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.
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
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).
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
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
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.
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.