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 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 usually use debt crowdfunding because they need the financing and would rather repay the funds than give out shares.

Understanding Islamic Finance

Islamic finance is deeply rooted in Sharia law, a set of principles derived from the Quran and Hadith. These principles guide financial transactions to ensure ethical and moral practices. One of the fundamental principles of Islamic finance is the prohibition of interest, known as riba, on loans. 

The participatory and community-driven nature of crowdfunding aligns well with the principles of Islamic finance. Crowdfunding involves a large number of individuals contributing small amounts of money to support a specific project or venture. This collective approach not only fosters a sense of community but also promotes financial inclusion.

In the context of Islamic finance, crowdfunding is seen as a mechanism that emphasizes sustainable and socially impactful investments. The Quranic principles guide Muslims to make choices that contribute to the welfare of society. Crowdfunding allows individuals to participate in projects that align with their ethical values, promoting economic growth while adhering to the moral framework set by Sharia law.

Moreover, the concept of profit and loss sharing is central to Islamic finance. Crowdfunding inherently embodies this principle, as investors share in the success or setbacks of the funded projects. This aligns with the broader idea of ethical and equitable wealth distribution advocated by Sharia law.

All in all, crowdfunding serves as a contemporary financial tool that resonates with the principles of Islamic finance. Its participatory and community-centric model allows for socially responsible investments, fostering economic growth while upholding ethical and moral values as outlined in Sharia law. 

This alignment makes crowdfunding a viable and attractive option for individuals seeking financial opportunities within the framework of Islamic finance.

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.

Real-world Examples

Several successful Sharia-compliant crowdfunding platforms, such as Ethiscrowd, Kapitalboost, and Lounchgood, have emerged globally. These platforms have facilitated investments in various sectors, including real estate, small and medium enterprises (SMEs), and renewable energy. For instance, Lounchgood’s “Lighting Up Gaza” project demonstrates how Islamic crowdfunding can make a positive impact by providing solar-powered lamps in areas with limited electricity.

Beyond Muslim-majority Countries

Contrary to the misconception that Islamic crowdfunding is restricted to Muslim-majority countries, examples like Lounchgood in the U.S. and Energia Positiva in Italy showcase the global applicability of Sharia-compliant crowdfunding. These platforms allow individuals from diverse backgrounds to contribute to ethical and sustainable projects

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