Islamic crowdfunding - what is it and who benefits
Crowdfunding
For new businesses, entrepreneurs, and those with creative ideas, finding the appropriate finance to fund their ideas and projects can be difficult. It is even more difficult for those who are looking for funding options that are Sharia compliant. Without the necessary funds, creating a successful business or launching an idea is near impossible. Crowdfunding has emerged as a great way to raise capital and find the financial backing you need.
For Muslims, crowdfunding can be viewed as a halal way to raise funds, without having to resort to conventional funding options which are interest-based.
Crowdfunding facilitates economic growth for many companies, startups, medium enterprises, and individuals. In return for the investment, investors aim to receive a return from the profits generated.
This article will examine what crowdfunding is, who benefits from it, why more and more Muslims are using crowdfunding platforms, and what you need to look out for if you want to keep your money halal.
Basic Concepts Of Crowdfunding
The very basic concepts of crowdfunding revolve around raising funds from a crowd of people - hence the name crowdfunding. Essentially, it is the crowd that funds the project.
This is an alternative to going to a bank for a loan and securing funding that is essentially a debt.
Some of the key concepts that crowdfunding is based on include:
- the project: a creator or company starts the crowdfunding campaign based on a project or idea. The idea is presented via the online crowdfunding page coupled with a request for for investment and financial backing.
- the platform: the crowdfunding platform is the means by which creators are connected to the angel investor, venture capitalists, potential donors, investors, companies, and backers. Some popular crowdfunding platforms include Indiegogo, GoFundMe, and Crowdfunder.
- Investors: the investors or backers are the individuals or companies that contribute funds to the campaign. In return, they can either receive rewards, equity or just the satisfaction of knowing they have made a contribution to a campaign they believe in.
You can see why any startup company or entrepreneur would look to crowdfunding as a viable way of raising funds.
A crowdfunding campaign should include full details of the project and present it well on the relevant platform or website. The details should be precise and include:
- the project details (including the industry, the market targeted, services on offer)
- the funding goal
- what the money will be used for
- timeline of the deal
Conventional Crowdfunding Types
Some conventional crowdfunding types include the following:
- Donation based crowdfunding: this is where donors contribute to the campaign without expecting anything in return. Many charitable causes raise money this way, but it is also used by individuals for personal fundraising.
- Reward based (equity crowdfunding): this type of crowdfunding is when backers contribute funds to a particular project in exchange for non equity rewards. These can include incentives, early access offers, or special merchandise.
- Debt based crowdfunding: this is the type of crowdfunding where backers lend money to the crowdfunder on the understanding that the money will be repaid (this usually includes interest repayments).
Crowdfunding - Islamic Finance
Some of the basic Sharia rules relating to finance must be complied with if any crowdfunding campaign is to be considered halal. As a financial model, Islamic finance has been successful for many decades. Not only does it facilitate financial inclusion for marginalised communities, but also ensures that small and medium sized businesses have accessible finance.
Islamic crowdfunding aligns with the ideals of Islamic finance, with the focus on the development of society and individuals whilst meeting Sharia goals.
Conventional finance and management has not been able to support small and medium Muslim businesses in the way that crowdfunding has. This is because conventional financial transactions relating to funding are based on interest and debt repayments. For Muslims, this is a price they are not willing to pay.
Crowdfunding is a public-private collaboration, and when done in a Sharia compliant way, it can offer Muslims a viable way of raising money whilst also delivering economic growth.
In fact, crowdfunding as a concept is not unfamiliar to Islamic finance. The current crowdfunding concept can fund its roots in the concept of Islamic microfinance which aims to bring social justice and equity into financial transactions.
IS CROWDFUNDING SUITABLE AS A HALAL FORM OF FINANCING?
To answer this question we need to examine whether crowdfunding can be compliant with Sharia rules, and what Sharia rules state in relation to crowdfunding. Crowdfunding at its very essence is a social collaboration idea, and this fits with Islamic finance principles.
