The old adage “there is strength is numbers” is most evident in the field of crowdfunding. Projects and activities which seemed impossible to undertake have been supported by mass funding in different parts of the world. In this article, the author elaborates on how the development of this alternative financial take can create a path towards a better world.
Barack Obama’s election as the 44th President of the United States in early 2009 brought back the role of crowdfunding for the great things that changed the world. The large amount of Obama campaign fundraising is a testament of people’s willingness to support someone through finance to whom they trust before the person runs his promise, this financial participation is called crowdfunding. Several multi-funded projects have reached the aspect of urban development. Mass funding changes people’s perceptions and creates something that seems impossible. The urban development in this mass funding phenomenon has taken place in Bogotá, Colombia. The $240 million Skyscraper called BD Bacata has been built right in the heart of Colombia’s capital. All funds from these skyscrapers have been collected through mass funding campaigns with the support of more than 300,000 Bogotá citizens. Crowdfunding has also been able to finance the expansion of the Suez Canal in Egypt. The canal has been operating since 1869 because it can save time and travel costs of the ship from a distance of 19,800 km to 11,600 km. As much as $8 billion has been donated by Egyptians since July 2014, it is now almost complete. The three examples of fundraising above for both the political needs of the presidential election, the urban social needs as well as the necessity of the ship’s maritime traffic to excite the business can be met by crowdfunding replacing the already large and non-agile banking functions. This shows that the involvement of the crowd to fund unusual and creative projects has proved that crowdfunding is not only an opportunity but has already demonstrated success. There is a great opportunity for crowdfunding to become an alternative funding for business, social, and community projects to build a better and more humane world.
Crowdfunding is a generally accepted financial instrument, meaning it can also be implemented in a non-ruling Islamic economic system. So when crowdfunding will be implemented in the Islamic economy there must be an institution that ensures that crowdfunding system and procedures must meet the requirements of halal business according to Islamic Shari’a. And that can be fulfilled by forming a Sharia Council or Board of Sharia that serves as a filter and validator of a crowdfunding platform halal.
Condition of Islamic Finance in theWorld
The Muslim market is huge and potential. The 57 member countries of the Organisation of Islamic Conference (OIC) have recorded a Muslim population of 1.70 billion or 23.18% of the world’s population. Even by 2030 the world’s Muslim population is expected to increase by 35% to 2.2 billion. A large Muslim population is a potential market because they need food, clothing, education, health, housing and other necessities. During this time they meet the needs and goals of their lives more than imports. They mostly export natural product commodities such as mining, plantation, fishery, and agriculture. They have an unfavourable ability to meet their needs independently, such as being self-employed. According to Global Entrepreneurship Monitor (GEM) 2015 the number of people doing entrepreneurial activity in Muslim-majority countries (such as Egypt, Indonesia, Iran, Malaysia, Pakistan, Saudi Arabia and Turkey) is low between 15%-25% only.
The economic structure in Islamic countries is dominated by small and medium enterprises, almost 80-95% are SMEs. The biggest challenge for MSMEs (Micro, Small and Medium Enterprises) is the ability to access banking or other financial institutions. In Islamic countries as well as in developing countries, access to financing ranges from 15% to 42%, the smallest in Indonesia is 15% and the highest in Saudi Arabia, meaning only 15% of credit proposals from Indonesian SMEs are approved for funded by Indonesian banks. While 85% of SMEs’ and new or creative projects funding needs cannot be served by banks and other financial institutions. Another problem is the credit collateral as a guarantee requirement for each bank financing.
The usury-free Islamic financial instruments can be used to solve access and guarantee problems. Islamic banking and finance have grown tremendously since the 1970s, global success, both in terms of growth, development, institutional and product diversity. In the last 5 years, the sharia banking and finance industry has grown an average of 17% per year and assets of USD 1.87 trillion in 2014, consisting of banking assets of USD 1.47 trillion, USD 294.7 billion Sukuk, Islamic Fund Assets of USD 75.8 billion, and Takaful Contributing USD 21.4 billion.
