BLUE CHIP | Islamic Crowdfunding
A number of crowdfunding or peer-to-peer (P2P) financing platforms are following Shariah-compliant principles and value-systems. But more work needs to be done to streamline regulations
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rowdfunding refers to the process of securing funding for a project or venture by raising money from
a group of people, through the Internet based crowdfunding platforms. These are outside the banking system and bring investors and businesses needing funds on one platform, facilitating direct and faster access to funds. Crowdfunding as a concept originated
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in the West as a mode of fundraising for musical and arts projects. Crowdfunding is an alternative market to raise funds for sectors like real estate. Low interest rates (on bank deposits), better technology and limited capital with banks offer such platforms a scope to innovate and grow. A number of such platforms, compliant with the Shariah, have also started operations. Crowdfunding offers investor an equity in the project. This is different to debt which attracts interest and is prohibited within the Islamic principles. The community based nature of crowdfunding fits suitably in the world of Islamic finance. Unlike banks that emerged from a corporate background, the community is at the forefront of crowdfunding. Here profit is not at the forefront of investment decisions. Most crowdfunding structures, namely equity, rewards and donations except those based on debt are Shariah compliant. The World Bank forecasts that with high social media penetration, and belief that the practice can be in accordance
with the Shariah laws, the crowdfunding value in Middle East and North Africa will reach up to $5.6 billion by 2025. Alternative investment not only offers individuals to post a profit but also do some good to bring a benefit to the society. Crowdfunding helps in community building and encourages social and ethical responsibility which is tenets of Islamic view. Muslims are encouraged to build an ecosystem based on their own value system. Crowdfunding is based on principles like risk sharing and democratisation of wealth, which are also championed by the Islamic finance. Crowdfunding is the way ahead for the Islamic world. It can be of critical use to the small and medium enterprises. A November 2013 report by Fajr Capital
Advisors and Crowdfund Capital Advisors said crowdfund investing fills a key gap in the spectrum of Islamic financial services available today. “While the Islamic financial services industry has successfully designed interest-free alternatives to debt-based financing (typically based on Islamic trade instruments), Islamic equity financing has been more elusive. Crowdfund investing offers a transparent, cooperative and cost effective way to do just that”, the report said. Islamic crowdfunding platforms have demonstrated exponential growth in recent times in several nations. In the UAE, some of such platforms include Aflamnah, Eureeca and Goodgate, some of such platforms in Malaysia are Make the Pitch,
myStartr, platforms operating in Indonesia include Bursalde, Pantugan and Wujudkan. A promising ecosystem for
crowdfunding exists even outside the UAE in Jordan, Egypt, Saudi Arabia and Lebanon, etc. There is a surge in the interest in Islamic crowdfunding especially over last one year or so. Policymakers are encouraging equity crowdfunding by revamping regulatory environment, offering tax breaks, and setting up investment funds that can coexist with the private sector investors. Policymakers can draw from the crowdfunding legislation from other markets and frame regulations that safeguards market participants without deterring investments and design policies to cater to the needs of Shariah- sensitive entrepreneurs. Crowdfunding will work wonders when accompanied by efforts to fuel entrepreneurial spirit and innovation. With streamlining of regulations, Islamic
crowdfunding platforms will get a further push in the GCC. Investors need to have a greater confidence in the provisions related to crowdfunding. Crowdfunding will change the face of Islamic finance once it expands its outreach and acceptance by becoming a tool to develop vibrant entrepreneurial culture and strengthen the community and the economy.
www.wealth-monitor.com | February 2016
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