The Advantages of Crowdfunding: A Quick And Easy Way of Raising Money
Crowdfunding
Crowdfunding is a process of raising money for a business or idea. Unlike traditional methods of raising finance, crowdfunding is innovative and based on the concept of raising funding via crowds of people.
Some crowdfunding contributors will donate funds entirely altruistically, simply to support the business. Other crowdfunders will see their funding contribution as an investment into the business venture. In return, these investors will be rewarded with a return on their investment. The reason crowdfunding is so popular is that is has become a great way of raising money quickly. This means that no matter how ambitious or how small your project, there is a way to raise finance without resorting to asking financial institutions.
How Crowdfunding Works
Crowdfunding enables businesses and individuals to attract investors in the business through the practice of funding a project by raising sums of money from a crowd of people who are willing to invest in the business. Some of those offering funds will do so altruistically, expecting nothing in return, but for many of the donors they will expect a return on their investment. In order to start a crowdfunding campaign there needs to be a specific cause or project, and a specific goal amount in place. Businesses and entrepreneurs can then ask or invite a number of people to donate various sums of money (small and large) until the crowdfunding goal is achieved.
The unique part of crowdfunding is that it mainly takes place online. The digital revolution over the last decade, coupled with the increase in social media exposure and marketing means that crowdfunding campaigns can be widely shared and marketed. As crowdfunding tends to take place online, the use of social networks is key and makes it inherently easy for supporters of a crowdfunding campaign to share it widely, ensuring the project gains widespread exposure and funding.
Crowdfunding is used for all manner of projects, including charity projects, creative projects, start up businesses, entrepreneur ideas and small businesses. Crowdfunding is a great way for non-traditional businesses such as those businesses following Islamic finance principles, to raise funding in a Sharia compliant way.
Types Of Crowdfunding
The main types of crowdfunding models are as follows:
Investment Based Crowdfunding
This type of crowdfunding is often used by businesses looking to raise capital. Businesses will offer to sell ownership shares and stakes in return for a crowdfunding investment. Businesses will promise to use the funding to develop their business idea or product and in return the investor will receive a share of the business in return for the finance they provided. In this way, donors ultimately become shareholders of the company, with the possibility of owning some of the business equity. Often, these shareholders may also be provided with rights to be involved in the business process and project.
Donation Based Crowdfunding
Donation based crowdfunding is essentially a model where donors are asked to contribute to the project by way of a donation. Individuals will essentially donate funds with the aim of meeting the project finance goal, and in return the donors do not expect anything in terms of shares or financial returns. People who donate rather than invest are not backers of the business, they just offer finance on a not-for-profit basis.
Advantages Of Crowdfunding
For anyone looking to raise finance for their business or idea via crowdfunding, there are some important advantages you should be mindful of.Advantages:
- There are often minimal upfront fees or costs and this means there is some protection from risk when starting out
- There is little financial risk with almost no start up debt
- It's a great form of market testing and marketing research, seeking the opinion of your target audience
- Money can be raised quickly and campaigns can go viral
- Social networks, websites, and online platforms can result in speedy and widespread exposure
- You can use the crowdfunding campaign to gauge public perception, generate interest, and obtain feedback
- Investors and donors can become personally invested in campaigns and this will help you build loyalty programs and interest in your idea
- Crowdfunding enables start-ups, small businesses and innovative ideas to get financial backing
- It is a great way of raising finance and covering costs for those businesses without access to traditional forms of bank lending or in a difficult economy
- You can create community support for your project and build on these important relationships and customer loyalty
- Crowdfunding enables more effective risk management as there is often less risk for smaller businesses
Crowdfunding Tips
For a successful approach to crowdfunding you need to make sure you have a clear and strategic approach to the campaigns. The advice and tips will help you create a successful crowdfunding campaign:
- Pre launch: make sure you do your research, collate all the information you need, build email marketing lists and think of ideas for your campaign content
- Create compelling content: this could include a campaign video, written information relating to your goals and graphics/videos
- Tailor your PR: before your campaign goes live research your audience, find out where they hang out virtually (Twitter, Instagram, Facebook) and target them
- Strategic social media and influencer use: the greater your reach and the reach of the platforms you use the greater your chances of exposure and success. You don't have to limit your audience to the United Kingdom.
- Engagement: encouraging others to comment, share and post about your campaign will deliver your message to a wider audience
- Donations: don't ask for money immediately but do make sure you ask family, friends, colleagues to donate. Share your passion for your project and draw the reader in. Remember to also ask the right people for donations.
Crowdfunding Platforms
Some of the most popular crowdfunding platforms include the following:
- Kiva
- Kickstarter
- Patreon
- GofundMe
- Indiegogo
- Seedrs
All these platforms enable users to share the campaign and spread the word about your project on various social media platforms and via email.