In general, Islamic financial assets are concentrated in the Middle East and Asia. GCC (Gulf Cooperation Council like Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and UAE) is the largest contributor of Islamic financial assets. This region accounts for 37.6% of the total global Islamic financial assets. MENA (Middle East and North Africa such as Morocco, Algeria, Tunisia, Libya, Iraq and Iran) excluding GCC is in second position, with a share of 34.4%. Asia ranks third, 22.4% of the global total, driven largely by Malaysia’s Islamic financial market. The contribution of Sub-Saharan Africa and particularly to the European region is relatively small. The sharia banking and finance industry is supported by nearly 400 Islamic financial institutions operating in more than 70 countries, including countries outside the Organisation of Islamic Cooperation (OIC) countries such as Britain, Germany, Singapore, Luxembourg, the United States and Mauritius. However, the fundamental problems for banks, including Islamic banking, are low access for SMEs and owners of creative projects. This is an opportunity for alternative financial institutions like crowdfunding.
Crowdfunding Conditions in Islamic Countries
To close the funding gap of banks in SMEs, crowdfunding is one of the alternatives. But there are Crowdfunding Platforms that do not meet the criteria desired by Muslim consumers, among them is that the source of funds is lawful and not usury. Likewise, the use of funds is not contrary to Islamic law such as pornography, food and alcoholic beverages, containing pork, blood and carrion.
Some Muslim countries have successfully established and run crowdfunding. Egypt with AqarFunder established since 2012 has managed to organise a fundraiser for the Suez Canal widening. Shekra which was established in Cairo since 2013 with the principle of profit sharing managed to finance many special projects or startup business. Yomken, founded in 2012, has financed 1,500 innovators, completed 41 social challenges, and provided solutions to 132 existing problems in Egyptian society, accounting for 82% of project funding success.
Indonesia may be the crowdfunding capital of Asia with two Kickstarter-like sites that listed initial successes in raising money for creative projects and business startups. There are currently no clear rules regarding crowdfunding in Indonesia, although there are several crowdfunding platforms already in operation: Kitabisa.com is a crowdfunding platform that is open to facilitate technology, creativity and business projects. Kitabisa.com succeeded in funding 2,388 projects worth $100 billion collected from 140,971 people and or community together. Kitabisa.com runs on the basis of donations and does not expect returns or rewards, working on humanitarian grounds without basing themselves on religion, ethnicity and groups. An example is the “Rebuild Masjid Tolikara Papua” project. The project aims to rebuild a mosque in Tolikara, Papua, Indonesia that has been burned by Christians when Muslims perform Eid prayers, 2015. The project raised $3 billion. It also operates several crowdfunding platforms, such as Kopernik, Wujudkan.com, GandengTangan, and AyoPeduli.
In Iran although there is no clear rule from the government, crowdfunding platform has been in operation since 2014. There are several active crowdfunding among them Fundiran, Mehrabane, 2nate, Fundorun, Hamijoo, and Fundly.ir. In Jordan, at least two crowdfunding platforms are operated: Liwwa and AFkarmena. Liwwa is a crowdfunding based on lending and equity, serving SMEs in Jordan and even in some Middle Eastern countries. Established since 2013, at least has funded $2 million for 95 loan projects. Liwaa has even used the concept of Islamic financing by implementing Murabaha in designing a financing contract between the owner of the money and the borrower.
Malaysia is the only Islamic country that has clear rules on crowdfunding, based on the state agency has allowed six crowdfunding platforms to operate in Malaysia: Alix Global, Ata- plus, Crowdo.com, Eureeca, PitchIn, and MyStartr.
Crowdfunding Solves the Problem
Given the limitations of banks in funding businesses especially SMEs and new and creative projects it is better to give the opportunity to crowdfunding to grow, even in an Islamic country. We can implement one or four types of crowdfunding available: Donation-based, Reward-based, Lending-based, and Equity-based. Let’s support crowdfunding for more SMEs and creative funded projects for a better world.
About the Author
Sentot Imam Wahjono is an Associate Professor of Management in his hometown of Surabaya, Indonesia, teaching undergraduate and master programmes. Now assigned to teach in UTeM (Malaysia) from UMSurabaya (Indonesia). He has a long-standing interest in research on Financial Economics.
