Crowdfunding unites communities online to raise funds for specific projects through bite-sized individual contributions. A recent report by Massolution projected this fast-growing industry to hit a whopping US$35 billion globally this year. UMAR MUNSHI tries to find out why crowdfunding is all the hype these days.
At its infancy, crowdfunding was mainly a fundraising tool for supporters of musical or arts projects. Then along came Kickstarter and Indiegogo, two pioneering platforms that went viral, and gave the world an idea of the immense scope of applications for crowdfunding. By 2011, more than a million campaigns in North America and Western Europe had been crowdfunded, to the tune of US$1.5 billion.
Today, crowdfunding has evolved and made strides into the investment world, with real estate crowdfunding one of the fastest-growing segments of this booming industry. The crowdfunding industry is still dominated by the US, but Asia has recently seen strong growth – overtaking Europe as the next-largest crowdfunding region by volume.
Technology is a key driver and enabler for crowdfunding. The ease and speed of online transactions, as well as the ability to fund projects directly, give crowdfunding wide and universal appeal. Investment-based crowdfunding has also benefited from the decline in sentiment toward the financial world. The recent financial crises, continued insipid returns, and stock market volatility have made the capital markets much less appealing. The top-heavy nature of the financial systems and their perceived role in the creation of inequality have also diminished the popularity of capital markets.
Savvy and progressive investors have enthusiastically turned to crowdfunding. Low entry capital makes it especially attractive for the middle income and small-medium business owners.
There are four main types of crowdfunding: debt, equity, rewards and donations, with new variations and hybrids, such as revenue-sharing, continuously emerging.
The object of crowdfunding investments differ. Crowdfunding of start-ups empowers entrepreneurs but has inherently higher risks. The power to create, however, has unique appeal. There is also a recent phenomenon where a start-up’s crowdfunding success is taken as proof-of-concept and attracts venture capital. SME crowdfunding helps to bridge funding gaps – exacerbated by the credit crunch – for growing companies looking to expand. Real estate crowdfunding breaks down the capital barrier for this favorite investment of the wealthy, and as it continues to gain traction, has the potential to reduce income inequality over time. The premise is that we can all become landlords or even real estate developers.
Islamic crowdfunding is a new term coined to describe Islamically-inclined or Shariah compliant platforms. Fundamentally from a structural and contractual viewpoint, most crowdfunding categories except debt crowdfunding are Shariah compliant. Of course, the nature of the campaign or business also needs to be ethical and in line with Shariah.
I firmly believe that Islamic crowdfunding will change the Islamic finance landscape.
My belief stems from the fact that the fundamental basis of Islamic crowdfunding is the community, whereas Islamic banks emerged from a much more corporate environment. When the overriding motive and mechanism revolve around the community, profit motives cease to be at the forefront of decision-making. Logic is based on a more holistic view of community benefit, which results in many wonderful initiatives and movements for the societal good. This is clearly in line with Islamic principles. Islamic crowdfunding has the unique ability to empower the masses to create and re-create products, lifestyles and communities independent of capitalist corporations or bureaucratic governments. In essence, if harnessed properly, society is now able to shape its own world based on its own needs, wants and principles.
Unfortunately, Islamic crowdfunding has taken some time to get off the ground. Up until 2014, there was just a handful of Islamic crowdfunding platforms worldwide, but over the past two years, this sector has suddenly sprung to life.
The Middle East has the most vibrant Islamic crowdfunding scene, with almost 10 platforms spread from the UAE to Egypt, a few of which have venture capital backing. One prominent platform is Liwwa which is Jordan/Palestinian-based and has crowdfunded small businesses with a total of US$500,000 to date.
A casual estimate puts Islamic crowdfunding globally in 2015 at approximately US$25million. Two of the larger platforms outside the Middle East are LaunchGood from the US and Club Ethis from Singapore. LaunchGood is focused on reward-based crowdfunding of new ideas or causes, and is leading the market with more than US$4.5 million to date. Club Ethis focuses on real estate development crowdfunding of affordable housing in Indonesia, and has crowdfunded US$2.2 million in its first 20 months.
Other prominent Islamic crowdfunding platforms include SkolaFund, Kapital Boost, PitchIn and Blossom Finance from Southeast Asia; Beehive, Shekra, Zoomaal, Eureeca and Aflamnah in the Middle East; and Easi Up 570, HalalSky and FundingLab in the west.
The future of Islamic crowdfunding is indeed bright and exciting. The Middle East is expected to continue to lead growth, especially with the recent flurry of venture funding into quality platforms, and the natural acceptance of crowdfunding by the general community there. Malaysia recently issued six equity crowdfunding licenses, and is now exploring issuing peer-to-peer platform licenses too.
This gives current and future Malaysian platforms a regulatory advantage, and may well spur the development of the industry not only in Malaysia but also in Singapore and Indonesia. Western platforms are poised to grow also, especially since crowdfunding itself enjoys higher market acceptance and awareness.
Islamic crowdfunding is here to stay, and its rate of growth and impact depends a lot on the support and engagement of the Muslim community, as well as ethical investors subscribing to the same ideology. It is potentially an incredibly powerful tool, one that must be used in unity for maximum impact.
Umar Munshi is the co-founder of ClubEthis.com and KapitalBoost.com (Singapore). He can be contacted at [email protected].