Emergence of Islamic crowdfunding in Asia

Muslim entrepreneurs and the less wealthy, increasingly shut off from bank loans by stricter capital rules, can take heart in a new form of financing taking root in Asia — Islamic crowdfunding.

The practice of raising funds from a pool of investors via the Internet is emerging in Singapore and seeking to comply with Shariah principles.

Ethis, set up in the city state in March 2014, has raised S$2.5 million ($1.8 million) to finance buyers of affordable new homes in Indonesia and is seeking another S$50 million by 2017, director Umar Munshi, 32, said in an interview. It plans to expand to Malaysia next year. Kapital Boost started on the island in July to fund small businesses in Southeast Asia.

The crowdfunding industry worldwide reached $16.2 billion in 2014, pioneered by online hubs like Kickstarter, according to Californiabased research company Massolution. Gulf Asia Shari’ah Compliant Investments Association said the “huge” potential for the system is stifled by a lack of legislation.

Malaysia introduced rules governing equity-style funding this year while Indonesia has no regulations and Singapore is in consultations.

In October 2015, the US Securities and Exchange Commission approved rules to allow small investors to buy shares in crowdfunded startups.

“The potential for Islamic crowdfunding is huge, particularly if it stays true to, and focuses on Islamic values such as profit- and loss-sharing,” said Suhaimi Zainul-Abidin, a founding member of the Shariah association in Singapore.

“The segment leads to more fluid deployment of capital, helps solve financing issues faced by many small- and medium-sized enterprises and allows small-time investors to sink their teeth into interesting but bite-sized investment opportunities.”
Kapital Boost

Kapital Boost is looking to procure up to S$30 million to help fund small businesses in Singapore, Indonesia and Malaysia ranging from meat suppliers to garment producers, managing partner Erly Witoyo said in an e-mail interview. It has raised S$200,000 so far for seven companies, he said.

Witoyo said crowdfunding began in Asia in 2013 via CoAssets and Crowdo in Singapore, adding that there are about 10 to 15 companies providing such services in the city state, Indonesia and Malaysia.

“Muslims comprise approximately a quarter of the global population, and yet Islamicbased financial assets comprise only less than 1% of total global financial assets,” said Witoyo, 41, a former Barclays and Credit Suisse Group executive.

“Especially in Singapore, the options for investing in Shariah-compliant financial assets are limited.”

‘More prominence’

The Manila-based Asian Development Bank estimates that average bank loans to small- and medium-sized enterprises declined to 18.7% of total lending last year from 23% in 2007.
Kapital Boost currently only focuses on SMEs in Singapore and Indonesia, Witoyo said. He said the process conforms to the Islamic principle of Murabaha. Investors buy an asset on behalf of an enterprise, which agrees to buy it back at a mark up at a future time and date, the difference being the profit rate, he said.

Ethis is in the midst of building 1,200 homes in Indonesia, according to Munshi. The company plans to start raising money for Malaysian housing projects in the second quarter of 2016 and will open a branch in Kuala Lumpur this month, he said.

“As Islamic crowdfunding grows, it will start to gain more prominence and importance in the Islamic finance industry,” said co-founder Munshi.