Islamic Crowdfunding - A Gateway to improve financial inclusion in

Malaysia

Abstract

Micro-financing also called micro-credit, is one among the smallest amount developed
areas in Islamic finance because it stands at but 1 percent of the worldwide Islamic finance
services industry and are designed and developed with the first intention of poverty alleviation
and fulfillment of the shari’ah requirements. Differ from the commercial banking which only
focused on maximizing risk and minimizing risk, micro-financing may be a service provided
specially to unemployed or low-income individuals or groups who do not have any other access
to financial services. While institutions participating within the area of microfinance most
frequently provide lending microloans can range from as small as $100 to as large as $25,000
and many banks offer additional services like checking and savings accounts also as micro-
insurance products, and a few even provide financial and business education. The goal of
microfinance is to ultimately give impoverished people chances to become self-sufficient. The
World Bank estimates that quite 500 million people have benefited from microfinance-related
operations. Islamic economic system promotes equity-based and risk sharing instruments to
suits Shari’ah principles. Therefore, the equity-based crowd-funding is seen to be the best
alternative sort of financing that meets the overall Shari’ah requirements as Islamic crowd-
funding are often used as a medium to fund projects and Islamic product. Theoretically, Islamic
crowd-funding is potentially to be employed in countries with Muslim population and countries
that are based on Islamic religion. Board of Shari’ah is required to make sure that project and
product offered in crowd-funding portal is a qualified and must follow the Islamic halalan
toyyiban also any donation or loaned given by funders must be permitted by Islamic law. As
crowd-funding platforms has gaining momentum in the European countries, following an initial
success in the USA, the Islamic banking and finance industry in Malaysia should explore the
chances of implementing their models into our Islamic micro-financing facilities as a drive to
enhance financial inclusion in Malaysia. This research outlines few factors that cause the
formation of crowd-funding, the advantages and therefore the barriers of crowd-funding, also
what the policy makers and regulators should do in order to promote and spread the awareness
about what the crowd- funding would benefit the society.
INTRODUCTION

What is crowdfunding

Crowdfunding is a method of raising capital through the collective effort of friends, family,
customers, and individual investors (or donors). This approach taps into the collective efforts of
a large pool of individuals—primarily online via social media and forums—and leverages their
networks for greater reach and exposure. Increasingly, larger investors including financial
institutions, fund houses, family offices and high-net-worth individuals are also participating in
Crowdfunding platforms, resulting in the larger platforms becoming bonafide funding
marketplaces, where different fund sources are aggregated to finance projects together.

Crowdfunding is a very useful tool for start-ups that may have innovative money-making
and job-creating ideas through new businesses and eventually help to create a better
community. In the past, to apply for a loan from banks, start-ups and micro and medium-sized
enterprises (MMEs) will need to have a strong business plan and financial history. These
applications will typically be rejected as they are deemed to be too risky when viewed through
the lens of the banks’ credit and risk assessment. Fortunately, through innovative delivery
models such as online crowdfunding platforms, startups, SMEs & MMEs can now have access
to a huge base of investors online. When these same startups are featured on crowdfunding
platforms, thousands of micro and large investors and supporters may decide to rally behind the
startups and support it. For example in 2009, only USD10 million was raised globally through
nine major crowdfunding platforms. However the figures escalated dramatically to over USD767
million in 2016 with backers from over 200 countries. This has facilitated the growth of
entrepreneurs by providing finance to about 1.3 million crowdfunding projects. Additionally,
apart from start-ups, SMEs & MMEs, crowdfunding can also be used as a platform to get
donations for the under served segment of the society.

Crowdfunding vs. Islamic Crowdfunding

The main point of departure between crowdfunding and Islamic crowdfunding is the application
of Islamic principles in the latter. At a glance, in Islamic crowdfunding, financing is raised from a
collective effort of friends, family, customers, and individual investors (or donors) – primarily
 online via Shariah-compliant (in accordance with the Islamic principles) platforms. In addition, to
further ensure its Shariah compliance, Islamic crowdfunding must avoid the promotion of
forbidden substances such as gambling, alcohol, pork and any other items that are prohibited in
Islam. The term is also more loosely used to refer to Muslim-focused platforms and Muslim-
owned platforms that may not have obtained formal endorsement of Shariah-compliance.

