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
