How To Control Crowdfunding Issues In Islamic Finance Perspective

Pic: Amanie Advisors

Islamic finance is founded on Shariah concepts of justice and public interest. Compared  to the conventional financial system, Islamic finance must comply with the Shariah principles  that promote competency and sustainability. Nowadays, crowdfunding has become a popular  fundraising method for entrepreneurs worldwide, and it is one of the favoured methods for  startups and small businesses to raise capital. As a Muslim, this mechanism needs to comply  with the Shariah rulings to avoid interest (Ribā), gambling (Maysir), uncertainty (Gharar) and  all other prohibited matters (Haram). As such, this article aims to know how to control  crowdfunding issues must comply with shariah and any relevant platform in Malaysia.  

First of all, Crowdfunding is a means of soliciting small amounts of money from a large  number of individuals, generally online, to finance a project or business. By using this strategy,  individuals or organisations can access a larger pool of possible investors who are interested in  supporting their concept or cause by passing along more conventional funding sources like  banks or venture capitalists. Crowdfunding contributes to the creation of public wealth through  an integrated online system via the online crowdfunding platform. As a result, it is regarded as  a powerful and cost-effective route. Furthermore, it provides different types of business  methods which its fund can be raised as a donation, an equity investment or a loan. 

As known, conventional systems are in the business of lending and borrowing money  based on interest but Islamic financing avoids interest-based transactions. For instance, in term  of equity crowdfunding means the investors invest money in return for shares or a small piece  of equity in the company. As a result, equity crowdfunding is typically used to raise money to  fund the launch or for growth-focused companies. So, to make sure the crowdfunding is sharia  compliant, the appropriate sharia issues in this form are Musyarakah and Qard. Musyarakah is  a cooperation agreement with the participation of investment capital from two or more  investors while Qard is intended to finance projects with loan-based financing or the provision  of debt as agreed and investors will enjoy a number of benefits. The business person is still the  owner and must return the funds, while the funder is the lender (creditor). 

Furthermore, there are also some issue not compliant with sharia principle in debt-based  crowdfunding or also known as peer-to-peer lending. It is because the investors lend money to  companies and the companies need paying them back the money often with interest. So that, 

the Murabahah principles is the best and most appropriate of Sharia-compliant because  Murabahah is an agreement where a commodity is offered for a cost-plus profit and an ethical  model which is interest-free. In religious belief, sale-based contract such Murabahah, Tawaruq and Ijarah is allowed. The primary distinction between halal crowdfunding in Malaysia and  conventional crowdfunding is the use of the Sharia issues principle such as Murabahah, Qard and Musyarakah. The implementation of the Murabahah principle, which allows businesses to  finance tangible goods-based trade and Some well-known Islamic crowdfunding portals are  Ata Plus, Waqf World, Ethis Kapital, and Nusa Kapital. 

According to the law applicable in Malaysia, through the community fundraising has  been practiced in Malaysia directly or indirectly since 1982, it must be updated to sure that this  business still allowed and follow all the Sharia principles. any bodies or company would like  to be crowdfunding’s platforms need to register under the Securities Commission Malaysia  (SCM) and must follow all the guidelines. These guidelines must provide the requirements for  the registration of a person as a recognized market operator for both equity crowdfunding and  peer-to-peer platforms. For now, there are four) salient features of the guideline such  requirements for platform operators’ registration, requirements for reporting and disclosure,  requirements for Shariah compliance and anti–Money Laundering. 

In conclusion, crowdfunding in Islamic finance has shown promising potential as a  means of providing financial support for small businesses and start-ups. However, there are  several challenges that need to be addressed, including the need for greater transparency and  accountability, as well as the development of appropriate regulatory frameworks. In general,  crowdfunding in Islamic finance has the potential to be a powerful tool for financial inclusion  and promoting economic growth, but it will require continued collaboration and innovation in  order to fully realize its potential. 

By Muhammad Firdaus bin Mohd Johan, Bachelor Degree Student, Faculty of Shariah And Laws, Universiti Sains Islam Malaysia (USIM)

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