TYPES OF ISLAMIC CROWDFUNDING

There are 4 types of crowdfunding, namely donation crowdfunding, reward crowdfunding, equity
crowdfunding and crowdfunding for projects and term-based financing, typically referred to as
peer-to-peer financing or P2P financing. In donation crowdfunding, donors donate to Shariah-
compliant non-profit projects, social-development initiatives etc. While in reward crowdfunding,
donors contribute money for a reward such as a gift or the final product from the project owner.
It is noteworthy to point out for both equity and debt crowdfunding, they may be placed under a
wider category of ‘investment crowdfunding’ since Islamic finance investment models may be
hybrids of what is typically categorized as P2P or equity. In equity crowdfunding, investors
contribute a substantial amount of cash and will become shareholders of the crowdfunding,
sharing both profit and loss. Finally, in P2P crowdfunding, investors will expect in return
principal repayment with profits.

Selected Examples of Islamic and Muslim-Focused Crowdfunding Platforms in Malaysia

Here are some of the Islamic and Muslim-focused crowdfunding platforms in Malaysia, and a
brief snapshot on what they do.

1.    ETHIS VENTURES

Ethis Ventures partners with, develops and operates ethical and Islamic crowdfunding platforms
both in Malaysia and Singapore (and soon the world). It has an associate group of platforms,
namely EthisCrowd.com, KapitalBoost.com, NusaKapital.com, GlobalSadaqah.com and Skolafu
nd.com.
EthisCrowd.com and KapitalBoost.com are both based in Singapore, and are widely-recognised
pioneers in the field, having won numerous awards and accolades over the past few years.
EthisCrowd.com is the world’s first real estate Islamic crowdfunding platform focusing directly
into social impact real estate projects in Indonesia and KapitalBoost.com is Asia’s first Islamic
P2P crowdfunding platform for small and medium-sized enterprises (SMEs). The two platforms
came together in Malaysia to form NusaKapital.com.

NusaKapital.com is the world’s first regulated Shariah-compliant peer-to-peer (P2P)

crowdfunding platform based in Malaysia. It was awarded one of 6 licenses for P2P financing by
Securities Commission Malaysia. A second platform in Malaysia, GlobalSadaqah.com focuses
on Islamic Social Finance. It helps to match charity funds for sadaqah, zakat (a form of tax on
wealth) and waqf (a form of endowment made for religious purposes) from both the public as
well as financial institutions such as Islamic Banks. Donations are made to high-impact charity
campaigns. Featured campaigns include supporting the education of Rohingya refugees,
funding children from low-income families to have heart surgery and even campaigns to end
energy poverty in villages with solar power.
 Skolafund.com platform matches deserving underprivileged undergrads with potential funders
who donate to ‘micro-scholarships’. Essentially, Skolafund allows students wishing to pursue a
tertiary education to raise funds for their personal tuition fees or other education-related
expenses. Over the past 3 years, it has funded more than 100 students from less-privileged
families studying in universities and colleges in Malaysia.

2.    LAUNCHGOOD 

LaunchGood.com is the world’s largest donations and reward Islamic crowdfunding platform,
based in the United States. As at March 2018, it has raised USD35 million in over 102 countries
and funded 3,274 campaigns, with a large emphasis on personal fundraising campaigns, while
also raising funds for disaster relief and humanitarian aid in conflict zones. Recently, it also
established its representative office in Malaysia.