The idea is that individuals collaborate and donate resources to a project, service, or trade that they believe in. With Islamic finance's emphasis on equitable wealth distribution, crowdfunding certainly meets this focus.
Wealth distribution in a fair way is a core principle of Islamic law, and what better way to flow funds from one person to another than crowdfunding. Crowdfunding enables the public to help private sector companies and individuals to grow their enterprises in a socially responsible way.
Another important aspect of Islamic finance to mention here is the focus on ethical responsibility and profit and loss sharing (risk taking). This is pretty much what crowdfunding does. It allows companies and individuals to share in the risks being faced as well as the opportunity to share in the rewards and returns that are generated.
Of course, not every form of crowdfunding model is halal. For example, any form of crowdfunding that includes interest payments or haram industries or enterprises is not permissible and not Sharia compliant. In fact, any crowdfunding model involving interest or speculation is prohibited.
It is important to ensure you do your research and find a project and platform that works within the parameters of Islamic finance rules.
Islamic Crowdfunding
Islamic crowdfunding enables investors to support small and medium businesses in their economic activities via a distribution of wealth. Look out for projects that have an element of social and economic justice attached to them.
There are many crowdfunding projects out there which aim to relieve poverty and to provide financial aid to the poor based on charitable donations and these projects always do well.
Mudaraba contracts can be used in Islamic crowdfunding. They work on the basis that:
- profits from the projects are distributed between the creators and the investors.
- predefined percentages are used in relation to profits
- Investors do not influence the project or have veto powers
- the contracts are beneficial for startups with innovative ideas
In addition, having a zakat based crowdfunding project would also be a concept that is compliant with Sharia rules. Those in need of zakat can set up campaigns asking for zakat money or charitable donations.
Sharia Rules And Regulations
As already mentioned, any crowdfunding project must be Sharia compliant if it is deemed to be in accordance with Islamic finance rules. This means:
- the project, goods, or services must not be involved with any haram industries (porn, alcohol, gambling).
- the capital used to finance the project must be halal
- no interest can be paid or charged
- a Sharia supervisory review should be in place to monitor and track the crowdfunding campaign
Challenges For Those Offering Islamic Crowdfunding
Despite their popularity, crowdfunding campaigns also have their own unique challenges.
Some of the challenges include:
- Generating public interest: one of the main reasons crowdfunding campaigns fail is that they do not generate enough interest from people. Getting the attention of potential funders and investors is key to a crowdfunding campaign.
- Trust: with so many crowdfunding campaigns live at any given moment, some investors shy away from crowdfunding. Before you try and raise any money via crowdfunding, it is important to be able to tell the story of the project and why funding is needed.
- Ideas protection: as with anything these days, once a crowdfunding campaign does well, 10 similar projects will come forward. When presenting your project on any platform you need to ensure that you provide enough information to garner interest from backers, but also keep enough back so you can protect your idea.
- Risk management: as Sharia rules state that profits, losses and risks should be shared equally it is important to ensure that the crowdfunding arrangement meets these goals.
- Technology: in many countries around the world, electronic payment methods are still not common. This means crowdfunding still has limited availability to the poorest in our society.
Overcoming Challenges
The best way of overcoming the challenges relating to crowdfunding is to make it more accessible. By its very definition, crowdfunding is a concept that relies on the crowd to forward fund projects.
Due to the importance crowdfunding places on sharing and participation, crowdfunding platforms across the world are demonstrating cultural and social benefits. As a new platform, there is still more regulation and development to come, but for Muslims it is an innovative approach to raising finance in a halal way.
One of the most fundamental points to remember with crowdfunding is that crowdfunding itself is not automatically deemed to be halal. Each crowdfunding investment opportunity of project needs to be evaluated by the investor or creator to make sure the investment complies with Islamic finance rules.
