Author: Herbi Arfah
Crowds is an opportunity; a golden one. It offers limitless opportunities for business owners, especially when they are trying new start-off their compiled commercial models to be backed by those around them. Today’s corporate world offers a fresh dawn to catch up and grab crowd capital prospects for fundraising purposes. Funding through the crowd, or Crowdfunding is not a new financial instrument. Long time ago, aggregating pool of capitals has existed, which has now been developed from traditional context to more sophisticated arrangements. Prior to the post global financial crisis, between 2008 to 2009, the new model of crowdfunding was introduced, with the intervention of new technological enhancement and up-to-date business structures.
Islamic Crowdfunding, an extension of conventional crowdfunding framed and developed within the Islamic principles, was proposed less than 7 to 8 years ago. It was introduced with the aim to combine source of capital from both Islamic communities (through Sadaqah, Waqf and Zakat contributions) as well as to ethically and socially drive crowds’ money through a digitized platform, with blockchain currently leading the trend. Crowdfunding companies are popping up to catch at least few if not most percentages of Muslim crowds’ potential.
To date there are approximately 1.9 billion Muslims amounting to one-fourth of the global population. By rationalizing these numbers, and having such a significant target market, businesses should be able to reach multitudes within the crowd who are able to donate even a little amount for proposed campaigns through new technological advancements. This leads to feasible fundraising through Islamic communities, working within the principle of brotherhood to help one another through new advancements. But, is this the reality? Unfortunately, Islamic crowdfunding is yet to become as significant. Many, not limited to crowdfunding companies, including Islamic social finance practitioners and academicians, have been hoping for active engagement and high levels of acceptance from the public. But, this impactful dream is yet to come true.
To dwell into this further, we studies a crowdfunding platform which was set up with the aim of utilizing Islamic social finance to fund social campaigns. Our study showed that in 3 years, this platform raised funds for upto 70 small campaigns (each below RM50,000) and funds for an estimated 6 medium level projects (each above RM50,000) while they saw a 72% funding completion for charitable campaigns. This information is reflected below in Figure 1
Figure 1: Compilation of Live Campaigns of Undisclosed Islamic Crowdfunding as per 3 December 2020.
Let us put some context to the above data to see if the platform was able to reach any significant milestones through crowdfunding. If there are 300 million Muslims in the target market, the platform would maybe want to reach 10% of the market from whom the expected contributions could be around $1 per person per year. This would means that the platform would be able to collect funds worth of $30 million annually. To note, this is assumed to be the lowest expectation or target for said crowdfunding platform. Yet, in practice, what we are seeing is that funds collected within 2 to 3 years of operations itself is under RM2 million which is equivalent to $494,000 (or less). This shows that clearly, there is a gap in Islamic crowdfunding platforms and in its approach to reach the target customers. A revenue of RM2 million would not be sufficient to cover even the cost of business, let alone assure business continuity. Thus, the lack of success stories in Islamic crowdfunding.
I am truly dissatisfied by the slow moving pace of Islamic crowdfunding, yet even I am unable to pinpoint the exact issue in this practice. The problem could be anything or anyone; and to understand this, further in-depth analytical study must be conducted.. The questions that arise are many; Who failed Islamic crowdfunding? Is it the less responsive crowds? Lack of marketing leading to unsuccessful campaigns? Is it the lack of awareness within the crowd or restrictive engagement? Or is it something none of the practitioners not seeing? , We and maybe the silent crowds, still hope for success of Islamic crowdfunding and will engage to follow up this. The way to go forward must be uncovered and it would be great to engage with you on this matter, so please share your ideas to firstname.lastname@example.org
To discover and understand the gaps in Islamic crowdfunding, and to identify why it is not performing optimally, I recently sat down with one of the leaders in Blockchain crowdfunding, Mr. Hamid Rashid who is the Founder of FINTERRA, a leading blockchain-based Fintech provider that has Islamic crowdfunding as one of their unique solutions. I would like to share this conversation to offer a practitioner’s insight as well as field experiences regarding challenges, realities, and outlook for Islamic crowdfunding. Let us dig in an insider’s mind to see better and wider picture on Islamic fintech and crowdfunding realities.
What challenges did you face early on, in particular prior to launching Finterra in 2017?
Selling the idea to others especially stakeholders including investors, partners and team was most challenging. Building business model, targeting the markets, pricing, and marketing were also significant confronting points when we started Finterra back in 2017. Raising the capital to fly the idea in the right momentum was also taking sometimes. Finally, human resources; quality within the team is very important however it was a bit difficult to find the right ones.
Could you explain briefly on what are Finterra’s value propositions?