3.    PITCHIN

PitchIN is widely recognised as Malaysia’s national crowdfunding platform. Since inception in

2012, the pitchIN rewards venture has become the most successful rewards crowdfunding
platform in South East Asia, evident through its successful groundbreaking crowdfunding
 projects such as the first ever Indie festival in Penang, TAPAUfest and TeeSomethingNice, a
tee-shirt project in celebration of Hari Malaysia and Merdeka 2014. In addition, PitchIN also
helped to secure a permanent place for Wok It, a Malaysian mobile kitchen that serves quick
and customised meals to raise finances to build their kitchen and to set up a permanent home.
Apart from reward crowdfunding platform, PitchIN also offers equity crowdfunding platform.

4.    ATA PLUS SDN. BHD. 

ATA PLUS Sdn Bhd’s equity crowdfunding platform known as Ata-Plus aims to democratise
financial inclusion by matching capital with exciting businesses. Investors can leverage on the
comprehensive networks in the ATA PLUS ecosystem to manage risk in supporting sustainable
business. Although ATA PLUS is not formally Shariah-compliant, it can be regarded as a type of
Muslim-focused crowdfunding platform.

Conclusion

Finally, Islamic crowdfunding platforms can be deemed as an integral component of the present
Islamic financial industry as it helps to fulfill the inherent characteristics and principles of Islamic
finance. In addition, it will also create a win-win situation for all the relevant stakeholders.
Moving forward, if properly implemented and exercised, Islamic crowdfunding platforms in
Malaysia can be the next game changer of the Islamic financial industry.

In 2019, a Singapore-based crowdfunding platform will be the first Shariah-compliant service of

its kind to operate in Malaysia, after it was named by the Securities Commission as a
recognised market operator.

Ethis Ventures, which develops and operates Islamic crowdfunding platforms, will move into
Malaysia in the first quarter next year, its co-founder revealed after receiving a licence from
finance minister Lim Guan Eng at a ceremony in Kuala Lumpur on Friday.
“There has been no Shariah platform in Malaysia,” Umar Munshi told Salaam Gateway. “That is
our value proposition to the Malaysian market: we want to bring Shariah-compliant
crowdfunding services here.”

Though this is the third issuance of licences for equity crowdfunding (EFC) and peer-to-peer
(P2P) operators, none of the recipients had focused on Islamic finance before Ethis. Two ECF
and five P2P non-Islamic operators were also awarded licences today.

Ethis’s flagship service is Ethis Crowd, a real estate crowdfunding platform that connects retail
investors and Islamic banks to fund social housing developments primarily in Indonesia. It also
operates SME crowdfunder Kapital Boost, and Islamic social finance crowdfunding marketplace
Global Sadaqah.

“We have a lot of plans in Malaysia. The first thing is to serve the Shariah market for equity
crowdfunding, for SMEs and start-ups that are locally based,” said Munshi.

“Before this there was no Shariah-compliant option available. Now we have this licence, we will
give SMEs the opportunity to raise funds that are Shariah-compliant through crowdfunding and,
of course, people will be able to invest in these SMEs in Malaysia.”

The company will maintain its Singapore headquarters but will now use Malaysia as an
operational base, he added.

In his first budget last year, finance minister Lim announced fintech would be a priority for the
new government under Prime Minister Mahathir Mohamed, which recently marked its first year
in power. To encourage more start-ups, Lim announced a 50 million Malaysian ringgit co-
investment fund to help support them and ordered the Securities Commission to draw up a
regulatory framework to govern digital financial platforms.
Speaking at today’s event, the minister said: “The digital economy plays a crucial role in
Malaysia’s growth. It grew on average 9 percent annually from 2010-16, making this growth
faster than Malaysia’s overall GDP growth.

“The government is committed to drive Malaysia’s digital economy agenda in an inclusive and
sustainable manner to get the benefits from it. We are seeing more digital innovations making
inroads into the capital markets.”

But before the digital economy can boom, Lim said more Malaysians must gain better financial
literacy, particularly among the young and old, which he believes is far behind the level of other
countries.

“We need to educate them on the benefits and risks, and ensure that decisions taken by
stakeholders are well-informed and well-thought-out. Without this, the development and growth
of the fintech industry may not be able to realise that potential,” Lim said.

