By Arno Maierbrugger
Gulf Times Correspondent
Bangkok
The upcoming World Islamic Banking Conference to be held in Manama from December 1 to 3 will see another debut in the field of Shariah-complaint finance when panels will be discussing about Islamic crowdfunding for the first time.
The (conventional) crowdfunding industry worldwide reached a value of $16.2bn in 2014, pioneered by online hubs such as Kickstarter, IndieGoGo, FundRazr, RocketHub, SeedInvest and a number of others, making the sector interesting for the globally growing Islamic finance industry.
The basic idea of crowdfunding is the practice of funding a project or venture by raising financial contributions, or micro-investments, from a large number of people through Internet-based platforms who equally share the risk of such an investment. Crowdfunding is part of the newly emerging sharing economy and a form of alternative finance outside of the established financial system.
With these characteristics, even conventional crowdfunding comes very close to Islamic values such as profit-and loss-sharing and providing lending and financing facilities for the less wealthy, returning some sort of authenticity to banking and facilitating an economy independent from large financial institutions.
“In the past, Shariah finance often mirrored conventional debt financing,” says Matthew Joseph Martin, Muslim entrepreneur and founder and CEO of Blossom, a crowdfunding-based microfinance company in Indonesia launched earlier this year (Gulf Times reported on June 17). “Profit-sharing modes of financing [for founders and small business] are preferred in Shariah, but they were considered unworkable. This was due in part to an ‘information asymmetry’, meaning the entrepreneur had all the information and the capital provider had none, except maybe trust and a reputation to go on. It’s far more complex to originate and service a profit-sharing structure versus a debt structure.”
With Islamic crowdfunding, these problems could be resolved as it gives smaller firms access to capital at shared risk for investors and creates new opportunities while traditional Islamic banks are seldom structured for this.
Crowdfunding could be a particular solution – in addition to microfinance – for emerging countries in Asia where Muslims frequently struggle to set up smaller firms or startups as they are increasingly shut off from bank financing owing to stricter capital rules and little interest of larger banks – whether conventional or Islamic – to engage in small-scale financing.
And the market is moving. Malaysia’s financial regulator issued rules on equity crowdfunding in February this year, providing legal clarity, but capping fund at $688,000 in a 12-month period. Apart from Blossom, other Islamic crowdfunding platforms have been launched, such as Singapore-based Kapital Boost which focuses on small and medium-sized enterprises in Indonesia, and Ethics Pte, also based in Singapore, which aims to provide crowdfunded finance to buyers of affordable new homes in Indonesia and Malaysia.
To adapt crowdfunding to Islamic finance principles, several questions need to asked, though. First of all it needs to be determined how to ensure that all the Shariah-compliant requirements are complied with by a particular crowdfunding initiative. Secondly, the disruptive nature of crowdfunding represents a general threat for established banks, in the Islamic finance sector additionally with regards to fees as costs of Islamic banks are already higher due to lack of human capital and more complicated product structures.
In this regard, traditional Islamic banks face the same issues as conventional banks emerging from disruption by the new “sharing economy” and innovations in financial technology that transfer more and more banking services to online platforms.
