internal Sharia audit to be independent of the executive management. The feedback highlighted that, at a theoretical level, yes, the Sharia board is independent of executive management (Bank Negara Malaysia 2019); however, in practice, executive management has a lot of influence on the Sharia board. Issues were identified, such as, executive management’s influence over the Sharia advisory board remuneration, management and control of the auditing exercise, access to documents and decision-making (Khalid and Sarea 2021). Further issues were on lack of transparency and how political issues impact the Sharia boards despite Islamic jurisprudence supporting independent Sharia boards that are not influenced by executive management (Table 2).

This theme raised several issues, there was support for Islamic finance standards and how the standards can include IP rights. The main issues identified were lack of agreement amongst Sharia scholars as to whether IP can be considered property, known as “maal.” Fundamentally, this is one of the core challenges despite the Sharia fatwa deeming IP as maal (Malkawi 2013). Without unanimous agreement on this, the foundation for Sharia acceptance of IP rights have not been adequately set (Raslan 2007). Another key issue here is time for development of an IP and Islamic finance-compliant industry. IBs’ and institutions are hesitant to work with IP assets. However, some participants commented on how this is not due to the Qur’an and Sunnah being silent on it. Rather, it is more likely since IP is very relative, and IFIs’ are hesitant about delving into the wide pool of interpretations and logistically need support on how to work with IP.

There were concerns on capacity building and on how best to regulate an IP and Islamic finance industry and what measures would be in place to deal with ethics, conduct, market manipulation, and maintain asset stability. Unfamiliarity with Islamic finance-compliant IP products is a further issue. Within the potential marketplace, there is a lack of exemplars of successful applications of IP/Islamic finance products that can demonstrate beneficial results to all parties. The legal rights and remits of Sharia scholars in relation to IP rights are not clearly defined. There is a lack of understanding of the role of Sharia scholars in the development of an IP and Islamic finance industry. This issue can be addressed by developing a legal framework that can act as a model law for IP and Islamic finance law across jurisdictions, as different jurisdictions have national laws with Sharia law influence at varying degrees (Table 3).

The responses to key challenges highlight the lack of uniform rules in the Islamic finance industry, giving each region full autonomy over Sharia-based rules (López Mejía et al. 2014). There was criticism of a lack of motivation for innovation due to several hurdles (Kammer et al. 2015), such as internationally accepted frameworks. IP is internationally standardized by the WIPO; however, there is no equivalent World Islamic Finance Office. This essentially allows IBs’ and IFIs’ to have their own interpretation of IP in relation to Islamic finance. Also, there was criticism of a lack of understanding of the primary and secondary sources of Islamic law and adherence to the rulings. Expertise is an issue when Islamic legal opinions are being issued in relation to IP. Timing of Islamic Finance evolution and the disconnect between the speed at which conventional financial standards in IP development are being implemented compared to Islamic Finance was highlighted as a challenge. Feedback relates to Islamic Finance not responding quickly enough to the digitalisation of assets in areas such as cryptocurrency, blockchain and fintech (Elasrag 2019). In order for IP and Islamic Finance to be a priority for the Islamic Finance community, banks, and financial institutions, evidence-based research on the economic value of an IP framework is needed (Azmi 1995) (Figure 6).

The strongest priorities were identified as avoiding interest and speculative risk. To ensure that pertinent priorities are covered, participants were further asked to list further priorities that are not included in the survey answer options. The participants stated other areas including: enabling risks to be shared equitably, profit and loss sharing, ethical consideration factored into dispute consideration and resolution, upholding the higher objectives of Islamic Law, Maqasid al-Shariah and practicing the “real” Islamic finance, promoting business innovation, avoiding non-compliance with Sharia, solutions for countries from crumbling sovereign debt by applying Islamic financing principles appropriately and for it to be in line with religious values (López Mejía et al. 2014). Comments critique Islamic finance as an industry as a whole and argue that Islamic finance, as practiced today, is not consistent with the true Maqasid al-Shariah as it does not alleviate poverty (Ishak and Nasir 2021).

Islamic finance treats debt burdens in a very similar way to conventional financing. Feedback highlighted the strong ethics and moral values of Islamic finance, which underpin the toolkits and products proposed by this research. While the research proposes Islamic finance innovation, it does so within the constraints of ethics and moral values in the primary sources of Islamic law. Criticism of conventional regulations and their impact on Islamic Finance included the uncertainty and reactive conventional financing frameworks as opposed to a proactive approach as predicated by Islamic Law (Figure 7).