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Written by Ruby Hinchliffe on 5th August 2020
The UK is now home to a growing 27 Islamic fintechs, ahead of Malaysia, Indonesia and the United Arab Emirates (UAE).As of July 2020, IFN FinTech – a global network representing fintech’s Islamic segment – says it’s recorded 142 Islamic fintechs around the world.
Malaysia has 19 fintech start-ups, followed by the UAE with 15, Indonesia with 13, and Saudi Arabia and the US with nine.
The UK's Islamic fintech scene
The UK’s fintech start-up scene has seen some significant traction from Islamic-friendly – as well as focused – firms.My Ahmed, a sharia-compliant e-money platform, was accepted onto the Financial Conduct Authority’s (FCA) regulatory sandbox in July.
In the same month, Islamic peer-to-peer (P2P) lending platform Qardus launched its services in the UK. So did sharia-complaint gold trading platform Minted, which plans to launch a digital bank in 2021. As did Kestrl, a sharia-compliant ethical banking alternative.
Since January, Islamic banking app Niyah and sharia-complaint digital bank Rizq have also launched in the UK.
Capital at Risk. Returns are not guaranteed
August 5 2020, read the full article at Fintech Futures: https://www.fintechfutures.com/2020/08/uk-leads-the-way-in-islamic-fintech-ahead-of-malaysia-and-uae...
WHAT IS A VENTURE CAPITAL TRUST?
A venture capital trust (VCT) is essentially an investment company. In the UK the government introduced VCTs in 1995 as a way of ensuring that investors could invest in start-up companies. The government was keen to encourage investment in entrepreneurial businesses by offering tax relief to investors. Recently there has been discussion and debate about whether VCTs are halal or haram.
For new businesses, VCTs are a great way of raising investment, and for investors they are an opportunity to invest in upcoming businesses.
For anyone looking for Sharia compliant investing, VCTs can be a good opportunity to invest in a halal way. Investing in VCTs can be halal, but you have to ensure that the VCT you invest in complies with Sharia rules about investment and financial transactions.
In recent years, as the Islamic finance market has expanded so too has the desire for Sharia compliant VCTs. The Islamic VCT market is innovative and presents a viable alternative to conventional investment models which are not always acceptable to Muslims who want to invest in line with Sharia rules.
Whilst it is always a personal choice as to where investors want to invest, for Muslims there are additional considerations that require them to be mindful of Islamic laws.
Let's have a look at how VCTs work and how they can operate in a halal way.
HOW DO VENTURE CAPITAL TRUSTS WORK?
VCTs work by raising money and then using the funds to invest in new and innovative companies. Usually these companies are innovative and privately owned. The idea is that the investment raised is then used to generate a profit and solid return for the investment.
The company can be dealing in products and services, offering employment opportunities, and/or meeting a need in the economy. The number of companies seeking investment is never-ending.
As an investor in a VCT, the investor becomes a shareholder of the trust. It is important to note that the investor does not become a shareholder of each individual company, rather the investor becomes a shareholder of the trust in its entirety.
Most VCTs will invest in different companies. This enables the VCT to keep its investment portfolio options diverse and spreads the risk. It is always important to ensure you have all the information you need about the VCT before investing.
When the companies within the trust return a profit, this is paid over to the shareholders.
WHAT DO VENTURE CAPITAL TRUSTS INVEST IN?
Most VCTs will invest in new, small, and entrepreneurial companies across a wide variety of sectors. These can include tech companies, retail, clothing brands, food outlets and many more.
Many of these companies will be privately owned, and some of them are quoted on the Alternative Investment Market or the London Stock Exchange.
Different Types Of Venture Capital Trusts
There are some different types of VCTs. What differentiates them from each other is the investment focus and area:
- specialist VCTs : these are VCTs that remain focused on a specific interest and sector. For example, there are VCTs that only invest in healthcare, or retail. Due to the lack of choice and sector diversification, this often means that they can carry more risk.
- Generalist VCTs : these types of VCT are wide-ranging when it comes to investment. They invest in companies across different sectors. The value to the investor is that there is diversification and less risk.
- AIM VCTs : the Alternative Index Market (AIM) VCTs invest in shares issued by AIM quoted companies. The AIM was set up by the London Stock Exchange in 1995 to ensure that there was a market for companies who can't (or won't) meet the demanding requirements for listing on the London Stock Exchange.
Venture Capital Trusts And Tax Advantages
One of the main reasons VCTs are popular is that they offer tax incentives. Investors can take advantage of:
- tax free dividends
- up to 30% income tax relief
- tax free growth
- capital gains tax exemptions and deferrals
WHAT IS VENTURE CAPITAL TRUST TAX RELIEF?
VCT tax relief can be claimed when an income tax return is filed with HMRC.