In addition, the crowdfunding platform and the project need to be assessed on an ongoing basis. Do not assume that once a project starts it will remain halal. Muslims who want to use crowdfunding to raise funds or to invest must ensure that they continue to ask questions, undertake due diligence and consult with scholars and financial advisors who understand Islamic finance.
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Nothing good can be said about a global pandemic and to even look for a silver lining can at times just feel wrong. However, as humans we are programmed to look towards the future and to make the best of changing situations in our lives and in the world around us.
While the shift towards remote work is perhaps the most notable and obvious lasting social change brought on by COVID-19 the data clearly shows that there was also an equally seismic change in people’s spending habits over the past two years. For millions of people the forced reduction in travel, meals out and just about everything else we consider to be fun in life has lead to a substantial increase in their bank balance and household savings.
Research by the Institute for Fiscal studies shows that the household savings rate peaked at 23% during 2020.
Put simply, for every pound that people had leftover after bills, rent and other essentials, households have on average been saving almost a quarter of it. This has been an unexpected yet very pleasant surprise for anyone looking to buy a house, put money aside for their child’s future or even just to take a long overdue holiday in 2022.
What is perhaps even more surprising is that people haven’t been showing any signs of ‘blowing it’ now that pandemic restrictions are easing up and workplaces, entertainment venues and restaurants are opening their doors to the public.
There is a clear trend it seems to not let this once in a lifetime financial windfall go to waste, yet for many people who have for years struggled to save anything at all there is also uncertainty about what to do with their newfound ‘nest egg’ and how to best use it to help them achieve their financial goals.
3 Ways To Make The Most Of Your Pandemic Savings
1) PUT YOUR MONEY TO WORK
Having money stashed away under your mattress or in a savings account is nice and can give you peace of mind about your financial security, but it doesn’t actually help you to build a better, brighter future for you and your loved ones. The average savings account with a high street bank typically pays you an interest rate of less than 1% per year. That means for every £1 you hand over and let them use for loans to other customers, you earn 1 single penny each year. This is not great, especially when you stop and think about how much banks earn on those loans they make with your savings, as the interest rates they charge for overdrafts, credit cards and personal loans can often be as high as 10% or even 25% APR.
In the past it was simply not possible to do anything else than keep your money at the bank, but the rapid growth of new innovative FinTech platforms like Qardus mean this is no longer the case. Our investors have earned over £285,000 through their investments on our platform, through lending their money directly to verified, high growth UK businesses that are aligned with their ethics and values. By cutting out the middleman - your bank - and letting our smart technology do the hard work for you, it is truly possible not just to enjoy the security of the money you’ve saved up during the pandemic, but to actually make it work for you!
The compounding nature of rates mean your modest savings can turn into something that you can truly use to build a brighter future for you and your family.
2) HELP PEOPLE AND SOCIETY
Having money is good, having more money is even better, but the hardships endured by all during the recent pandemic have truly brought life to the phrase - ‘money can’t buy you happiness’.
The pandemic brought out the best in our society, as people worked together both on the frontline in hospital A&E departments, as well as on the ‘home front’, delivering food to elderly neighbours who could not leave their homes for months on end. This is another trend that looks set to continue, as people seek out different ways to make the world a better place one day at a time. Investing is no exception, as when you make values based, ethical investment choices you can not only grow your own future, but help others to build theirs at the same time.
Unlike your savings deposited in a low-yield high street bank’s vault, on platforms like Qardus you can choose where your money goes, who you invest in and for what purpose. We only allow verified, robust businesses to obtain funding on our platform, to mitigate the risk of your investments, and to increase the potential returns on your money. However, unlike other p2p lending platforms we actually allow you to choose which specific businesses you want to fund and invest in, so that you can be sure your money is being invested according to your beliefs and values.
Each investment opportunity on our platform provides you with not only the financial details about the business you are funding, but also their story so you can get to know the people behind the business and make investment choices that make the world a better place £1 at a time.
