Crowdfunding : Source of Financing and Investment Opportunity
Crowdfunding, also known as participative financing, presents itself as a method of fundraising that allows individuals and businesses to seek financial contributions from a large number of people, in various forms of financing, typically through online platforms. It serves as an innovative alternative to traditional funding methods, providing the opportunity to realize diverse projects through the power of the community. Rooted in ancient communal practices, Crowdfunding experienced modern growth in the early 2000s with the advent of the Internet, becoming a substantial substitute for conventional financing by directly connecting project promoters with fund providers worldwide.
Based on the transactional model to be established, four main types of crowdfunding are distinguished:
- Donation-based crowdfunding, where the promoter seeks donations for a specific action or work,
- Loan-based crowdfunding, where the promoter aims to fund the project through public loans,
- Investment-based crowdfunding, where the promoter opens the capital to the public to fund the project,
- Pre-sale crowdfunding, where the creator seeks resources to fund production and offers contributors exclusive access to products and a sense of direct contribution.
III- Advantages, Disadvantages, and challenges of Crowdfunding
Beyond diversifying funding sources, Crowdfunding contributes to democratizing access to financing and reducing promoters’ dependence on traditional funding sources. Its impact on Financial Inclusion and social cohesion is evident, especially for Donation-based Crowdfunding and Pre-sale Crowdfunding. However, this democratization, independence, and all the positive aspects of Crowdfunding are subject to obstacles that can hinder the product’s growth and affect its effectiveness. These include project failure risks, legal complexity for certain products, regulatory disparities between developed and developing countries, etc. For this globally-oriented product, challenges are numerous, including defining ethical rules for promoters, empowering platform administrators in choosing promoters and projects, encouraging developing countries to ease Crowdfunding regulations, imposing platform access obligations for filtering aimed at transparency and transaction reliability on one hand, and combating money laundering and terrorism financing on the other.
IV- Crowdfunding status and perspectives
Crowdfunding models are evolving with the introduction of new approaches such as decentralized financing (DeFi) and the increasing use of blockchain, offering a set of financial activities on crypto assets taking place “on-chain,” via automated, decentralized, and intermediation-free protocols. Future perspectives include clearer regulations, increasing integration of technologies like blockchain, and the expansion of crowdfunding into new sectors such as green financing, financial inclusion, and integration of very small businesses.
A- Crowdfunding in Developed Countries:
The United States has the world’s most mature crowdfunding markets. Crowdfunding platforms, whether focused on funding creative projects, business financing (Equity Crowdfunding), or other areas, play a significant role in funding numerous startups and innovative projects.
In 2022, the US crowdfunding market is the largest, with a total transaction value of USD 34.2 billion for a global market of USD 65 billion worldwide (Source: STATISTA https://www.statista.com/study/47352/fintech-report-alternative-financing/).
In Europe, crowdfunding adoption has become widespread, with variations in regulation and popularity between countries. The UK, France, and Germany have been leaders in the field, but other European countries have also seen the emergence of successful crowdfunding platforms. To cite France, in 2022, EUR 2.4 billion was collected on crowdfunding platforms, representing a 25% growth compared to 2021. Since 2015, the figures have multiplied by 14 to reach a cumulative amount of 7 billion in financing since the emergence of Crowdfunding in France, across all transactional models (donation, loan, investment).µ
B- Crowdfunding in Africa:
In sub-Saharan Africa, there is a growing interest in crowdfunding. However, despite a spectacular increase in fundraising of nearly 481% in 3 years (2018-2020), locally collected funds remain low. It is observed that in a market estimated at USD 1.2 billion in 2020 with forecasts of USD 2.5 billion in 2025, only 3% of funds raised are done on local platforms. The absence of crowdfunding regulations in almost all African countries hinders the development of crowdfunding platforms. Nevertheless, some countries already have regulations or are in the process of adopting them, including Morocco, Algeria, and Tunisia.
C- Crowdfunding in Tunisia:
Tunisia recently adopted a specific regulatory framework for crowdfunding since 2020 (Law No. 2020-37 of August 6, 2020, and Decree No. 2022-765 of October 19, 2022, regulating Crowdfunding activity in investment in securities). However, relaxations in foreign exchange regulations are strongly recommended to allow Tunisian residents to diversify crowdfunding sources and enable the industry to internationalize.
VI- Synthesis Reflections
- Reflection on Crowdfunding Risks:
Despite its significant benefits, Crowdfunding presents considerable risks for both investors and promoters, including project failure risks (only 20% success in developing countries), the risk of scams or lack of information, and higher risks for investors in Crowdlending without personal guarantees, leading to higher expected returns and higher project financing costs. Banking institutions consider crowdfunding credits as financial debts that impact a company’s debt capacity, forcing them to recalculate the risk of any new commitment.
- Reflection on Islamic Finance and Crowdfunding :
Analyzing the benefits of Crowdfunding and some of its objectives reveals a significant convergence with Islamic Finance (IF) fundamentals.
Indeed, participative finance, adherence to ethical rules, democratization of funding, connection to the real economy, creator’s freedom in project management, and transparency on the product are common concepts found in both IF and Crowdfunding.
Some innovative Crowdfunding products are compatible with Islamic Finance trends and goals, reflecting its fundamentals.
- Investment- Crowdfunding perfectly aligns with the Mudharaba product, where there is cohesion between labor force (project creator/Rab AL3AMAL) and capital force (contributor/Rab ALMAAL), freeing the creator’s hand in project management.
- Pre-sale Crowdfunding is nothing other than the ISTISSNAA and SALAM products offered by Islamic finance.
- Donation-based Crowdfunding is a product that derives its uniqueness and legitimacy from “ZAKET” and “SADAKA,” considered pillars of Islamic economy.
- Loan-based Crowdfunding: When provided without interest, this product is strongly encouraged by Islam. The KARDH HAÇEN can be seen as a variant of Crowdlending that aligns perfectly with the principles of Islamic Finance.
This leads us to say that Crowdfunding represents a significant opportunity for the development of financial resources in Islamic finance and the consolidation of participatory finance, a banner it has carried since its inception. Developing SUKUK, SALAM, and ISTISSNAA Crowdfunding platforms, among others for donation, is, in our opinion, a lever for the international development of Islamic finance that should be carefully considered by enthusiasts of this thriving financial sector.