Announcing the new licensees, Securities Commission chairman Zaid Albar said each operator
had been chosen to “provide a differentiated value proposition” including Islamic finance “to
meet investors’ growing demand for Shariah-compliant asset classes.”

“While markets have traditionally relied on intermediaries to perform these functions, advances
in technology and analytics have since tilted the playing field towards dis-intermediation. In
other words, the digitisation of finance has made capital markets easier, faster and cheaper to
access, both for issuers as well as investors,” said Albar.
“We hope that these registrations will help to further broaden the ECF and P2P financing
segments while ensuring healthy competition and meeting the demands of investors.”

ATTRACTING INTERNATIONAL START-UPS

Aside from helping SMEs raise funds through its platform, Ethis also aims to attract and re-
domicile international Islamic economy start-ups to a base in Malaysia where they can raise
funds through crowdfunding.

By opening its doors to Islamic crowdfunding, Malaysia can put pressure on its competitors in
the race to attract viable fintech start-ups, Munshi believes.

“Places like Dubai have already been facilitating Islamic start-ups and offering them funding, but
equity crowdfunding is a completely different ballgame. We have an unlimited number of issuers
that we can raise funds for, whereas the specific funds allocated by governments are limited.

“Global investors who want to invest in Islamic economy start-ups or Malaysian SMEs and start-
ups, there’s a lot of scope for that,” he said.

(Reporting by Richard Whitehead; Editing by Emmy Abdul Alim [email protected])

© SalaamGateway.com 2019 All Rights Reserved

According to BNM, “Islamic finance and crowd-funding are inherently compatible and mutually
reinforcing” to promote maslahah mursalah (unregulated public interest). To comply with
Shari’ah, Islamic crowd-funding can only be applied for halal projects, which prohibits gambling
and speculations (maysir), uncertainty (gharar) and interest rate (riba). Thus, among the four
types crowd-funding, only lending-based crowd-funding does not comply with Shari’ah since it
consists the element of riba. The reward based crowd-funding, which is almost similar to the
concept of Bay as-Salam, gives specific rewards, services or gifts to investors who fund the
projects or businesses via crowd-funding. This model is suitable to companies which are looking
for financial assistance to create a new device or gadget by asking public (investors) to pre-
purchase the product via internet. Once the device or gadget is successfully invented, it will be
delivered to the investors who have initially funded the project [5]. Mystartr (Malaysia) is one of
Malaysia’s largest reward-based crowd-funding platforms for creative projects. The platform
connects filmmakers, musicians, artists, and designers to backers who are interested in
supporting their projects. Since its inception in 2012, Mystartr has funded more than 1 million
MYR (US$264,000) worth of projects. The donation-based crowd-funding (charity) is made
through social media and other campaigns and is widely used by non-profit or charitable
organizations to seek donations from the public. Before this type of crowd-funding is being
named, its concept has been used by large charitable organizations in fund raising [6]. In
Malaysia, donation crowd-funding is dedicated to support donation based campaigns which do
not expect any return for the money invested. The philanthropic approach upholds maslahah
mursalah in practical, where the funds can be used for starting up businesses, to assist existing
businesses, or for social and personal reasons such as medical and education expenses. There
are several active donation crowd-funding platforms in Malaysia such as Skolafund, Bitgiving
and Ekoperasi. They serve as point of contact for both, donators who like to spend money for
the good cause and for persons who need financial aid through a modest capital injection. The
equity-based crowd funding (ECF) is defined as an approach that “match startups with investors
and facilitate investment transaction via online” [7]. ECF is essentially a fundraising campaign
where people invest in a company (commonly SMEs) in exchange for shares in that company.
The investors then become a partial owners of the company and have an opportunity to partake
in the company’s profits. The investors also stand to gain from the eventual sale of the shares in
the company if it continues to be successful and goes public in the future. This crowd-funding is
very much like mudarabah type of financing, which also involve real market activities with proper
management and distribution of wealth. Malaysia is the first country in ASEAN to introduce a
regulatory framework to facilitate equity crowd-funding in 2015, with six registered equity crowd-
funding (ECF) platform operators to fully operationalize by 2016 to provide an alternative venue
for capital-raising to SMEs and innovative new businesses. Financial inclusion is defined as “the
process that ensures the ease of access, availability, and usage of formal financial system for
all members of an economy” [8]. Like crowd-funding, it also plays a vital role in providing
socioeconomic benefits to community as it can reduce poverty and narrow the gap of income
inequality. Likewise, [9] concluded that financial inclusion is a delivery of financial and banking
service to disadvantaged and low income group of people at an affordable cost. Hence, it is
affirmed that financial inclusion is to be in correlation with desirable economic outcome [10]. But
then, these groups will not enjoy the economic growth if they are still being excluded from
financial system. As per World Bank statistical data, there are still more than 2.5 billion adults
are excluded from the financial system [11]. Financial inclusion should not only consist of
opening of bank accounts but should also create an awareness in financial products and to
educate people about financial planning as avoidance to get involved in fraud money saving
schemes. In Malaysia, there was a claim saying that Islamic finance can help the disadvantaged
and low income group to access financial services through financial inclusion [12]. The Bank
Negara Malaysia (BNM) has long realized that an inclusive financial system is vital for
sustainable economic growth in long term. Thus, a Financial Inclusive Framework was
introduced by Agent Banking Initiative in 2011 through four areas, which is to provide
convenient accessibility, expanding take-up of financial products and services, promoting
responsible usage and enhancing consumer satisfaction (Bank Negara Malaysia, n.d.).

