Crowdfunding Framework in Islamic Finance

Crowdfunding Framework in Islamic Finance

Hasnan Baber (Woosong University, South Korea)
DOI: 10.4018/978-1-7998-0218-1.ch017

Abstract

Crowdfunding has been a topic in limelight for the last few years. Crowdfunding platforms are the intermediaries which connect the contributors with fundraisers. Crowdfunding has started its journey in traditional finance however; its attributes and characteristics are much alike with Islamic financing. While the same concept will be applied to Islamic finance, there must be a proper framework which will guide the Islamic crowdfunding platforms to raise funds for Shari'ah complaint projects as per Islamic laws and regulations. This chapter provides different outlooks of crowdfunding and illustrates how different Islamic finance instruments and products can be used in Crowdfunding. The chapter provides framework for process of crowdfunding campaigns which will be complaint with Shari'ah regulation under the supervision of the Shari'ah body. At the end of chapter, two crowdfunding platforms are discussed which does not claim to be Shari'ah complaint but can be roadmap for Islamic crowdfunding platforms.
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Introduction

Crowdfunding is an umbrella term which encompasses all the process in which individuals or organizations unite to provide financial support to a wide-range of activities like a project, a business or personal loan, a cause, a start-up, an innovation, and other requirements through an online web-based platform. Crowdfunding is a system of raising capital by asking to a pool of individuals and organizations through online or mobile phone (Jenik, Lyman & Nava, 2017). Alonso (2015) stated crowdfunding a new approach where investors provide financial support to business proposals in return of financial or non-financial benefits. Heminway and Hoffman (2010) defined crowdfunding as a mechanism where start-ups raise funds from a group of people through the internet which is supported by social networking and viral marketing.). Aveni & Jenik (2017) stated crowdfunding as a FinTech’s alternative finance (AltFi) category. Crowdfunding is an innovative method of funding a project or idea through a contribution made by the general public known as the crowd (Jenik, Lyman & Nava, 2017). A crowdfunding portal does exactly what financial intermediaries used to do in traditional fundraising with more convenience and efficiency (Belleflamme et al., 2014; Klohn and Hornuf, 2012; Dorfleitner et al., 2017).

The online feature and the small quantum of investments of crowd-funding make this different from its traditional counterpart. Crowdfunding act as a link between the crowd also known as contributors (Kim & Moor, 2017) or backers and fundraisers. Investors are not always expert investors like in traditional investments. They are simple people who have access to the internet and want to support a project or cause by making small contributions. Crowdfunding is part of the financing application of Financial Technology (FinTech). Increasing restriction on lending after the crisis of 2008 by banks made borrowers look for alternatives and decreasing interest rates made investors seek for other ways to invest offering better yield (Delivorias, 2017). Kirby and Worner (2014) blamed the financial crisis of 2008 for the outpouring of crowdfunding growth and expansion. Thus, crowdfunding has been called the great equalizer, because as Harrison (2013) argues, anyone with a good idea can access global backers or contributors and a global market. As an intermediate of funders and fundraisers, a crowdfunding platform offers information and matching service between the crowd and projects (Wu et al., 2018). Vismara (2018) stated that the success of the project and the final outcome depends on the events which happened during the first days of the campaign. Astebro et al. (2018) concluded the same results and find that early contributors gather and disseminate information which encourages other contributors to invest.

Key Terms in this Chapter

Sadaqah: It is an act of giving charity but not obligatory.

Start-Ups: A start-up is a company which is in its early stage of business and development.

SME’s: (Small and medium enterprises) Different countries define SME’s different but in common these are the enterprises which range from home office to mi\medium size range.

Equity: The worth of a company, distributed into many equal parts possessed by the shareholders, or one of the equal parts into which the value of a company is divided.

Fintech: FinTech is the blend of delivering financial services and innovative information technology.

Shari’ah: Islamic rules and regulations which governs an act or doing business.

Investments: the investing of money or capital in order to achieve lucrative returns, as interest, income, or appreciation in value of money or capital invested.

Zakat: Fourth pillar of Islamic faith and obligatory on all wealthy Muslims. It is an act of given some predetermined part of ones wealth to the poor sections of the society.

Crowdfunding: It is an innovative process to raise funds usually in small amounts from a large population called as crowd through online application/website.

Peer-to-Peer (P2P) Finance: It is a process of connecting fundraisers who are looking for loans with investors who want to invest their money in those loans.

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