Crowdfunding: An Innovative Instrument for Development Finance and Financial Inclusion

Crowdfunding: An Innovative Instrument for Development Finance and Financial Inclusion

Louka T. Katseli (National and Kapodistrian University of Athens, Greece) and Paraskevi Boufounou (National and Kapodistrian University of Athens, Greece)
Copyright: © 2020 |Pages: 27
DOI: 10.4018/978-1-7998-2436-7.ch011

Abstract

Crowdfunding is an innovative fin-tech mechanism for financing sustainable development. As this chapter demonstrates, crowdfunding can prove to be a powerful tool for financial inclusion, as it opens up funding possibilities for stakeholders, activities, and projects which would not be able to tap funding through the banking system or traditional credit and/or equity providers. This chapter provides a review of the most important recent European crowdfunding initiatives and critically evaluates the present Greek crowdfunding mechanism and its extension into a loan-based and equity-based funding system. By identifying the institutional and functional factors that constrain its use, it provides recommendations for their alleviation. The development of a grant-based crowdfunding platform in Greece has proven to be a powerful innovative tool to meet urgent financial needs in the course of the recent crisis as well as a tool for financial inclusion.
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Introduction

The expansion of international trade and investment activities as well as the need to address sustainability challenges through the implementation of Sustainable Development Goals (SDGs) have increased demand for effective development finance. As traditional forms of development finance have not produced the desired results (ERD 2015), increased attention is being paid to identifying Innovative Financing for Development Instruments (IFDIs). The main definitions of IFDIs are presented in Table 3 (in the Appendices).

According to the World Bank (2012, p.1) an Innovative Financing for Development Instrument can be defined as any financing approach that helps to:

  • Generate additional development funds by tapping new funding sources and looking beyond conventional mechanisms -such as budget outlays from established donors and bonds from traditional international financial institutions- or by engaging new partners including emerging donors and actors in the private sector.

  • Enhance the efficiency of financial flows, by reducing delivery time and/or costs, especially for emergency needs and in crisis situations.

  • Make financial flows more results-oriented, by explicitly linking funding flows to measurable performance on the ground.

Most IFDIs involve combining available financial instruments into a new package or using them in a new context or setting, such as a new sector, country, or region. In some cases, the driving force behind the new financial mechanism is two-fold: to raise new resources and to make the use of those resources more effective.

IFDIs are sorted into four categories, based on the source of contribution (private or public sector) and on the range of their scale (international or national). As argued in ERD (2015), although public domestic mechanisms comprise the largest share of all IFDIs, the use of international private mechanisms has proliferated especially in emerging economies and developing countries. They have attracted significant attention as they have permitted direct access to development-related support by bypassing bureaucracy that has often hampered the flow of traditional forms of development assistance. International private IFDIs include crowdfunding platforms that provide donations, micro loans (e.g. KIVA) and/or equity investment (e.g. Symbid and Crowdcube).

Development finance has been evolving in a rapid pace. In both developed and developing economies, entrepreneurs and NGOs combine traditional debt and equity start-up finance such as personal support systems, angel investors, and venture capitalists with microfinance (Khavul, 2010), peer-to-peer lending, crowdfunding (Schwienbacher, Belleflamme & Lambert, 2013), as well as other financial innovations.

Crowdfunding is an Innovative Financing Development Instrument, whereby a large and otherwise unrelated number of people contribute mainly small financial donations for varied kinds of rewards (financial or not). It is usually conducted via Internet-based platforms that act as the bridge between fundraisers and funders. Crowdfunding usually attracts small contributions, usually from members of the public not familiar with the business world. It bears the risks that are associated with the internet’s virtual nature. The aforementioned elements of crowdfunding distinguish it from traditional financing methods.

In very recent years, the position of crowdfunding in the alternative finance landscape has progressively shifted from being just a marginal option to becoming a well-established and mature funding mechanism. Having started from a limited pool of innovators, crowdfunding has become widespread among investors and supporters in both project and campaign-financing (ECN 2018).

In addition to being considered as an alternative finance option, crowdfunding has also earned a primary reputation as a means to “democratize finance”. This is due not only to the mobilization of a large crowd of individuals, but also to the virtuous processes of co-decision, co-creation, engagement and ownership by all parties involved.

The present paper is organized as follows:

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