3) PROTECT YOUR FAMILY AND YOUR FUTURE
If the events of the past 24 months have taught us anything it is that we all need to do a better job of planning for the unexpected and ensure we have the financial resilience to live happily during the good times and the bad.
In fact over 8 million people have no savings at all to rely on in the event of illness, job loss or anything else life might throw at them.
While investing can seem risky and may not be something you have done before it doesn’t have to be. We have created the technology, investment screening processes and legal contractual structures to allow you to invest with confidence in a diverse portfolio of ethnical opportunities with high returns. By investing regularly and diversifying your investments you can grow your ‘rainy day savings’ into a solid financial future for you and your family.
What Is The Recovery Loan Scheme
The Recovery Loan scheme was launched on the 6th April 2021 by the UK government as a successor to the government’s Interruptions Loan Scheme and bounce back grants from 2020. As with any loan scheme, this scheme requires the payment of interest. This, of course, is contrary to Islamic Sharia law principles that forbid the collection or payment of interest.
For many Muslim-owned and backed businesses, the question has arisen as to whether the Recovery Loan Scheme is Sharia-compliant. Before we address that, we need to look at the Recovery Loan Scheme and its key features.
The Recovery Loan Scheme provisions were put in place by the government to ensure that they were able to provide financial support to UK businesses. The government wanted to offer additional funding to businesses in the UK that needed the funding to survive the economic turmoil brought on by the pandemic.
The Recovery Loan Scheme’s main purpose is to facilitate recovery and growth post-pandemic. The payments from the Recovery Loan Scheme also aim to ensure that businesses survive during the transitional period back to regular business activities.
The scheme is open to any business that is:
- Trading in the UK
- Able to show it has been adversely affected by the pandemic
- Not involved in any insolvency proceedings
- A viable business if not for the pandemic
How The Recovery Loan Scheme Works
The Recovery Loan Scheme wants to facilitate a full return to business activities for those businesses that have been impacted by the pandemic. The successive lockdowns have affected many small and medium businesses that have been unable to earn an income from their trade.
The Scheme is targeted at businesses that are viable enough to afford debt finance. The British Business Bank administers the Scheme. The actual funding is made available via a range of accredited lenders.
As with any process that involves applying for a loan, businesses need to make a formal application via the lender of their choice.
The loan consists of standard commercial lending terms and this includes the payment of interest on the loan amount. The interest rate varies depending on the lender who provides the loan.
Features Of The Recovery Loan Scheme
An approved lender of the Scheme can provide various loan products including:
- Overdraft facilities
- Asset finance monies
- Term loans
- Interest and fees payments
Any business applying for a loan through the Scheme can borrow up to £10 million. There are also minimum facilities that start in the sum of £1,000.
Some other key features are:
- Guarantee: the government itself guarantees up to 80% of the loan to the lender, irrespective of the size of the loan. This guarantee is not provided to the business, but direct to the lender.
- Interest: any business that takes out a Recovery Scheme Loan will have to make interest and fees payments from the date the loan is drawn. Although interest rates are capped at 14.99%, lenders are encouraged to keep the rates low.
- Term: terms vary from 3 months to 6 years.
What Are The Sharia Rules Relating To Loans And Interest
Sharia law prohibits businesses from paying or receiving interest. Interest, known as riba in Sharia law, is forbidden as it is seen as a mechanism that promotes social injustice. One of the central concepts of Islamic Finance is that Muslims cannot benefit from lending money and paying interest on loans.Sharia law deems riba as an exchange with no equity. That means that it encourages an exchange that is considered to be unequal and unjust. Riba is considered to be an exploitative transaction.
Bottom Line
If we have a look at the Recovery Loan Scheme, it relies on interest payments as a key feature of the Scheme’s repayment terms. The interest element of the Scheme deems it to be non-compliant with Sharia law. In this case, the business will be repaying the full loan amount plus interest at a rate decided on by the lender.
The Scheme goes against the Sharia principle of ensuring investments and payments are socially responsible.