Malaysia Malaysia is the first country in Southeast Asia that has put in place a regulated
framework for crowdfunding. The Securities Commission Malaysia (SC) has announced
approvals for six equity crowdfunding platforms (ECF) to operate, paving the way for a new
alternative fundraising channel for businesses (Sue-Ann, 2015). The six platform operators are:

1) Alix Global, partnering with Swedish crowdfunding platform FundedByMe which has a
Scandinavian nexus of investors. Penang-based Alix Global is a digital marketing agency and a
WeChat solutions provider in Malaysia.

2) Ata Plus, is a local crowdfunding platform that seeks to match Syariah-compliant businesses
with investors looking for sustainable business opportunities.

3) Crowdonomic, is a regional crowdfunding company with offices in Singapore, Malaysia and

Indonesia. It is backed by US and Japanese investors.

4) Eureeca, is an ECF platform operator in Dubai and is regulated by the UK Financial Conduct
Authority. It offers Malaysian companies a path to raise funds from the Gulf region.
5) PitchIN, is an established local rewards-based crowdfunding platform. It has partnerships
with government agencies and angel investor networks. PitchIN is a rewards based
crowdfunding site in Malaysia where people can raise money for various different types of
projects. Crowdfunding categories currently listed on the pitchIN platform include arts & design,
photography, publishing, technology, community, film & video, games & music. pitchIn is all
about fueling innovation & funding creativity

6) Propellar Crowd+ aims to use Malaysia as a ECF hub for Asean. It has partners in markets
across North Asia and Oceania, namely Hong Kong, China, Taiwan and New Zealand.

ISLAMIC CROWDFUNDING CONCEPT

Islamic crowdfunding is Islam-based crowdfunding. Project and product being offered is halal
and permitted by the religion of Islam. Likewise the money will be used to finance a project must
be guaranteed halal. To determine the halal of a project or product then it is necessary to
establish Sharia Supervisory Board, was to ensure that the money that will be offered to finance
a project or product was lawful then for a while the owner of the money (potential funders)
required to fill out a declaration form halal money. The proposed conceptual of Islamic
crowdfunding scheme as shown in Figure 1.

Figure 1: Islamic Crowdfunding Plaform Process.

