What is Crowdfunding?
Crowdfunding is a method of raising capital through the collective effort of friends, family, customers, and individual investors (or donors). This approach taps into the collective efforts of a large pool of individuals—primarily online via social media and forums—and leverages their networks for greater reach and exposure. Increasingly, larger investors including financial institutions, fund houses, family offices and high-net-worth individuals are also participating in Crowdfunding platforms, resulting in the larger platforms becoming bonafide funding marketplaces, where different fund sources are aggregated to finance projects together.
Crowdfunding is a very useful tool for start-ups that may have innovative money-making and job-creating ideas through new businesses and eventually help to create a better community. In the past, to apply for a loan from banks, start-ups and micro and medium-sized enterprises (MMEs) will need to have a strong business plan and financial history. These applications will typically be rejected as they are deemed to be too risky when viewed through the lens of the banks’ credit and risk assessment. Fortunately, through innovative delivery models such as online crowdfunding platforms, startups, SMEs & MMEs can now have access to a huge base of investors online. When these same startups are featured on crowdfunding platforms, thousands of micro and large investors and supporters may decide to rally behind the startups and support it. For example in 2009, only USD10 million was raised globally through nine major crowdfunding platforms. However the figures escalated dramatically to over USD767 million in 2016 with backers from over 200 countries. This has facilitated the growth of entrepreneurs by providing finance to about 1.3 million crowdfunding projects. Additionally, apart from start-ups, SMEs & MMEs, crowdfunding can also be used as a platform to get donations for the under served segment of the society.
Crowdfunding vs. Islamic Crowdfunding
The main point of departure between crowdfunding and Islamic crowdfunding is the application of Islamic principles in the latter. At a glance, in Islamic crowdfunding, financing is raised from a collective effort of friends, family, customers, and individual investors (or donors) – primarily online via Shariah-compliant (in accordance with the Islamic principles) platforms. In addition, to further ensure its Shariah compliance, Islamic crowdfunding must avoid the promotion of forbidden substances such as gambling, alcohol, pork and any other items that are prohibited in Islam. The term is also more loosely used to refer to Muslim-focused platforms and Muslim-owned platforms that may not have obtained formal endorsement of Shariah-compliance.
Types of Islamic Crowdfunding
There are 4 types of crowdfunding, namely donation crowdfunding, reward crowdfunding, equity crowdfunding and crowdfunding for projects and term-based financing, typically referred to as peer-to-peer financing or P2P financing. In donation crowdfunding, donors donate to Shariah-compliant non-profit projects, social-development initiatives etc. While in reward crowdfunding, donors contribute money for a reward such as a gift or the final product from the project owner. It is noteworthy to point out for both equity and debt crowdfunding, they may be placed under a wider category of ‘investment crowdfunding’ since Islamic finance investment models may be hybrids of what is typically categorized as P2P or equity. In equity crowdfunding, investors contribute a substantial amount of cash and will become shareholders of the crowdfunding, sharing both profit and loss. Finally, in P2P crowdfunding, investors will expect in return principal repayment with profits.
Selected Examples of Islamic and Muslim-Focused Crowdfunding Platforms in Malaysia
Here are some of the Islamic and Muslim-focused crowdfunding platforms in Malaysia, and a brief snapshot on what they do.
Ethis Ventures partners with, develops and operates ethical and Islamic crowdfunding platforms both in Malaysia and Singapore (and soon the world). It has an associate group of platforms, namely Ethis.co, KapitalBoost.com, NusaKapital.com, GlobalSadaqah.com and Skolafund.com.
Ethis and KapitalBoost.com are both based in Singapore, and are widely-recognised pioneers in the field, having won numerous awards and accolades over the past few years. EthisCrowd.com is the world’s first real estate Islamic crowdfunding platform focusing directly into social impact real estate projects in Indonesia and KapitalBoost.com is Asia’s first Islamic P2P crowdfunding platform for small and medium-sized enterprises (SMEs). The two platforms came together in Malaysia to form NusaKapital.com.
NusaKapital.com is the world’s first regulated Shariah-compliant peer-to-peer (P2P) crowdfunding platform based in Malaysia. It was awarded one of 6 licenses for P2P financing by Securities Commission Malaysia. A second platform in Malaysia, GlobalSadaqah.com focuses on Islamic Social Finance. It helps to match charity funds for sadaqah, zakat (a form of tax on wealth) and waqf (a form of endowment made for religious purposes) from both the public as well as financial institutions such as Islamic Banks. Donations are made to high-impact charity campaigns. Featured campaigns include supporting the education of Rohingya refugees, funding children from low-income families to have heart surgery and even campaigns to end energy poverty in villages with solar power.
Skolafund.com platform matches deserving underprivileged undergrads with potential funders who donate to ‘micro-scholarships’. Essentially, Skolafund allows students wishing to pursue a tertiary education to raise funds for their personal tuition fees or other education-related expenses. Over the past 3 years, it has funded more than 100 students from less-privileged families studying in universities and colleges in Malaysia.
LaunchGood.com is the world’s largest donations and reward Islamic crowdfunding platform, based in the United States. As at March 2018, it has raised USD35 million in over 102 countries and funded 3,274 campaigns, with a large emphasis on personal fundraising campaigns, while also raising funds for disaster relief and humanitarian aid in conflict zones. Recently, it also established its representative office in Malaysia.
PitchIN is widely recognised as Malaysia’s national crowdfunding platform. Since inception in 2012, the pitchIN rewards venture has become the most successful rewards crowdfunding platform in South East Asia, evident through its successful groundbreaking crowdfunding projects such as the first ever Indie festival in Penang, TAPAUfest and TeeSomethingNice, a tee-shirt project in celebration of Hari Malaysia and Merdeka 2014. In addition, PitchIN also helped to secure a permanent place for Wok It, a Malaysian mobile kitchen that serves quick and customised meals to raise finances to build their kitchen and to set up a permanent home. Apart from reward crowdfunding platform, PitchIN also offers equity crowdfunding platform.
ATA PLUS Sdn Bhd’s equity crowdfunding platform known as Ata-Plus aims to democratise financial inclusion by matching capital with exciting businesses. Investors can leverage on the comprehensive networks in the ATA PLUS ecosystem to manage risk in supporting sustainable business. Although ATA PLUS is not formally Shariah-compliant, it can be regarded as a type of Muslim-focused crowdfunding platform.
Finally, Islamic crowdfunding platforms can be deemed as an integral component of the present Islamic financial industry as it helps to fulfill the inherent characteristics and principles of Islamic finance. In addition, it will also create a win-win situation for all the relevant stakeholders. Moving forward, if properly implemented and exercised, Islamic crowdfunding platforms in Malaysia can be the next game changer of the Islamic financial industry.