ISLAMIC CROWDFUNDING PLATFORM IN MALAYSIA

 

ISLAMIC CROWDFUNDING PLATFORM IN MALAYSIA

Crowdfunding is an alternative way of finance fundraising from the community, where those seeking funding and those looking to invest or donate can be matched. Creators and entrepreneurs can make use of these online crowdfunding platforms to expand the number of potential investors and donors, to finance their online project via the Internet. It is an effective and efficient initiative to be recognized because crowdfunding facilitates in helping to generate public wealth along with the integrated system.

In recent years crowdfunding has emerged as a viable and popular alternative channel for entrepreneurs to fund their early stage businesses. The rapid development of internet technology worldwide has turned crowdfunding into a mechanism that pools resources for a particular cause and purpose that they believe in.

Crowdfunding is identified as an open call, essentially through the internet for the provision of financial resources either in form of donation model or investing model in order to support initiatives for a specific purpose. It offers an alternative to traditional funding opportunities for innovative entrepreneur and it seems to work because it eliminates distance-related economic issues such as financing and monitoring progress (Kromidha, 2015). A large amount of creative areas has adopted this crowdfunding idea to fund the money. The establishment of various internet platforms in the investment sector made this form of financing enthralling for investors. The funding of companies over the internet community has been discussed intensively since 2010 and explored in practice and theory.

In order to find additional funding for beginner-companies, according to Denis (2015) a website on their projects must be developed, firstly in order to prove potential investors with all the necessary information about the process of project implementation and possible risks. However, not only professional investors have the opportunity to finance projects that they are interested in. Modern instruments of implementation and support of various projects by means of internet-technologies allow any internet user to become a participant of financing the mentioned projects.

Defining crowdfunding

A definition of crowdfunding is broad as it is used and covers various discipline of financing for multiple purposes and proposed as a new financing mechanism. Many scholars are in a state of evolutionary flux in finding the most accurate definition (Mollick, 2014).  Crowdfunding is defined as a mode of collective funding activities which originally rooted in a broader concept of crowdsourcing (Poetz & Schreizer, 2012) and microfinancing (Morduch, 1999). Crowdfunding is the practice of funding a project or venture by raising small amount of money from a large number of people, typically via the internet (Oxford Dictionaries, 2014).  The concept of crowdfunding derives from the term that start out as crowdsourcing which has created a buzz in terms of alternative financing. According to the Merriam Webster dictionary, it is the practice of obtaining needed services, ideas or content by soliciting contributions from a large group of people, and especially from an online community, rather than from traditional employees or suppliers (Crowdsourcing, 2014). It would seem off the back of that, crowdfunding and crowdsourcing are the same and the terms are similarly for preference. However crowdsourcing focuses on organizations that are usually target-oriented, whereas, crowdfunding focuses on the general non-profit sphere (Dei-Anang, 2015).

Therefore, crowdfunding in the application of this concept, is the collection of funds through small to medium-size contribution from a crowd in order to finance a particular project. As explained by Belleflamme, Lambert & Schwienbacher (2013) crowdfunding can be defined as crowdfunding that involves an open call, mostly through internet, for the provision or financial resources either in form of donation or in exchange for the future product or some form of reward to support initiative for specific purpose.

Crowdfunding is the practice of developing an online group-based investment campaign to generate funds for a specific project (Massalution, 2012). According to Kirbi and Worner (2014) in IOSCO Working Paper Crowd-funding: An Infant Industry Growing Fast defines crowdfunding as ‘an umbrella’, a term describing the use of small amount of money, obtained from a large number of individuals or organisations, to fund a project, a business or personal loan and other needs through an online web-based platform. This means the project is basically funded by the large number of small, one-time payments made by people who are interested in the project dedicated to internet websites.

Generally crowdfunding is subject to the business concept of a crowd test project and usually each individual who is interested to help in achieving a particular goal provides a small sum of contribution in exchange for profit, or a product, or a service, to be produced. Sometimes, the individual merely contributed for charity without expecting anything in return (Lutfi & Ismail, 2016).

