A Shariah Compliant Crowdfunding: What You Should Know About It

A Shariah Compliant Crowdfunding: What You Should Know About It

A Shariah-Compliant Crowdfunding can be your next alternative for halal investment. In today’s article, we will briefly talk about it.

Definition of Crowdfunding

Crowdfunding is a method of raising capital from a large group of people to finance a new business venture.  It is a method of raising funds from the general public- primarily online via social media campaigns and crowdfunding platforms.

The availability of crowdfunding has created investment opportunities for investors. The crowdfunding platform (CFP) operator, the fund seekers or issuers (entrepreneur), and the crowd funders constitute a tripartite relationship in crowdfunding.

The crowdfunding operator is in charge of creating and maintaining the online platform that allows issuers to communicate with crowd funders. The issuer or entrepreneur provides details on a project. It could range from charity to the development of a new product.

4 Types of Crowdfunding

  1. Donation-based crowdfunding; this type of crowdfunding works by asking for small donation from a large number of individuals to raise money for charity. It is suitable to raise money for community projects. For example, raising money to cover the medical expenses of the people in need, or providing assistance to the victims of natural disasters.
  2. Reward-based crowdfunding; another common type of crowdfunding that typically allows investors to contribute the the venture in return for non-financial benefit such as goods or services at a later stage.
  3. Equity crowdfunding; also known as crowd-investing whereby the investors get a percentage of ownership in the venture in exchange of their donations. The concept is similar to buying a common stock on a stock exchange or venture capital.
  4. Debt crowdfunding; In another words, it also called as “peer to peer” lending (P2P). It works by collecting funds from investors with the promise to pay them back at a later date. Entrepreneurs are usually use debt crowdfunding because they need the financing and would rather repay the funds than give out shares.

A Shariah-Compliant Crowdfunding

As Alberto Brugnoni, managing partner of Assaif, the earliest Islamic finance consultancy in Europe, says, “The concept and structure of crowdfunding are perfectly Shariah-compliant.” According to him, crowdfunding has the same participatory methods that are the cornerstone of Islamic finance. However, crowdfunding can be applied in conventional and Islamic ways.

What distinguishes between conventional and Islamic crowdfunding is the existence of the Shariah committee. Instead of involving only three parties (fund seeker, investor/ funder, and platform), Islamic crowdfunding has the Shariah committee who oversees the operations and procedures of the crowdfunding activities. Furthermore, the committee ensures that Shariah’s principles and procedures are rigorously followed throughout the operation. They are also responsible for conducting regular assessments and audits on the platform.

In addition, researchers and Islamic scholars have been trying to develop a framework for Islamic crowdfunding and peer-to-peer lending. One of the efforts is implementing a Murabaha system or sales contract in debt crowdfunding or P2p. This method can be an alternative to conventional debt crowdfunding, which applies the interest system on debts lent by investors or funders.

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