Ahead of the Federal Reserve meeting on December 15-16 where all signs are the Fed will commence a gradual rise in rates, oil markets continue to be under pressure. In part this reflects the effect of a stronger dollar, as well as new estimates from the International Energy Agency that the supply glut is worse than previous thought. Add to this an OPEC meeting that failed to meet expectations relating to supply reductions and it is no surprise that oil is below $40 per barrel. Yet to be determined is whether the Fed decision will exasperate the oil weakness and dollar strength or whether it has been (more than) priced in.
Islamic Crowdfunding – a Global Perspective from Singapore
Umar Munshi, co-founder of ClubEthis.com & KapitalBoost.com, contributed this post. He can be contacted at email@example.com
Islamic Crowdfunding has the potential to help us change our world for the better. When an online community unites and pools resources, this community has the financial and social clout and capability to create and re-create multiple aspects of the world and directly impact society.
Crowdfunding itself started and blossomed in the West initially as a fundraising tool for supporters of musical or arts projects, until Kickstarter and Indiegogo, two pioneering platforms, went viral and kicked off the trend. Last year, these two platforms crowdfunded a total of more than US1billion! A recent report by Massolution projects this fast-growing industry to hit $35billion globally in 2015.
There is an immense variety and scope of applications for crowdfunding. crowdfunding continues to evolve and in recent years made strides into the investment world. Real estate crowdfunding is one of the fastest-growing segments of this booming industry worldwide. The global crowdfunding industry is still dominated by the US, but Asia has recently seen strong growth – eclipsing Europe as the next-largest crowdfunding region.
Crowdfunding platforms are able to grow rapidly because of technology. The ease & speed of online transactions, as well as the ability to fund projects directly makes crowdfunding highly appealing, especially to Millenials. Investment-based crowdfunding has also benefited from the decline in sentiment towards the financial industry. The recent financial crises, continued poor returns, and stock-market volatility have cast a dreary gloom over the financial world. The top-heavy nature of our financial systems, and its perceived role in the creation of inequality has also diminished its popularity. There are now even groups and movements campaigning against the perceived ‘Financialization’ of the global economy.
Savvy and progressive investors are thus turning enthusiastically to Crowdfunding as their investment vehicle of choice. The low-entry capital makes it especially accessible to the middle income and small-medium business owners.
There are three main objects of investments through crowdfunding:
- Crowdfunding of startups empowers entrepreneurs but has an inherently higher risk of failure. This creative power is however hugely appealing, and we all dream of having a share in the next big thing (called a ‘Unicorn’ in tech-speak). There is also a rising trend where a startup’s crowdfunding success is taken as proof-of-concept and thus attracts further rounds of angel or venture capital.
- SME crowdfunding helps to bridge funding gaps, exacerbated by the credit crunch, for stable and growing companies to expand.
- Real estate crowdfunding breaks down the capital-barrier to this favorite investment of the wealthy. At this continues to gain traction, it will help reduce the yawning income-inequality created by the disparity in the ownership of land and real estate assets.
There are four common types of crowdfunding today – debt investment, equity investment, rewards and donations. Debt investment is based on fixed-interest returns with capital guaranteed. Equity investment is where investors and business owners have shared ownership – this is the area most in line with Shariah. This year, the Securities Commission Malaysia announced the licensing of six equity crowdfunding platforms, which is a positive sign for Islamic crowdfunding industry. Rewards are typically for supporting startups, where the reward can range from the actual object of crowdfunding (a form of pre-ordering) to something simple like a t-shirt. Donations is purely philanthropic giving with no commercial return.
Why Islamic Crowdfunding?
Alternative investments allow individuals to not only profit, but also do something good to bring benefit to society. Crowdfunding allows the building of communities and promotes ethical and social responsibility which are critical aspects of the Islamic worldview. Islamic crowdfunding is an unprecedented opportunity that very rarely comes. Muslims have been trapped in a capitalist system where money and profit are the main motives of life. With this new wave, Muslims are empowered to create an ecosystem based on our own value-systems.
Islamic finance will never be the same again, once Islamic crowdfunding has greater outreach and acceptance. The backbone of Islamic crowdfunding is the Community, whereas Islamic banks emerged from a much more corporate environment. When the overriding motive and mechanism revolves around community, profit motives cease to be at the forefront of decision-making. Decisions are based on a more holistic view of community benefit, which results in many wonderful initiatives and movements for social good. Islamic crowdfunding has the unique ability to empower the masses to create and re-create products, lifestyles and communities independent of capitalist corporations or bureaucratic governments. In essence, if harnessed properly, society is now able to shape its own world based on its own needs, wants and principles.
