Attaining financial inclusion via Islamic crowdfunding
THE Islamic financial industry has become one of the fastest-growing sectors of the global financial system as it offers a comprehensive financial system of its own, ranging from banking, capital market to takaful sectors.
As at end-2016, total Islamic banking assets had reached US$1.8 trillion (RM7.49 trillion) and was projected to surpass US$3 trillion mark by 2020.
Even though Islamic finance has inherent characteristics and principles that promote financial inclusion, there is uneven access to Islamic financial services and instruments. For example, key Islamic banking and finance regions such as the Middle East and North Africa (Mena) and East Asia and Pacific have one of the highest percentages of adults without bank accounts.
In 2013, only 18 per cent of adults in the Mena had accounts in formal financial institutions, while in East Asia and Pacific only 55 per cent had accounts. Globally, two billion adults do not have accounts, and it is estimated that about 200 million micro, small and medium enterprises (MSMEs) in developing economies lacked access to affordable financial services and credit.
MSMEs, being a key economic indicator to achieve poverty alleviation and overall sustainable growth, seems to remain underfunded in Muslim countries, with an average SME financing of only 8.75 per cent as a percentage of total private sector lending.
Thus, fuelling changes in the overall Islamic financial system requires the exploration and implementation of innovative delivery models such as crowdfunding.
What is Crowdfunding? Crowdfunding taps into the joint efforts of a large pool of individuals — primarily online via social media and crowdfunding platforms — and leverages their networks for greater reach and exposure.
Crowdfunding is especially useful for start-up entrepreneurial ventures that usually have practical money-making and job-creating ideas to create new businesses and eventually help to build a better community.
In the past, to apply for a loan in formal financial institutions, start-ups and MSMEs will need to have a business plan. But generally these loan applications are rejected for being too risky. However, through innovative delivery models, such as online crowdfunding platforms, they can have easy access to hundreds and thousands of investors. Achieving Financial Inclusion
through Crowdfunding
As briefly explained above, crowdfunding could be helpful in improving access to finance for excluded and underserved individuals, start-ups, MSMEs, etc. that might have limited or no credit history. This is evident from a World Bank study that shows there was opportunity for 344 million in developing economies to participate in crowdfunding.
Through it, there will be innovations of existing models to serve ‘bottom of pyramid (BoP)’ customers, such as microfinance, etc. On a positive note, new asset classes that are mostly unavailable to BoP customers will now be made available.
In summary, crowdfunding represents a novel fundraising tool embedded in the current financial innovation which operates to produce convergent innovations that deliver both economic and social outcomes to benefit all interested communities, which will eventually contribute towards the efforts of financial inclusion. Selected Syariah-compliant Crowdfunding Platforms Over time, syariah-compliant crowdfunding platforms have evolved to become an essential part of the overall Islamic finance activities, mainly to facilitate implementation of projects for borrowers who are facing difficulties raising money through traditional lending channels. A similar sentiment is shared in Malaysia.
For example, in Malaysia, a successful education-based crowdfunding platform named Skolafund is established as an online web platform for students, especially the ones in need, to crowdfund their scholarships for higher education. The platform was very successful as it has helped to sponsor the education of many poor Malaysians.
And more recently is something that is very dear to the heart of every Malaysian, which is the establishment of crowdfunding by the government to help reduce the country’s staggering debt. In less than 24 hours, the fund took in US$1.76 million.
Conclusion and Moving Forward
Finally, Islamic crowdfunding platforms can be deemed as an integral component of the present Islamic financial industry as it helps to fulfil the inherent characteristics and principles of Islamic finance that is currently missing — financial inclusion.
Also, through crowdfunding, a broader group of consumers who were initially excluded from certain segments of the financial system now have financial access. However, despite the potential benefits as mentioned above, a significant impact of crowdfunding on financial inclusion has yet to be witnessed.
Moving forward, it is essential for a sound and enabling legal and regulatory framework to be in place for crowdfunding to achieve its market-building potential and deliver on its promise to promote financial inclusion.
MSMEs, being a key economic indicator to achieve poverty alleviation and overall sustainable growth, seems to remain underfunded in Muslim countries, with an average SME financing of only 8.75 per cent as a percentage of total private sector lending.
Shabana Hasan is a freelance Islamic banking and finance writer. She can be contacted at shabanamhasan@gmail.com. Mohammad Mahbubi Ali is a research fellow at the International Institute of Advanced Islamic Studies Malaysia. He can be contacted at mahbubi@iais.org.my.