The feedback is very relevant to the research and the study overall, as the responses demonstrate that the current Islamic finance products are not designed to complement IP assets. Instead, there needs to be Islamic finance frameworks and products that are designed with IP as the asset and create new regulatory provisions in this novel area. The example provided gave an Islamic finance product for franchising a brand. As such, the IFI or IB is not buying the IP; rather, it is lending on the value of the IP. This is an important element of Islamic finance innovation to create products and toolkits that allow for IP assets to be leveraged for Islamic finance. Many participants could see that the potential product could work using Islamic finance principles. The comments that form part of the issues are relevant as these help in creating products and toolkits that address market concerns. There is hesitancy to offering Islamic Finance products for IP assets. Several comments questioned the validity of Islamic finance financing methods for IP assets, with the main concern being around a lack of knowledge/understanding of how the products can be in line with Islamic law (Jamar 1992). This relates back to earlier findings that the primary sources of Islamic law are silent on IP rights, and secondary sources are relied on for acceptance of IP rights as permitted under Islamic law.

The attention to detail is crucial to the successful launch of an Islamic finance and IP market. Creating products that meet Islamic finance standards is only one element of the bigger process. The issue can be resolved by adopting a regulation and auditing framework for Islamic finance and IP sharia boards, having a Sharia compliant structure in place for each type of IP right and develop IP based assets within an Islamic finance structure. Jurisdictional differences were highlighted as Malaysia for example is seen as more progressive and liberal with Islamic finance development whereas other jurisdictions are more conservative and reserved with their Islamic finance offering. Other Islamic finance products can be used for IP assets as stated by several participants and the survey had one example to share for the purposes of showing how and Islamic finance and IP financial arrangement could work. The full products and toolkits will consider a range of Islamic finance options that are applicable to IP (Table 4).

The responses showed overall support for audits and due diligence requirements to be part of the regulations in Islamic finance and IP products. Several scenarios were posed and there was significant engagement with the role audit and due diligence requirements and assurances can play in the overall development of a novel Islamic and IP sector. Understanding the technicalities and practicalities of IP audits and due diligence requirements and how the requisite principles and assurances can be successfully applied to the Islamic finance and IP products and toolkits is a must (Kasim, Ibrahim, and Sulaiman 2009). By addressing Riba and gharar concerns with IP assets and the reliability of the valuation methods, a future IP/IF industry can ensure it is compliant with Islamic Finance. The legal framework for the Islamic finance and IP sector will need to be robust and embed existing Sharia principles of property law, contract law, and public international law into IP law (Figure 8).

This theme introduced the survey audience to the three main current IP valuation methods. It was aimed at gathering feedback on the applicability of current and established financing methods to Islamic finance. The cost method was seen as the most risk-averse and favored for its alliance with Islamic law, although most comments did reflect that all three methods have crossover potential to an Islamic finance and IP model. Each of the three main valuation methods has its own advantages and disadvantages when considering an application to an Islamic finance and IP industry. For the cost method, the cost is not a mirror reflection of the intangible value the IP asset has created; it can often include irrelevant elements, as not all historical investment is productive and ignores the blocking effect of the IP itself. For the market comparison method, there are difficulties in finding comparable data, and often, there are no obvious equivalents (Sharma and Kumar 2021). The income-based method is the riskiest of the three and requires considerable evaluation and modification to comply with Islamic finance standards. The value from IP can be hard to isolate; this can lead to future projections potentially being uncertain, especially where market data is limited.

There is a gap in the existing valuation methods. A fourth valuation method would address this gap by creating metrics that ensure accuracy, equity and Islamic law compliance, which takes into account key features of all three existing valuation methods. The market method was the most preferred method of the three. Its key features made it the strongest method for an Islamic finance valuation tool: transparency, reliability, an open and competitive market, fairness, and certainty.

For feasibility and viability of IP in Islamic Finance, participants shared their knowledge and expertise to help best inform the IP and Islamic finance frameworks to meet the market demands and be fit for purpose. Viability and feasibility are the two most important criteria for an Islamic finance and IP sector. The comments addressed several issues, which have been grouped into key priority areas. The data collected is relevant to both IP owned by individuals seeking financing and IP owned by companies/businesses seeking financing.

Building on earlier themes of lack of human capital, legal policy-making, regulatory structures, guidelines and resource management frameworks in creating a new context in which IP-backed Islamic financing for IP assets could work. The Islamic finance innovation into the IP sector needs to create benchmarking tools to be able to measure and quantify the IP asset that circumvents riba and gharar. There was strong feedback on the need for Islamic finance innovation and utilization of existing products such as sukuk, mudaraba, musharaka, tawarruq, ijarah, to address underuse of IP and intangible assets to meet the needs of the Islamic finance community and ethical investors through principles of profit sharing/participatory form of financing. For specific industries, IP is often the strongest asset and companies are not necessarily cash-rich; however, they have valuable IP (Margono 2024a). For patents in IT/AI inventions and data-based business’ products will have IP rich assets that, if valued accurately/correctly, could be leveraged as collateral for financing.

