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The Importance of Crowdfunding through Sharia Principles

Friday, August 10, 2018

The rise of crowdfunding (raising capital by taking small amounts of money from numerous investors or backers) has proven to be a positive trend for entrepreneurs. Many entrepreneurs have used crowdfunding services to help jumpstart or sustain the growth of their business.

A Goldman Sachs report noted that crowdfunding could potentially become the most impactful financial model to change the financial system. And the World Bank predicted that by 2025, crowdfunding investment would hit $96 billion per year in developing countries.   

Crowdfunding websites such as Kickstarter and Indiegogo have helped popularized the concept. Both platforms have been critical to the success of several companies. One such company is Pebble, a company that produced smartwatches. Pebble successfully raised over US$20 million from their Pebble Time crowdfunding campaign and sold their intellectual property to Fitbit (one of the largest wearable companies) in 2016. Another success story is Oculus VR acquired by social media behemoth Facebook in 2014 for US$2.3 billion.

There are four main types of crowdfunding—lending (debt), donation-based, rewards-based, and equity crowdfunding. All four crowdfunding types enable a project initiator to collect public funds for co-funding a business or product with the help of digital technology. As a result, the project initiator does not have to rely solely on conventional financial institutions or restricted to their personal network of friends and families to raise funds.    

Is It Necessary to Use Islamic-Based Crowdfunding? 

Pebble’s success story shared above epitomizes the potential of crowdfunding, especially for entrepreneurs. However, an issue worth considering is suitability. Put it another way; is a conventional crowdfunding system suitable for the business atmosphere in Indonesia where majority of the population is Muslim? It may not be entirely so, specifically for the lending (debt) and equity crowdfunding.
A platform specifically based on a sharia crowdfunding model is needed to serve the Muslim market in developing countries. This is doubly important, since conventional financial institutions do not target the Muslim market maximally. Depending only on a sharia banking model where the national asset is only around 5% in the conventional banking is unwise. 

According to the 2015 Global Islamic Economy Report, the global sharia financial asset is estimated to reach $3.5 billion in 2021. Sharia crowdfunding may thus serve as one of the main innovations to help achieve this target as well as positively influence other halal industries such as the food, real estate, pharmacy, and fashion.         

The Benefits of Sharia Crowdfunding

Sharia crowdfunding is markedly different from conventional crowdfunding. For instance, an important tenet of sharia crowdfunding is the application. Sharia crowdfunding transactions should not contradict Islamic law by supporting products or services relating to gambling (maisir), interest (riba), and uncertainty (gharar). Furthermore, the crowdfunding has to be transparent and beneficial to society. 

Read Also : 6 Common Misconceptions about Islamic Finance

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