Sharia law clearly states that lending with the payment of interest favours lenders who make money at the expense of the borrower. Islam forbids the receipt of income from money alone, and this is precisely what interest payments are.
Islamic Finance is based on ethical economic principles. The Recovery Loan Scheme is therefore not Sharia-compliant as the interest payment element of the Scheme is contrary to Sharia principles.However, businesses that operate within Islamic Finance principles can still recover from the pandemic. Islamic Finance is focused on sustainable economics and there are products available within the Islamic Finance market that can assist businesses with economic recovery.
The Qardus Option For Business Funding
We provide finance to small and medium-sized enterprises with growth potential that the business owners want to unlock. The funding available is from £50k to £200k with terms of between 6 and 36 months.
Our funding process is rooted in Islamic community principles and is certified as Sharia-compliant. As a result, we don't charge interest and we don't work in business sectors considered damaging to society, such as alcohol, tobacco or gambling.
Because of our principles, our funding solution is an attractive option for Muslim business owners, but we also provide funding to business owners outside the Muslim community.
We offer fast, flexible and affordable business growth funding that's firmly grounded in ethical principles.
Starting a new business requires an investment of time, energy, commitment, and money. For any small business or startup company, the financial investment is what converts the original concept and elevates into a running business. However, securing the required finance to get your startup off the ground can be difficult, especially when the venture capital market is unpredictable or saturated. Funding is central to ensuring that the business can begin its operations, and it has the cash flow to pay for wages, suppliers, and equipment.
Money can often be one of the main limiting factors that prevent businesses from getting off the ground or launching properly. Many business beginners will not have access to the financial sums needed to build and expand their business. An injection of cash into the business means that it can start earning more quickly, and any profits can be reinvested into the business, thereby facilitating growth and profits.
Startup Businesses
Startup businesses can face many challenges when launching. Money can often be a barrier for new startups that can become overwhelmed with the costs of starting a business from scratch. Businesses that are new also find it difficult to attract investors or equity investments from private investors as they have no track record showing their performance levels.
New startups and small businesses may also find it difficult to raise funds via loans in the traditional financing route. Banks want to have a lot of information to support any application for funding, and many of them are more risk averse when it comes to small businesses and startups. This means that unless these businesses have personal savings to use, they can find it difficult to launch their business.
Sources Of Business Funding
Whilst there are some different options out there for those looking for startup funding, it is important to note that funding is dependent on many different factors. These can include the following:
- The strength of your idea
- The level of market research you have undertaken
- Leadership and their business ethos
- Early traction and users of your business
- Good advisors
Once you have a unique idea with a clear target market, and have considered all the points above and worked to strengthen them, you should be in a position to look for funding sources. Government statistics show that UK startups raised almost £2 billion of funding in 2021.Some common sources of business investment include the following:
- Banks
- Government lending schemes
- Grants
- Equity finance
- Angel investors
- Venture capitalists
- Business Partners
- Friends and family
- Savings
Let's have a look at the above in a little more detail.
BANKS
Commercial lenders have always been one of the more traditional routes to securing funding for businesses. Bank loans are an effective way of securing money and come with repayment terms you are familiar with. However, banks will always require some form of security and this can be prohibitive for new startups and smaller businesses who lack the security banks might require.
Securing financing through banks is far easier for established businesses than it is for new and startup companies, especially in unpredictable economic markets such as the one we have seen since the Covid-19 pandemic. This is one of the main reasons startups tend to look at alternative funding sources for their ideas.
GOVERNMENT LENDING SCHEMES
Government lending schemes are usually run in collaboration with banks and commercial lenders. You can find schemes that offer a percentage of the funding with the banks meeting the remaining funding required. Government lending schemes are a great source of funding as the terms are often far less stringent than those normally associated with commercial banks. The loan amounts for government schemes can vary depending on the type of business so always make sure you read the information carefully before you make an application.
