Islamic crowdfunding takes off in Asia
As the crowdfunding industry worldwide reaches $16.2 billion, the practice of raising funds from small investors is just taking off in Asia. The potential is huge, particularly if it complies with Sharia principles, but is stifled by lack of regulation. Beginning in Asia in 2013, there are now between 10-15 companies providing such services in Singapore, Indonesia and Malaysia, but only Malaysia has introduced rules governing equity-style funding so far.

Kuala Lumpur: Muslim entrepreneurs and the less wealthy, increasingly shut off from bank loans by stricter capital rules, can take heart in a new form of financing taking root in Asia — Islamic crowdfunding.

The practice of raising funds from a pool of investors via the internet is emerging in Singapore and seeking to comply with Sharia principles. Ethics Pte, set up in the city state in March 2014, has raised 2.5 million Singapore dollars (Dh6.4 million, $1.8 million) to finance buyers of affordable new homes in Indonesia and is seeking another S$50 million by 2017, Director Umar Munshi, 32, said in a November 3 interview. It plans to expand to Malaysia next year. Kapital Boost Pte started on the island in July to fund small businesses in Southeast Asia.

The crowdfunding industry worldwide reached $16.2 billion in 2014, pioneered by online hubs like Kickstarter, according to California-based research company Massolution. Gulf Asia Sharia Compliant Investments Association said the “huge” potential for the system is stifled by a lack of legislation. Malaysia introduced rules governing equity-style funding this year, while Indonesia has no regulations and Singapore is in consultations. In October 2015, the US Securities and Exchange Commission approved rules to allow small investors to buy shares in crowdfunded start-ups.

“The potential for Islamic crowdfunding is huge, particularly if it stays true to, and focuses on Islamic values such as profit- and loss-sharing,” said Suhaimi Zainul-Abidin, a founding member of the Sharia association in Singapore. “The segment leads to more fluid deployment of capital, helps solve financing issues faced by many small- and medium-sized enterprises and allows small-time investors to sink their teeth into interesting but bite-sized investment opportunities.”

Kapital Boost

Kapital Boost is looking to procure up to S$30 million to help fund small businesses in Singapore, Indonesia and Malaysia ranging from meat suppliers to garment producers, managing partner Erly Witoyo said in an email interview on November 2. It has raised S$200,000 so far for seven companies, he said.

Witoyo said crowdfunding began in Asia in 2013 via CoAssets Pte and Crowdo in Singapore, adding that there are about 10 to 15 companies providing such services in the city state, Indonesia and Malaysia. “Muslims comprise approximately a quarter of the global population, and yet Islamic-based financial assets comprise only less than one per cent of total global financial assets,” said Witoyo, 41, a former Barclays Plc and Credit Suisse Group AG executive. “Especially in Singapore, the options for investing in Sharia-compliant financial assets are limited.”

More Prominence

The Manila-based Asian Development Bank estimates that average bank loans to small- and medium-sized enterprises declined to 18.7 per cent of total lending last year from 23 per cent in 2007.

Kapital Boost currently only focuses on SMEs in Singapore and Indonesia, Witoyo said. He said the process conforms to the Islamic principle of Murabaha. Investors buy an asset on behalf of an enterprise, which agrees to buy it back at a mark up at a future time and date, the difference being the profit rate, he said.

Ethics is in the midst of building 1,200 homes in Indonesia, according to Munshi. The company plans to start raising money for Malaysian housing projects in the second quarter of 2016 and will open a branch in Kuala Lumpur this month, he said.

“As Islamic crowdfunding grows, it will start to gain more prominence and importance in the Islamic finance industry,” said co-founder Munshi.

Understanding risks

Malaysia’s regulator issued rules on equity crowdfunding in February, capping fund raising at 3 million ringgit ($688,000) in a 12-month period. The US. Securities and Exchange Commission approved a measure last month that enables start-ups and small businesses to procure as much as $1 million annually by offering shares.

“For Islamic crowdfunding, the issue is how do you ensure that all the Sharia- compliant requirements are complied with by the particular crowdfunding initiative?” said Megat Hizaini Hassan, head of the Islamic finance practice at law firm Lee Hishammuddin Allen & Gledhill in Kuala Lumpur. “There needs to be transparency.”

Islamic crowdfunding has some catching up to do, said the Gulf Association’s Suhaimi, adding that it’s hard to say what the size of the market is because it remains under-regulated in most jurisdictions.

“Many investors on these platforms may possibly be unsophisticated and may not fully understand the risks associated with such investments,” Suhaimi said. “They may be lured simply by the thrill of investing and the promise of higher returns.”