In Finterra we have three specific value propositions. We believe and serve the innovation in Waqf industry, a subset of Islamic Social Finance. Finterra is leading in this specific field globally. The second, we have strong value proposition in financial technology (FinTech) software development and, in fact, we are also well-known in providing e-wallet, payment gateway, microfinance, wealth management, and crowdfunding solutions. The third one is we are very strong in fund structuring and fund raising, so far, in our platform we have raised in less than 3 years over RM50,000,000. That achievement is significant compared to the others in the same segment.
What is your plan with the current company for the next 3 years, in terms of product suite and/or expansion?
We are going more to investment-linked and waqf-linked social finance project development. It reflects from our efforts now focusing on development of investment-linked projects. One example is our ongoing Finterra Global Plantation, a paulownia timber plantation project in Kedah, Malaysia. We are looking for big projects with return in excess of 20% to 30% per annum, means a sustainable income. We will focus more towards these kinds of business along with technology in blockchain and finTech development, but we still provide solutions in donation-based Islamic crowdfunding.
Which technological trend or development would Islamic Crowdfunding entrepreneurs need to look out for in the next 3-5 years?
In the tech space industry, especially in fintech, we need to put a focus in the key driver which is the technology and innovation part. Cloud computing, Distributed ledger or Blockchain, smart contracts and tokenisation are technological trends where the strength of solutions and products in fintech is centring. These technologies enable large reach and global operations which is very much relevant in crowdfunding. Consolidation in financial technology will be the other trend where e-wallet, payment gateway, e-KYC will converge in single solutions provider (like Finterra).
What future opportunities do you see in the Islamic Crowdfunding industry as a whole? In which areas do you see the most promising growth opportunities?
Equity-based and investment-linked crowdfunding will be the promising segments that Islamic crowdfunding should consider. The business opportunities related to these segments will provide a new source of capital for companies’ growth. However at the same time, the structuring of the investment offering is key, where investors look at security of their capital, dividend pay-outs, capital growth, and liquidity to exit.
In your view, what has been done successfully by the government and/or regulators (globally or in a specific country) in supporting Islamic fintech, specifically in Crowdfunding? What else should they do in the future?
The government, specifically in Malaysia, has given substantial support in overall financial technology (fintech) development. The regulators have established various frameworks and guidelines, and issued licenses to companies providing services like peer-to-peer lending, equity crowdfunding, property crowdfunding, and security token offering. They have done enough especially in Malaysia and some other countries.
What challenges need to be addressed by Islamic Fintech if they want to remain competitive?
Based on my experience, first, fintech shall create clear differentiation. It means how fintech is offering solutions compared to standard institutions. Second is providing solutions that are simple, easy, and user friendly. The third is the orientation on human touch in the service. This will bring customers back.
Why do you consider Investors should invest more in Islamic fintech?
Islamic fintech is a new space but has large market potential. But it does not mean the Islamic fintech is a non-universal solution, it should be a solution for everybody. Investors also have unique opportunities because Islamic FinTech is fast growing space and so far, there is none notable player in Islamic fintech. Therefore, there are chances for investors to support the creation of big global players in this space.
Is Islamic Crowdfunding slow in its expansion, can you clarify?
As compared to conventional crowdfunding providers, Islamic crowdfunding is quite slow in its expansion because the way it is offered like only for Muslims and packaged like exclusive to Muslim. Marketing, communication, and sales were done very specifically like for Muslim community, and markets only. It should be pictured in more universal message that can bring everyone together for example in ethical and humanitarian way. In general, Islamic crowdfunding is not raising as much as conventional crowdfunding is. The growth has been very small, therefore, its positioning, messaging, communication and channelling need to be altered for universal appeal. Furthermore, business/revenue approach is missing in the Islamic crowdfunding, it is too narrow by only having religious approach in their products, the result we can see no significant growth, expansion or successful exit’s. There is no unique products or services, only value adding not reinventing Islamic social finance.
Please share with us list of challenging factors in Islamic Crowdfunding.
Firstly, the venues for Muslims to put their money or donations are many. They can easily do shadaqah on the street, the neighbourhood, and masjid. Second is the communication through direct interaction like in masjid is more appealing to most segment of Muslim communities, the emotional part plays important role, in addition to credibility of institutions. The third is its exclusivity portrayal that will deliver narrow acceptance towards general crowds. In the future, challenges also will be very much in the use and application of new technology. The Islamic fintech should concentrate on user friendliness, simplified technology, customer service, communication, and positioning. The other challenge is more and more players are entering the markets be it conventional or Islamic, so competition becomes high and market capitalization for each player becomes smaller.
What your expectation on Islamic Crowdfunding ecosystem?
The community itself should explore, accept, and support new ideas and technologies, basically it should change it’s mindset. From the fintech side, the providers should consider doing Islamic crowdfunding beyond charity, they can make it like a lifestyle and position in more progressive way to attract Gen Y & X.
End of Interview