The COVID-19 pandemic harmed all areas of life. What is worse is that the unnecessary restrictions taken during the pandemic destroyed macro economies. This pandemic, defined as the ‘Black Swan’ in conventional economics, has accelerated all countries’ search for alternative financial resources. In addition, the occurrence of the Russia–Ukraine war at the end of the six-month recovery period brought the macro economies of the countries to a state of war. The biggest weapon of this position is the ‘0 Risk’ policy. The gap between national and international banks and the central bank policy interest rate has increased and the funding sources of the markets have been narrowed regardless of the credibility premium. SMEs and start-ups, which need these resources the most, were less affected by this contraction than expected between 2020 and 2022. The main reason for this was the value produced by the crowdfunding product as an alternative source of financing.
In addition, it has become increasingly difficult for Generations Y and Z, who have no experience of a global war/pandemic, to use traditional investment instruments. With the rise in global inflation and the expectation of recession, property and gold prices have reached historic highs. At this point, Generations Y and Z, which constitute 53% of the world’s population, have a high-risk appeal, adopt the principle of ‘high risk + high return’ and have been channeled to the crowdfunding sector.
Although there is no definitive data for the entirety of 2022, it is expected that the global crowdfunding industry, which had a market size of US$13.35 billion in 2021, will reach US$15.5 billion by the end of 2022, with a growth of approximately 11.7%. According to similar calculations, the global crowdfunding market size is estimated to reach US$25.93 billion by 2027.
Review of 2022
Since the global Islamic crowdfunding sector is an emerging market, there is no precise information on the market size. However, there is a numerical increase in the number of companies. According to IFN Fintech data, the number of Islamic crowdfunding companies increased by approximately 30% from 37 as of September 2021 to 48 as of November 2022.
These platforms are generally based in Malaysia, Indonesia and Singapore and operate as international service providers. Their primary activities are centerd on two crowdfunding methods: donation and equity crowdfunding. After analyzing the 48 companies with Islamic crowdfunding platforms, the total market size is estimated to be around US$100 million.
The global Islamic fintech industry will reach an estimated value of US$79 billion in 2022 and is rapidly increasing. At this point, Southeast Asia is the most promising market for Islamic fintech, with a highly concentrated Muslim population and a growing middle class.
However, the internet-based nature of crowdfunding has expanded the promotion and investment hinterland and has shown a successful development in the field of international micro investments in 2022. Micro investments ranging from US$10 to US$5,000 from South Asia and Europe were mobilized in the campaigns launched in Turkiye. This beginning could be a new idea for developing a global Shariah investment guide.
In 2022, AAOIFI organized public sessions on Islamic crowdfunding governance standards, which was a significant development in global Islamic crowdfunding development. Regarding legal infrastructure, the central bank of Saudi Arabia’s regulation updating the crowdfunding rules is also an important development on the public side.
In addition, the issuance of a license by the Capital Market Authority in Oman to the first Islamic crowdfunding platform in the country is noteworthy in terms of the expansion of Islamic crowdfunding.
Preview of 2023
The most crucial capital market mechanism is the secondary market. When micro investors are analyzed, it is observed that their investment periods are not longer than a few months. In particular, the need for a secondary market becomes crucial due to the large volume of crowdfunding by Generations Y and Z and their fast and variable decisions. In 2023, Turkiye aims to establish a secondary market for crowdfunding and Sukuk products to spread capital to the grassroots.
The publication of the AAOIFI Islamic crowdfunding governance standard in 2023 will be an important development. Supporting the sector in terms of the basic principles of Islamic finance while public regulations continue will enable the sector to establish a more selective and secure platform.
The upper limit set by public authorities for campaigns is the main factor hindering the sector’s development. Although crowdfunding is initially seen as an alternative financing tool for SMEs and start-ups, it can increase participation in high-cost but calculable and predictable safe public projects. Particularly at this point, interest costs and the high fixed investment capital requirement in social housing projects developed for low-income people make the housing market increasingly inaccessible.
In Turkiye, the state has launched a project of 500,000 social housing units, 250,000 residential land plots and 50,000 workplaces with an investment of TRY170 billion (US$9.12 billion). The state has committed to a 40% subsidy on housing sales in the project. Part of the project financing will be provided by the TOKI crowdfunding platform, which was established by the state to produce social housing.
The Islamic crowdfunding sector is estimated to be below 1% of conventional crowdfunding, with an expected market size of US$100 million as of 2022, with 48 platforms. The lack of public regulation of Islamic crowdfunding platforms and Shariah governance legislation are the main reasons for this situation. The potential of Islamic crowdfunding is much higher than that of the conventional system.
In particular, when considering calculable and predictable public projects, renewable energy plants and many initiatives and projects with green status, two main factors emerge: high social impact and high profitability. In this context, with the completion of the Shariah governance standard and legal regulations of the countries, the production of macro projects and initiatives with micro investors will be facilitated.
Muhammed Karakulah is a researcher in Islamic capital markets and crowdfunding. He can be contacted at [email protected].