In Islamic crowdfunding there are four parties, namely:

1. Project Initiator (PI - which can include: individuals, organizations, and business)

2. Potensial Funders (PF)

3. Crowdfunding Operator (CFO)

4. Board of Sharia (BS)

All activities are conducted online or internet base. All information on the project or product that
is promoted by PI provided in electronic format if it is in the form of photographs, movies or
other forms of presentation, and then uploaded to the portal CF platform.

By crowdfunding (CF) operators, materials uploaded by the PI will be identified by labeling the
account name and then uploaded into the portal as a platform CF project or product is offered to
PF. Furthermore, PF will choose a project or a product that suits his interests. And if there is a
project or a product that is appropriate, then the PF would send a sum of money in accordance
with the options available as donations, loans or equity-based.

Money sent through accounts CF Here it will be cut by transaction fee (5-10%) agreed upon
earlier, and send the rest to the project initiator account when the funds collected have met
campaigned budget.

CONCLUSIION

Islamic Crowdfunding is worthy to be implemented mainly in the countries based on Islamic or

Muslim-majority countries. Crowdfunding itself is very suitable to be implemented because it is
easier for project initiators, especially not bankable yet, including starters business. The role of
the board of Sharia is very important and necessary to filter project or product is Islamic or halal
course offered by CF operators to potential funders. Accordingly BS becomes halal guarantee
institution for PI and PF.

Islamic crowdfunding appropriate forms are: Musharaka and Qardh. Islamic crowdfunding
Musharaka are intended as an investment objectives, donations and equty-based purposes.
While Islamic crowdfunding Qardh is intended to support the financing of projects with loan
basis is demanding a refund which is included into the project at the agreed time with a number
of benefits that can be enjoyed by potential funders who lent funds.
Conclusions and Recommendations

Islamic finance has the capacity to face the unpredictable impact of current financial activities on
the economy. With the help of technology, Islamic finance can compete for neck-to-neck with
the conventional system. Crowdfunding can be one of the main game changers in this industry
since it has disrupted the financial systems. By introducing Islamic P2P crowdfunding, Islamic
finance can promote the real value of the Maqasid Shariah in the current financial market by
promoting a real impact, sustainability and competency in the real economy.

Islamic crowdfunding also faces many challenges to compete with the current crowdfunding
system since the regulators are more concerned with the majority of industry players. For
example, Malaysia regulates crowdfunding business as a second-class player in the market by
limiting the funds raised and the fundraiser. Therefore, it is recommended to have regulation
supporting both banking and crowdfunding players and combining the expertise in technology
and financing business.

Furthermore, one of the strengths of Islamic financial institutions is the presence of Shariah
members. This strength impacted the public greatly since all solutions are derived from Shariah
principles. With the presence of Shariah members in Islamic crowdfunding, it can make their
platform

Buerhan Saiti, Muhammad Hamal Musito, Ensari YÜCEL

482-The Islamic Quarterly: Vol 62, No. 3

more interactive with distinguishable engaging interactions. For example, engaging the Shariah
department staff to give real-time feedback on issues that arise within a transaction or give real-
time Shariah screening on each business offered. Thus, one of the strengths of Islamic finance
is its Shariah workforce which can be utilised effectively in Islamic crowdfunding.

To protect investors from fraudulent crowdfunding campaigns, crowdfunding institutions should

carefully screen the business offered in its webpage. Regulators can introduce regulations for
crowdfunding to make periodic checks on the campaigns offered to the public. Other than that,
the crowdfunding entity can create a stricter application or use unique credit scoring available to
Fintech business to prevent scams. Crowdfunding can also create an open discussion on the
platform for the investor as well as the entrepreneur to produce a transparent system of
investment.
Crowdfunding players could also create a secondary market as an exit strategy in the business.
Regulators could create an online platform as a secondary market for crowdfunding investors.
This could include two sections which are equity-based and debt-based crowdfunding. In this
platform, the crowdfund holders could market and trade their assets. Due to transparency in the
crowdfunding instrument, speculative activities can be minimised in this particular market since
all trading depends on business activities that occur in the real world.