Yet Islamic crowdfunding has taken some time to get off the ground. Up till 2014, there was only a handful of Islamic crowdfunding platforms worldwide, but over the past 2 years, many new platforms have sprung up. A prominent platform in the Middle East is Liwwa, which is Jordan/Palestinian-based and has crowdfunded small businesses with a total of $500,000 to date. Interestingly Liwwa is one of the few Islamic platforms backed by both venture capital funds as well as banks.
Statistics are scarce but I estimate Islamic crowdfunding globally in 2015 to be at approximately $25 million.
Two or the larger Platforms outside the Middle East are LaunchGood.com from the US & ClubEthis.com (Ethis = Ethical + Islamic) from Singapore. LaunchGood is focused on Kickstarter-styled reward-based crowdfunding of new ideas or causes, and has crowdfunded more than $4.5 million to date. Club Ethis focuses on real estate development crowdfunding of affordable housing in Indonesia, and has crowdfunded $2.2 million since March 2015. More significantly, the projects that crowdfunding has enabled it to start on will eventually provide more than 1,500 homes for the needy – talk about social impact!
Real estate crowdfunding is one of the most lucrative forms of investment. This sub-sector projected to crowdfund $2.5 billion this year. This form of crowdfunding may be more complex, as real estate regulations and markets differ greatly between territories.
Crowdfunding is a natural way forward for Muslims and majority Muslim countries. Muslims make up almost a quarter of the world’s population, and we have a young and fast-growing population. Even the World Bank predicts that the Muslim world may be one of the first markets in which crowdfunding investment would be truly game-changing. As Islamic crowdfunding matures and grows from strength to strength, it is up to Muslims to participate in the creation of a truly Islamic ecosystem that has the capacity to bring tremendous benefits to our lives, and to humanity as a whole.
Expanding social impact while meeting liquidity management needs
Cooperation between international organizations like the recently announced cooperation between the Islamic Corporation for the Development of the Private Sector (ICD) and International Islamic Liquidity Management Corporation (IILM) offers ways to expand the impact of Islamic finance in OIC member countries. This is particularly relevant for the ICD and IILM cooperation because of the connection between sovereign funding and private sector development which is a key area where two organization’s missions overlap.
Many of the markets in the OIC have relatively centralized economies where the government, and government-related enterprises play significant roles in the economy. Governments, with support from the ICD, are working to expand the private sector but as always there is a shortage of capital available to support private sector development efforts.
A large portion of the ICD’s efforts are conducted through the development of Islamic financial institutions, including by direct placement of funds with Islamic financial institutions. The role for the IILM in this process, besides creating liquid assets for Islamic banks, is possible providing another source of funds for governments to support private sector efforts.
The importance of maintaining the IILM’s high credit rating and its requirement to only finance sovereign assets means that any support it may provide to private sector development efforts has to go through the sovereign. But, provided that the sovereign rating is high enough, the IILM structure allows it to provide funding to the government and also provides IILM with an asset to back its short-term issuance.
The IILM’s information memorandum filed with Malaysia’s Securities Commission states that its’ assets must be ‘A’ rated and can have tenors up to 15 years. It also allows for credit enhancements to support originators with lower credit ratings, which would include most of the OIC’s sovereigns. This provides an avenue by which private capital (provided by the buyers of the IILM’s certificates who are mostly Islamic banks) can support development efforts in OIC member countries.
The way the structure works is based on an asset-backed commercial paper model, where a long-term financial asset is financed with short-term commercial paper. In this case, the long-term financial asset is a mixture of tangible assets (including those underpinning ijara sale-and-leaseback arrangements) and commodity murabaha to expand the issuance relative to the tangible asset supply. The commercial paper issued by the IILM is rated A-1 and qualifies as HQLA because of its sovereign backing (the underlying assets) and liquidity support from similarly rated primary dealers.
The importance of this type of cooperation is that many governments are looking for both the funding they need from the IILM while the ICD provides a lot of technical assistance that can enhance the productive use of these funds. In addition, whereas a lot of funding is provided by official sources (including development banks and developed market governments), the IILM’s funding is largely from the private sector sources including the Islamic banks that need HQLA to meet the Basel III regulations that are currently being implemented. With Islamic banks’ contribution to development under challenge, the MOU offering cooperation with the ICD provides an avenue for private sector capital to be used for private sector development.