What this means for investors is that they can end up with a lower income tax bill, or even a refund if they have already paid their tax.
Islamic Finance And Venture Capital Trusts
Remember, one of the most critical elements of ensuring compliance with Sharia law when investing in venture capital trusts is that you need to work with a Sharia aware, and Sharia compliant, financial advisor.
This will ensure that the investment contract AND investment models are both compliant with Islamic finance rules.
Islamic Venture Capital Trusts Vs Conventional Capital Trusts
The main difference between conventional VCTs and Islamic VCTs is that Islamic VCTs must comply with Islamic finance rules relating to finance and financial transactions.
Islamic VCTs need to stay away from any form of investment in non-permissible, or haram, industries.
A very simple example of this would be as follows: a conventional VCT could invest in brewery shares. However, an Islamic VCT should stay away from any alcohol related industry.
Going further, anyone looking to invest in Sharia compliant VCTs should do additional due diligence and ask questions about the company they invest in. Does it operate ethically? Does it have conventional debts on its book that is interest-based? If so, then the VCT is not considered to be halal.
Advantages Of Investing In Venture Capital Trusts For Muslims
As long as the VCT is Sharia compliant, Muslim investors offer a diverse range of investment options. Muslim investors can take advantage of investing in other Muslim businesses and industries.
There are numerous ethical investment opportunities with halal VCTs that are attractive to Muslims. Socially responsible investing is a core principle of Islamic finance and there are VCTs out there that are ethical and socially responsible.
Halal VCTs also offer the potential for job creation with early stage companies. Supporting these businesses mean Muslims can indirectly be helping struggling economies and economic development. This aligns with the Islamic finance principles that relate to promoting economic wellbeing and financial inclusion.
WHAT IS WAKALA?
Wakala is a popular model Islamic VCTs when it comes to raising capital.
Wakala permits the asset manager of the trust (on behalf of the investor) to act on their behalf based on agreed conditions and terms.
Both parties then share the profits generated, and take on the risk of any losses together. This kind of profit and loss sharing arrangement aligns with Islamic finance principles.
Mudaraba And Venture Capital Trusts
When it comes to investing in start up companies, mudaraba is a common model that is used. The mudaraba contract is a contract that enables one party to the contract to bring assets in and for the other party to bring in effort and experience.
This means that investor provides the financing, and the entrepreneur takes responsibility for the day to day management of the trust. The contract outlines the respective responsibilities of each party and the profit sharing arrangement.
As already mentioned, despite the many advantages of halal VCTs, investors need to work with Sharia compliant advisors who can direct them to halal VCTs.
Consulting with knowledgeable advisors means you have specific guidance and adherence to Sharia rules.
Halal mortgage products and services started appearing on the market to help devout Muslims borrow money. By their very nature, mortgages have historically always been interest bearing.
Islamically, interest (riba) is strictly prohibited. This means that many Muslims were unable to access funding that would enable them to step onto the property ladder.
For many people, purchasing a family home (or refinancing) is an important lifetime investment. However, Muslims in the past have struggled to find halal mortgages that would be in compliance with Sharia principles and rules relating to financial transactions.
Previously, many Muslims not wanting to pay interest on conventional mortgage products would opt to remain in rental properties.
WHAT IS A HALAL MORTGAGE?
A halal mortgage is essentially a home purchase plan. It is not really a mortgage loan in the traditional sense of what we know a mortgage to be.
Halal mortgages are considered to be compliant with Sharia principles because they do not have a loan that is based on interest payments or accrual.
By comparison, traditional mortgages have always included interest payments.
Halal mortgages are more of a long term plan that is offered by the bank to the borrower. This purchase plan contains repayment terms and conditions. However, the purchase plan does not contain any element of interest.
What the purchase plan effectively becomes is more of a sale and lease agreement.The aim of a halal mortgage is to ensure that any prospective homebuyer who wants to purchase a home and wants the terms of the agreement to comply with Sharia law is able to access funding.
Any lender or bank that offers halal mortgages will have taken guidance and advice from experts in Islamic finance and Sharia law. This ensures that the halal mortgage products they offer are fully halal and Sharia compliant.
Comparison Between A Halal Mortgage And A Conventional Mortgage
The main difference between a halal mortgage and a conventional mortgage product is the element of interest.
In Islam, banks are not permitted to make profits from loans. Conventional mortgage loans are designed to profit the banks and the terms are often weighed heavily in favour of the banks. Customers are often required to pay back interest which can fluctuate depending on the market conditions.
The ethical Islamic finance principles that underpin halal mortgages mean that the power dynamic and relationship between banks and borrowers is more even.
HOW DO HALAL MORTGAGES WORK?
Halal mortgages do not involve the borrower borrowing a sum of money from the bank in the traditional sense.