Societal and cultural perceptions of IP as an Islamic finance compliant product are a challenge and the influence of society and cultural attitudes on IP acceptance needs to be addressed (Malkawi 2013). IP assets are seen as foreign products and their infringement is not taken seriously by the public (Ebrahim 2024). The deal quality that IP and Islamic finance can offer as an economic growth tool is the economic value that it can add. The more quality deals that can be offered and given exposure to the market, the potential for a successful new industry is more achievable and sustainable. The deal equity in an IP and Islamic finance industry can utilize IP to raise venture capital for R&D-based start-ups, create unique IP and Islamic finance products, and support mergers, acquisitions and joint venture agreements.

An IP and Islamic finance industry proposal needs to take into account the digital economy as a whole and understand non-fungible tokens (NFTs), blockchain and fintech (Margono 2024b). Patents, licenses, software development in the fields of AI, blockchain and other transformational technological advances are the main structures of monetizing revenue streams. IP-backed Islamic financing provides a Shariah-compliant solution for individuals and businesses to utilize their IP assets in various fields, including technology startups, product development, franchising, brand expansion, content production, royalty financing, research and development projects, trademark licensing, IP monetization, and projects related to Islamic art and culture (Unal and Aysan 2022). Technology Startups with valuable IP, such as patents or copyrights, can use this financing to raise capital for growth and innovation.

In Industry-specific innovation for research institutions, there is a potential benefit to universities and research institutions that can leverage their IP portfolios to secure funding for research and development. For pharmaceutical and biotech companies, IP-backed Islamic finance can fund drug development and research, often a costly and lengthy process. For the entertainment industry, creative and media companies with valuable copyrights can explore Islamic finance options for production and distribution. Manufacturing and engineering firms with patented technologies or unique engineering design rights can utilize Islamic finance for expansion or project financing. For art and creative ventures, artists, designers, and creators can seek funding for their IP-backed projects, ensuring protection and profitability.

The qualitative feedback on this theme highlighted the importance for appropriate control/procedures to be in place to ensure efficient implementation and for IFIs to quantify IP assets within their balance sheet to ensure reliability of the valuation. The regulators would need to a standardized mechanism of valuation for IP credit security. Most of the feedback gave insight into how IBs and IFIs could use different mechanisms to finance against IP assets.

Mudaraba and Musharaka could be useful mechanisms. In a Mudaraba, the IB provides the capital, and the company manages the IP as the working partner. Profits are shared based on a pre-agreed ratio. In Musharaka, both parties contribute capital, and profits and losses are shared accordingly using equity based or profit-loss sharing funding arrangement. IB offers a wide spectrum of fee-based services using three types of contracts, wakalah, kafalah, or ju’ala. The aim would be to allow IBs to use intangibles as collateral in their corporate funding.

There is an opportunity to develop possible securitization of IP rights and use them as collateral (Azmi and Engku Ali 2007). The question raised is on who has control over the property used as security and to what degree, as this will impact the validity of the IP and Islamic finance product to be used as security under Islamic law. How different types of IP rights/assets can be in control of the financier requires assessment and measures to create a model that supports innovation and respects Islamic law.

Comprehensive risk management, performance monitoring and internal control are required. Given the lack of best practices as the benchmark, the workability may be highly uncertain. Equity-based, profit-loss sharing funding arrangements and accurate, moderate, flexible approaches, in developing regulations for Shariah governance structures and processes. Efficiency of an IP and Islamic finance model hinges on transparency, proper valuation of IP assets, and adherence to Sharia-compliant contracts. Companies and IFIs should work closely with Islamic finance experts and legal advisors to ensure that the chosen mechanism complies with Islamic finance principles and meets their financial objectives. Risk management, deal certainty, security, guarantees, and legal remedies would all need to be part of the IP and Islamic finance model. By developing an IP and Islamic finance commercialization strategy, a commercialization team with an IP Sharia counsel/advisory, a commercial audit team, IP valuation and auditor, due diligence and licensing agreement contract lawyers with legal expertise in contract law, IP law, regulatory controls and securities will all support an efficient IP commercialization system in Islamic finance. Islamic evaluation (compliance with Sharia) will be part of the overall evaluation of assets. Consider durations as IP protection length varies depending on the time of IP asset. Financing IP can be both short term and long-term depending on the growth of these products. If the IP is valued with a clear structure, is transparent in terms of details and the model does not involve interest and uncertainty, is backed by qualified professionals to value the IP, the IFI can trade it, raise money, and treat it as a tradeable commodity using any of the available products used by Islamic finance.

Embedding Sharia principles of contract law to develop IP and Islamic structures through incorporating sharia-compliant doctrines, principles of mutual consent and gainful exchange to the protection of knowledge-based assets and promulgate Islamic law-based ethics to IP rights protection (Mukhtar 2018). A Sharia-compliant authentication process for IP rights protection highlights the protection of economic and moral rights from an Islamic perspective. This can be through applying Islamic law-based protection for IP rights as an acknowledgement of the time, labor, and efforts of the inventor.