Islamic crowdfunding

Islamic finance and crowdfunding are essentially compatible and mutually reinforcing. Islamic finance ideally, is a way of financing based on shariah principles that are ethical and adheres to socially responsible standards, which should ensure fair distribution of benefits and obligations between all the parties in any financial transaction. On the other side, crowdfunding also embodies these characteristics and provides a ground for novel developments in the field. Islamic finance and crowdfunding both conceptualize customers as investors and are able to potentially provide investment opportunities with higher returns. In addition, they both place a strong emphasis on transparency, mutual involvement, and trust. (Achsien, & Purnamasari, 2016)

Shariah and crowdfunding have similar goals and philosophical foundations, which are aimed to build communities, encourage risk sharing, democratise wealth, and channel capital to real economic activities. Consequently, we can define Islamic crowdfunding as the platform designed to comply with shariah principles.

Islamic crowdfunding is further described as the use of small amounts of money, obtained from a large number of individuals or organisations, to fund a project, a business or personal loan, and other needs through an online web-based platform in accordance with shariah principles.

For Islamic crowdfunding, there is a formal certification process to ensure the shariah compliance of platforms. Furthermore, similar to Islamic banks, Shariah Supervisory Boards may also present as a part of its governance. Islamic banks employ scholars of Islamic law in a consultancy and advisory capacity to examine the Shariah-compliance of their contracts and transactions. According to El-Gamal (2006), this shariah certification is actually the most obvious distinguishing feature of Islamic finance. It is envisioned, however, that when Islamic financial products have been standardised, the role of these boards will be substantially reduced .

Muslims are also forbidden from any transactions that incorporate elements of usury (riba), uncertainty (gharar) and gambling (maysir). Besides, they are prohibited from taking part in any business that involves forbidden activities in Islam. For instance, any project or business that contains pornography and alcohol must be avoided. The platform such as Kickstarter does not take this element of forbidden activities into account as it was promoting a pornography filming, Fine Art Nudes, in requesting funds to release a series of nude art (Kickstarter 2016).

As a Shariah compliant platform, one of its duties is to ensure that the business idea presented or pitched to them is Shariah compliant. If the platform wants to offer Islamic products, this framework suggests that the platform appoints a Shariah advisor in order to ensure that the proposed activities comply with Shariah laws, since it is a prerequisite in peer-to-peer and equity based models to be approved by the Security Commission of Malaysia. On top of that, the Shariah advisor ensures that in order for projects to be approved, they must operate according to Shariah laws, such that any ideas which passes the screening or due diligence process will then be promoted to the crowd or the public (Lutfi & Ismail, 2016).

As Islamic financial services industry, especially the banking sector, has successfully designed interest-free alternatives to debt-based financing for Small and Medium Enterprises (SMEs), typically based on Islamic trade instruments, Islamic equity financing for this SMEs remains exclusive. Islamic crowdfunding offers a transparent, cooperative, and cost-effective way for Shariah-compliant equity financing. As for lending-based model, crowdfunding essentially transforms what was previously an off-line financing (Achsien and Purnamasari, 2016).

In Malaysia, halal crowdfunding is becoming part of Islamic finance, acting as an alternative financing instrument to facilitate the implementation of projects for Malaysian borrower who are facing difficulties to raise money through the classical lending channels. The main difference of halal crowdfunding in Malaysia with conventional crowdfunding is the utilisation of the Murabahah principle which allows entrepreneurs to finance trade which are underlined by tangible goods. Among the established in Islamic crowdfunding platforms are Ata Plus, Waqf World, Ethis Kapital and Nusa Kapital.

As the final note, Islamic crowdfunding are typically independent. However, the next generation of Islamic financial institutions have to introduce and explore the elements of crowdfunding that could offer more benefit and profit in the future. Islamic crowdfunding might be perceived as a substitution for conventional funding offered by banks, finance companies, private equity and venture capitals, but it can actually become a complement that empowers the public to diverge their fund into the desired projects in a Shariah compliant way.

*This is master thesis, if any inquiries can email to habibahsramli@gmail.com