Instead, what will usually happen is that the bank will purchase the property on behalf of the borrower. The property will then be leased back to the borrower. The repayments will cover the initial purchase price and costs, and also an uplift to enable the bank to make a profit.
The monthly repayments made by the borrower to the bank will be partly put towards buying the property back from the bank and partly towards paying rent for residing in the property.
Once the term of the halal mortgage ends, the borrower will have paid back the bank and will fully own the property.
If you are looking for a halal mortgage, then you need to ensure that the lender complies with Islamic finance / Sharia principles.
Types Of Islamic Mortgages
There are three main types of halal mortgage products that are available in the United Kingdom:
- MURABAHA
A Murabaha mortgage is one where the bank purchases the property and sells it straight back to the borrower. The bank makes a profit by selling the property to the borrower for more than it originally paid for it.
This is less of a home purchase plan, and more like a traditional mortgage process. As the home is being solD for money it is considered to be within the Sharia rules that regulate the financial transaction.
- IJARA
A home purchase plan that is an ijara one involves the bank (a Sharia compliant bank) becoming the legal owner of the property you want to buy. The bank will purchase the property and then lease it back to the borrower for a fee.
The borrower is then required to make monthly repayments on agreed terms for the fixed term of the 'mortgage'. The repayments will cover an element of rental payment, and also repayment of the capital that was used to make the initial purchase of the property.
Once the term of the mortgage ends, the borrower should have repaid the bank and be the full legal owner of the property.
Once the borrower takes full ownership of the property they can then remain in the property or sell it on.
- DIMINISHING MUSHARAKAH
Diminishing musharaka works differently to an ijara product. In this type of arrangement, the borrower and the bank jointly own the property as co-owners (similar to a business partnership arrangement). As the borrower makes the repayments, so their share of ownership increases and the banks share of the property decreases.The amount of deposit you put down will help determine your respective share of the property.
The good thing about diminishing musharaka products is that as the borrower makes the repayments, the rental repayment element decreases and the bank's ownership share will keep reducing as the borrowers increases.
DO I NEED A DEPOSIT FOR A HALAL MORTGAGE?
The answer to this question is yes. It is more likely than not that your lender will require you to put down a deposit.
Of course, the size of the deposit will vary depending on the type of product you opt for and the lender you choose.
Normally, lenders will expect to see something in the region of a 20% deposit if you want to access a halal mortgage. However, it is important for you to look around at all the halal mortgages on the market and decide which one meets your needs.
There are some products and services that require much less than a 20% deposit.
You should also be aware that there are some additional costs you need to prepare for including:
- legal costs
- survey costs
- building insurance
- stamp duty
- broker fees
Any borrower looking for a halal mortgage should know that having a good deposit puts you in a strong position.
Advantages Of Halal Mortgages
There are many advantages of having a halal mortgage, and halal mortgages are not only available for Muslims. Many non-Muslims are now accessing halal mortgage products and services as they understand the concept and underlying ethical basis they have.
Some of the main advantages of halal mortgages are as follows:
- According to experts, halal mortgages facilitate financial inclusion and access to property/ house ownership for previously marginalised groups
- Those who want to live by Islamic finance principles can access funding in order to get on the property ladder
- Islamic mortgages and services are an ethical way to fund property purchases
- Halal mortgages are regulated by the Financial Conduct Authority ( FCA ) so borrowers have protection
- Islamic mortgages are less susceptible to market crashes and changes in economics
- Halal mortgages can offer borrowers the chance to own real property with stable property value
- Halal mortgages are not normally subject to fluctuating interest rates
- Halal mortgages have been approved by scholars
- Halal mortgages do not incur or charge interest (interest is strictly prohibited in Islam)
WHAT ARE THE RISKS INVOLVED WITH HALAL MORTGAGES?
It is important to start by saying that halal mortgages are no riskier than conventional mortgages.
One of the main problems with halal mortgages is knowing where to find them and doing your due diligence. This can be a complex and time-consuming exercise.
Sometimes, the rental repayments can be higher than if you opt for a conventional mortgage repayment plan. However, this is the price that is payable for having a home purchase plan that does not charge interest.
There has some been criticism of halal mortgages in recent years for being expensive. However, most banks and lenders who offer halal mortgages will be happy to go through the terms with you and offer favourable rates and services.
If you miss your repayments under a halal mortgage, you will face the same consequences you would as if you had a conventional mortgages. If you do not make the necessary payments then you could face repossession and court proceedings.
Your initial outlay and costs may be higher with a halal mortgage. Many banks have higher administration and processing costs so always check the terms and conditions of any agreement.
However, remember that halal mortgages are fully regulated by the Financial Conduct Authority and this means borrowers have legal protection. You can visit their website to find details of the protections available to borrowers.
In addition, the Financial Services Compensation Scheme does apply to lenders offering halal mortgages.
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