SINGAPORE • Muslim entrepreneurs and small businesses, 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 as well as the region and seeking to comply with Syariah principles.
Ethis, set up in March 2014, has raised $2.5 million to finance buyers of affordable new homes in Indonesia and is seeking another $50 million by 2017, director Umar Munshi said in an interview last week. It plans to expand to Malaysia next year.
Kapital Boost started in July to fund small and medium-sized enterprises (SMEs) in South-east Asia. It is looking to procure up to $30 million to help fund small businesses in Singapore, Indonesia and Malaysia, managing partner Erly Witoyo said in an e-mail. It has raised $200,000 so far for seven companies, he said.
The crowdfunding industry worldwide reached US$16.2 billion (S$23 billion) in 2014, pioneered by online hubs like Kickstarter, according to California-based research firm 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. Last month, the US Securities and Exchange Commission approved rules to allow small investors to buy shares in crowdfunded start-ups.
"The potential for Islamic crowdfunding is huge," said Mr Suhaimi Zainul-Abidin, a founding member of the Gulf Asia association in Singapore. "The segment leads to more fluid deployment of capital, helps solve financing issues faced by SMEs and allows small-time investors to sink their teeth into interesting but bite-size investment opportunities."
Kapital's Mr Witoyo said crowdfunding began in Asia in 2013 via CoAssets and Crowdo in Singapore, adding that there are 10 to 15 firms providing such services in the Republic as well as Indonesia and Malaysia.
"Muslims comprise approximately a quarter of the global population, and yet Islamic-based financial assets comprise only less than 1 per cent of total global financial assets," said Mr Witoyo.
The Asian Development Bank estimates that average bank loans to SMEs declined to 18.7 per cent of total lending last year from 23 per cent in 2007.
"For Islamic crowdfunding, the issue is how do you ensure that all the Syariah-compliant requirements are complied with," said head of Islamic finance practice Megat Hizaini Hassan at law firm Lee Hishammuddin Allen & Gledhill in Kuala Lumpur. "There needs to be transparency."
Islamic crowdfunding has some catching up to do, said the Gulf Asia association's Mr Suhaimi. "Many investors on these platforms ... may not fully understand the risks associated with such investments. They may be lured simply by the thrill of investing and the promise of higher returns."
BLOOMBERG