GRANTS
Grants from the United Kingdom government tend not to be repayable but you should always check to see what the terms and conditions state. Grants are a great source of funding for small businesses as they can provide an essential cash injection. However, remember that grants usually require a detailed application that needs supporting information, and you need to be able to provide the information as quickly as accurately as you can. Grants are competitive and fiercely fought over so always make sure your application is the best it can be. You should also check to make sure that the grant does not require you to hand over any shares in your businesses, and what the time frame for using the money is.
EQUITY FINANCE
Equity financing refers to an arrangement whereby an investor invests in your business and in return they are given equity/ shares in the business. If the business makes profits, then these profits are shared in accordance with the equity arrangements, and if the business fails then there is no return of the funds to the shareholders who invested. It sounds simple, and in practice it is a simple give and take relationship. However, it can be difficult to find the right equity investor for your business.
ANGEL INVESTORS
Angel Investors are usually wealthy investors who have the funds to provide to small or startup businesses in return for business equity, or shares. Angel investors tend to use their own net worth in order to fund projects in a private equity type arrangement. Angel investors tend to invest their finances in smaller or startup businesses for minority stakes, rather than investing in large businesses where their financial impact is lessened. They also typically invest their experience and knowledge in the business to enhance its success and are usually involved in multiple ventures at the same time.
VENTURE CAPITALISTS Venture capitalists tend to favour larger businesses with high growth predictions. In return for their investment, they receive an equity stake. Unlike angel investors, venture capitalists do not use their own personal funds, but instead they use an investment fund to finance projects and businesses. Venture capitalists focus their investment within industries such as technology, life sciences, and digital media.
BUSINESS PARTNERS
Having a business partner is a smart idea for any new startup. Not only does it mean that you have a partner to share ideas and concepts with. It also means that you have support when it comes to financing, operating and managing the business. Many business partners have a finance background and provide analysis and support to the business, becoming a trusted advisor. For a successful business partnership, you need to have a mutual vision for the business, commonality, and compatibility.
FRIENDS AND FAMILY
Although this may seem like an easy and obvious funding option, using friends and family as a source of investment can be problematic. Unlike borrowing from a bank, taking money from friends and family does come with a lot of additional stress and pressure. However, if you do have friends and family that believe in your business vision and want to invest this can be a good source of raising money quickly. Of course, with new ways of network funding such as crowdfunding and patreon, there are different ways of using your own networks to secure funds.
SAVINGS
Many new entrepreneurs struggle to secure funding and dip into their own savings. This can be risky as there is no guarantee that your business will succeed and you will recover your savings. Using savings might be one of the easiest ways to finance your business, however you may not have all the funding you actually need. Also, the UK business industry is heavily regulated so it is not simply a case of putting your savings in and being able to take them out when you want. Business laws, regulations and guidelines dictate how business finance operates so make sure you have this knowledge before investing your own savings.
What To Do Before Seeking Funding
These are the steps you need to take before you seek our funding options and sources:
- Business plan - make sure your business plan is robust and refined. It should include a summary, a pitch, forecasts, income and expenditure predictions, business process, scalability, market research and strategic management strategies, and projections.
- Accountant - it is essential that you have a good accountant on board so that your financial planning and business service economics planning is robust and considered. A good accountant will help you throughout your business's growth and can provide you with important information about the valuation of your business, taxes, and financial obligations.
- Credit scores - check your scores and improve them if you need to. In fact you should get all your personal finances in order.
- Consider the range of financing options available to you and narrow down the ones that apply to your business.
- Perfect pitching - prepare your pitch and practice it. Remember, if you don't know your business inside out then it is likely that any potential investor could lose interest. Your pitch does not have to focus on sales or products, but it must be convincing and provide real time information.
- Create a website and start networking and sharing your ideas on various platforms, sharing and gathering data, and building momentum for your idea. Your first customers will probably come from word of mouth or networking so get to work as soon as you can.
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