Under Sharia law, property law dictates on; the ownership of property, the right to possess and enjoy wealth through lawful means, and the doctrine of mutual consent (Ratnawati and Al Farizi 2023). For an IP and Islamic finance model to have an impact on economic growth, the quantification of the asset and the consequential loss necessitates compliance within set parameters similar to how Islamic finance has sought to limit speculative loss in property law. IP law can develop Sharia compliant remedies which can implement control measures that would allow IP rights protection to be more fit for purpose in Islamic finance. Market demand is key to the Islamic finance industry investing in an IP model. An IP that is in high demand would attract customers to the business, which in turn would increase its financial performance.

The most direct way to think about what IP is worth is in terms of their valuation on balance sheets, which can be formulated based on standardized regulation. IP has several avenues, which will each require their own parameters, such as royalties and revenue streams. Islamic finance may involve the issuance of Sukuk backed by IP assets. The value of the IP is crucial in determining the Sukuk’s attractiveness to investors. Securitisation structures must comply with Sharia principles.

A strong recommendation in the feedback was to delve deeper into the legal maxims of Islamic finance rather than mirror the actions of commercial finance, and “halal-ize” them in an attempt to create something “new.” This is a good recommendation as the aim of the research is not to create a weakly aligned alternative to conventional financing for IP but a robust legal framework that has considered the requirements of the relevant Islamic law and IP law. The aim to create a new IP and Islamic finance industry that has real impact for IBs, IFIs and the customers globally. It will need proper guidelines and indices to be able to measure the IP, standard on pricing, and value of amortization in the market imposed by the regulators instead of depreciation for tangible assets.

The concerns on the uncertainty of the value of IP as opposed to tangible assets and the impact to the business can be reduced by benchmarking the IP asset against market value and industry performance. The more structures we have in place to measure the performance of the IP-owning entities, the more certainty on the value of the IP. Aligning IP and Islamic finance to core Islamic values and principles will be part of the overall commercialisation strategy for this new sector. Through Islamic finance, IP-rich businesses can help grow humanitarian missions and efforts, alleviate poverty, and support a fair, peaceful, and a sustainable planet that aligns to SDG goals and climate action (Alawode and Abidin 2019).

There is potential to have a tiered approach to IP and Islamic finance systems. For example, IP and Islamic finance can be a part of special purpose, bankruptcy-remote investment companies that would decrease the customers’ risk profile and attract financiers. IP finance recapitalization can boost liquidity for initiatives with returns greater than financing costs. International commitments will be considered in the IP and Islamic finance legal framework, considering international standards, rules, agreements, treaties and conventions. Valuing IP and IP-rich businesses from an Islamic finance perspective involves considering both tangible and intangible assets and aligning the valuation with Sharia-compliant principles. The value of IP and IP-rich businesses can vary significantly depending on factors like financial performance, development stage, and industry. The valuation of IP and IP-rich businesses is not one-size-fits-all and should be tailored to the specific circumstances of the business and the transaction at hand. Additionally, it is essential to consider the ethical and social impact of the IP assets, as these factors can also play a key role in Islamic finance decisions. Consulting with experts in both IP valuation and Islamic finance can help ensure a thorough and compliant valuation process.

A key recommendation is to devise IP investment portfolios to guide business direction and strategy by appointing board members and maintaining regular consultations with management and directors. IP investments can leverage the knowledge of IP advisors and a network of experts in enterprise and entrepreneurship management and operations. Strive to maximize the value of its investments through a vast network of capital markets contacts, including venture investors, investment banks, and hedge funds to achieve timely realizations of its investments, which may come from strategic sales, successful licensing or litigation, initial public offerings, or royalty streams. Board appointments and ongoing consultations with directors and management influence their business direction and strategy (García Martín and Herrero 2018). IP portfolio investments can benefit from the expertise of IP advisors and a network of experts in enterprise and entrepreneurial company management and operations (Business Innovation Management, n.d.).

For a successful framework, it is important to consider both country-specific and global IP and Islamic finance products, as each of the Islamic financial IP products have different markets and audiences. Islamic finance is substantially stable and is based on strong moral and ethical foundations, which were recognized by different factors, especially the performance of Islamic banking/financing during global financial crises and recessions, which requires the equivalent level of evaluation to financing solutions. Valuing IP and IP-rich businesses in Islamic finance requires a holistic approach, considering factors like financial performance, development stage, and adherence to Shariah principles. Key considerations include transparent asset valuation, profitability, risk management, market demand, legal protections, ethical considerations, Shariah compliance, long-term sustainability, market comparable, and the choice of Shariah-compliant financing structures. A tiered tailored approach can determine value, considering the specific circumstances and principles of Islamic finance.