Crowdfunding is the collection of funds from individuals to finance certain entrepreneurship activity. Today, crowdfunding activity amid economic unrest has resulted in sluggish growth particularly during the COVID-19 outbreak. Inter-linkage between SMEs, entrepreneurs and external funding is an inseparable part of crowdfunding activity using digital platforms to meet their financial needs in the light of liquidity issues among them.
Review of 2021
The global crowdfunding market size is projected to reach US$25.8 billion by 2027, from US$12.27 billion in 2020, at a compound annual growth rate of 11.2% during 2021–27. Currently, China is controlling around 37% of the global crowdfunding market followed by the US with 32%, Europe 17% and the rest scattered in some Asian countries as well as the African region.
Meanwhile, based on the type of crowdfunding product, global equity crowdfunding showed a positive trend with a 36.2% market share in 2019 and it is expected to decrease slightly to around 35.7% in 2027 whereas reward crowdfunding recorded 27.4% in 2019 and 27.1% in 2027, and donation crowdfunding recorded 18.7% and is expected to increase to around 19.1% in 2027.
Islamic crowdfunding has become a solution to deliver accessible financial services to unbanked entrepreneurship activity. The practice of crowdfunding activity in some countries may vary either in the form of reward crowdfunding, equity crowdfunding or donation crowdfunding.
Today, transactions in crowdfunding activity use digital platforms via mobile applications. Meanwhile, Islamic crowdfunding differs in terms of emphasizing the Shariah compliance of social as well as commercial activity using designated contracts that meet the Shariah tenets.
The practice of Islamic crowdfunding is conducted using various business models, for example, peer-to-peer lending which is similar to that of conventional lending, yielding a profit margin as the return to investors. Equity investment allows contributors to trade capital for equity shares and enables them to become owners of the company.
Reward crowdfunding is merely a social activity without any intention to get a benefit from the contribution of funds. However, the platform provider may reward the contributors with a product or service as a form of appreciation. The final business model is hybrid crowdfunding where it is a combination of the previous business models.
In addition, Islamic equity crowdfunding is practiced widely in some countries like Indonesia and Malaysia and has contributed significantly to bridging the funding gap for entrepreneurs.
Today, Islamic crowdfunding has achieved a new milestone: Shariah security crowdfunding was introduced in Indonesia in 2020, replacing Shariah equity crowdfunding, the first of its kind in the world. Many platform providers are now struggling to obtain a license to start the business as soon as possible. Shariah security crowdfunding allows the investment in equity or Sukuk where the issuers and investors can be retail investors, entrepreneurs, cooperatives as well as individuals.
Shariah security crowdfunding also uses digital platforms to ease transaction and business activity between investors and issuers mediated by the platform provider. In this regard, there are no significant differences with that of conventional practices.
Preview of 2022
Shariah security crowdfunding is an essential avenue for SMEs, retail investors, cooperatives and individuals to uplift their scope of business with more secured business transactions and transparent, efficient and reliable business activity in line with Shariah rulings.
Although it is considered as an infant industry in the capital market, there is no doubt about the untapped opportunity as a majority of the people are mobile phone users with smart applications, while many entrepreneurs, retail investors and individuals are unbanked with business potential.
In view of the aforementioned, some key drivers of success in Shariah security crowdfunding may occur in the future such as the value proposition as the players continuously work toward enhancing the product value proposition and gauging product success chances. In addition, the use of social media as a source of free promotion is one of the major drivers of the global Shariah security crowdfunding market.
There will be a massive campaign as an avenue for crowdsourcing to provide considerable growth opportunities to crowdfunding manufacturers and of course there will also be more available trained information technology professionals and a skill workforce which will be factors for the growth of this sector. Emerging artificial intelligence technology and the increased adoption of cloud-based solutions are the market opportunities for the crowdfunding market which will happen in the future.
In short, Shariah security crowdfunding using digital platforms has entered into a new dimension of the Shariah compliant capital market. It is also a new landscape of the Islamic financial industry that will greatly contribute to the remarkable growth of Islamic finance. Collaboration and synergy among stakeholders, retail investors and SME players across the globe will result in a new milestone for Shariah security crowdfunding using digital platforms.
Akhmad Affandi Mahfudz is an Islamic finance specialist at the University of Darussalam Gontor in Indonesia. He can be contacted at [email protected]