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Introduction
This chapter wishes to explore the relationship between two
fast-growing industries: Islamic finance and crowdfunding. Institutions offering Islamic financial services have increased in number
and availability thanks to a growing demand by certain segments of
the worlds 1.3 billion Muslims for Shariah-compliant products.1
Meanwhile crowdfunding platforms are growing worldwide, thus
showing their viability to attract much-needed investment for businesses and entrepreneurs.
The chapter is divided into eight sections, including the present
introduction. The following two sections will present the two industries of crowdfunding and Islamic finance separately, in order to
proceed to the next section to explore their links and differences.
The fifth section will briefly introduce the current state of the crowdfunding industry in the Arab and Muslim world, while the sixth will
present the example of Yomken, a Shariah-friendly crowdfunding
platform. The following sections will explore the importance of
crowdfunding for Islamic banks, as well as develop an example of an
Islamic financial product based on crowdfunding. The final section
will comprise the conclusion.
Crowdfunding
Crowdfunding is a type of crowdsourcing, which can be defined as
a participative online activity in which an individual, institution,
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Islamic Finance
Islamic finance describes the sector of finance which follows the
rules of Shariah, the Islamic law, based on the Quran and the Sunna.
Shariah has identified interest (riba), uncertainty (gharar) and
gambling (maysir) as elements which are to be avoided in business
transactions. Following these prohibitions, Islamic banking is defined
by a set of rules: interest is forbidden, uncertainty in contractual
terms and conditions is not allowed, investment in certain economic
activities is banned (including pork, alcohol, tobacco and weapons
production, gambling and adult entertainment), the rewards and
risks of the economic activities have to be shared by all parties
involved, and every financial transaction must be backed by a tangible asset.10 According to Islamic law, money should be used in a
productive way. In this context, profit-making is not prohibited, but
conceptualized as just reward.
A distinctive feature of Islamic banking is its focus on developmental
and social goals, as it promises to benefit local communities and provide financial inclusion to those people who had been self-excluded
from the financial system for religious reasons.11 Islamic financial
institutions are expected to promote job creation and promising
economic sectors, stimulate entrepreneurship, promote social justice
and equality and the alleviation of poverty.12 Furthermore, banks
can contribute to, as well as manage, zakah (mandatory almsgiving)
funds for charitable and social purposes.
We can generally observe a unanimous agreement among Islamic
economists on the fact that Islamic banking operations should be
based on the profit-and-loss sharing (PLS) principle instead of on the
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50%
+ 10%
60%
+ 10%
50%
40%
30%
Bu
y
Sh -Bac
are k
s
3
Months
Figure 6.1 Income and ownership for the firm and the inventor
In return, the bank will have an equity share of the project that
will diminish exactly like the basis of the diminishing musharaka.31
Thus, profits from each project are shared between the bank and the
innovation owner. The latter gradually buys back the banks shares in
the project within a predetermined timeline and with a grace period
till the commercialization (Figure 6.1).
The added value of such a financial tool is that it will provide a
virtual channel to market and fund new, innovative projects. The
istebdaa contract enables entrepreneurs to develop their ideas
into products with the alternative and Shariah-compliant finance
method of crowdfunding. In addition, it also encourages, on the
one hand, young students, researchers and potential entrepreneurs
to come up with their own projects; and on the other, it provides a
pool of innovative projects that are highly needed in the Arab and
Muslim world to increase the overall welfare of the society.
Conclusion
This chapter has provided definitions of both crowdfunding and
Islamic finance, as well as explored their links and differences. With
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a special focus on the Arab and Muslim world, the chapter has
introduced the recent developments regarding crowdfunding in this
region, in order to explore the example of Yomken, a Shariah-friendly
crowdfunding platform. This example has provided the ground to
explore the importance of crowdfunding for Islamic banks, as it
can help develop new Islamic financial products. In this regard, the
authors have provided an example of such potential products, based
on the combination of existing Islamic finance contracts and crowdfunding, which need to be further explored by different scholars,
given their high impact on society.
Islamic finance, ideally, is an alternative way of financing based
on ethical and socially responsible standards, which ensures fair distribution of benefits and obligations between all the parties in any
financial transaction. Crowdfunding carries these characteristics and
provides the ground for new developments in the field, as it can use
Islamic finance as a tool to promote financing and development.
Given the challenges faced by Islamic banks in their application of
PLS principles, the development of both Islamic crowdfunding platforms, and new Islamic financial products based on crowdfunding,
provide the ground for an increase in partnership finance.
The area of venture capital is largely underdeveloped in Islamic
finance, which is actually where its essence lies: in partnership and
risk-sharing. Investors in the Middle East and North Africa (MENA)
region tend to be risk-averse and short-term oriented,32 and the
entrepreneurial ecosystem is largely underdeveloped. Thus, there is
a funding gap within the Islamic finance market that crowdfunding
could exploit. In this context, the use of Shariah-compliant crowdfunding not only means the further development of Islamic finance,
but also its connection to entrepreneurship, job creation and, ultimately, economic development.
Notes
1. Said M. Elfakhani, Imad J. Zbib and Zafar U. Ahmed (2007) Marketing
of Islamic Financial Products, in M. Kabir Hassan and Mervyn K. Lewis
(eds) (2007) Handbook of Islamic Banking (Cheltenham: Edward Elgar)
p. 116.
2. Enrique Estells-Arolas and Fernando Gonzlez-Ladrn-De-Guevara
(2012) Towards an Integrated Crowdsourcing Definition, Journal of
Information Science, 38(2) pp. 910.
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3. A. Ordanini, L. Miceli, M. Pizzetti and A. Parasuraman (2011) Crowdfunding: Transforming Customers into Investors through Innovative
Service Platforms, Journal of Service Management, 22(4) p. 448.
4. Ibid., p. 457.
5. Tanya Prive (2012) What Is Crowdfunding and How Does it Benefit
the Economy, Forbes, 27 November 2012, http://www.forbes.com/sites/
tanyaprive/2012/11/27/what-is-crowdfunding-and-how-does-it-benefitthe-economy/.
6. Ordanini et al., Crowd-funding, p. 445.
7. Helen Avery (2012) Crowdfunding: John Mack Backs Non-bank with
Board Role, Euromoney, 4 December 2012, http://www.euromoney.com/
Article/3010184/Crowdfunding-John-Mack-backs-non-bank-with-boardrole.html.
8. Massolution (2013) 2013 CF The Crowdfunding Industry Report,
http://www.crowdsourcing.org/editorial/2013cf-the-crowdfundingindustry-report/25107?utm_source=website&utm_medium=text&utm_
content=LP+bottom&utm_campaign=2013CF+Launch.
9. Massolution (2012) Crowdfunding Industry Report: Market Trends,
Composition and Crowdfunding Platforms, May 2012, pp. 1925,
http://www.crowdsourcing.org/document/crowdfunding-industryreport-abridged-version-market-trends-composition-and-crowdfundingplatforms/14277.
10. Stefan Volk and Markus Pudelko (2010) Challenges and Opportunities
for Islamic Retail Banking in the European Context: Lessons to Be
Learnt from a BritishGerman Comparison, Journal of Financial Services
Marketing, 15(3) pp. 1923.
11. Ibrahim Warde (2004) Global Politics, Islamic Finance and Islamist
Politics Before and After 11 September 2001, in Clement M. Henry and
Rodney Wilson (eds) The Politics of Islamic Finance (Edinburgh: Edinburgh
University Press) p. 40.
12. lbid. p. 1745.
13. Ahmed A. Fattah El-Ashker and Rodney Wilson (2006) Islamic Economics:
A Short History, vol. 3, Themes in Islamic Studies (Leiden: Brill) p. 367.
14. Warde (2004) Global Politics, Islamic Finance and Islamist Politics, p. 40.
15. Clement M. Henry and Rodney Wilson (2004) Introduction, in
Clement M. Henry and Rodney Wilson (eds)The Politics of Islamic Finance
(Edinburgh: Edinburgh University Press) p. 3.
16. Ernst & Young(2012) Growing Beyond: DNA of Successful Transformation,
World Islamic Banking Competitiveness Report 2012-2013 (The World
Islamic Banking Conference, December 2012) p. 4.
17. Massolution (2013) 2013 CF The Crowdfunding Industry Report.
18. Permissible under Islamic law.
19. Massolution (2013) 2013 CF The Crowdfunding Industry Report.
20. Yomken in Arabic means It is possible. Source: http://yomken.com/
about-us/.
21. Ralf Hooijschuur, Crowdfunding Arab/Middle East: Crowdsourcing
Platforms To Choose From, http://www.projects2crowdfund.com/crowdfunding-arab/.
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