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When crowdfunding is Sharia compliant

Contributed by: youris.com EEIG

Starting at the bottom, creating a tangible project, sharing and limiting risk. This is what crowdfunding and Islamic finance is all about when they come together
When crowdfunding is Sharia compliant
Islamic finance abides by the Sharia law. It demands socially responsible investment, with a real impact on the community. The interpretations of the Quran prohibit interest (“riba” in Arabic) on loans, and speculation – but not the fees for the provision of a service. In other words, they require sustainable investment. This is why, in addition to being deeply connected with crowdfunding, Islamic finance is also linked to renewable energy.

“The concept and structure of crowdfunding are perfectly Sharia compliant,” says Alberto Brugnoni, managing partner of Assaif, the oldest Islamic finance consultancy in Europe, “Crowdfunding has the same participatory methods that are the cornerstone of Islamic finance”.

In most cases, in fact, the difference between reward or equity-based crowdfunding platforms and Islamic platforms is virtually non-existent. In the first case, a promoter presents a project, asking the community to help in exchange for a reward which is proportional to the financial support. Those who participate are not investors but rather contributors.

Equity crowdfunding is Sharia-friendly too: “Because investors purchase a share in the company, participating in gains and losses,” explains Zakaria Abouabid, of Latham & Watkinssi Associates and Islamic finance expert.

What then distinguishes Islamic from “secular” crowdfunding? The first difference is the exclusion of interest, provided for – as an incentive – on some platforms such as the British Abundance.

The second concerns “the legality” of the project, which must be “halal” (i.e., allowed by Sharia). In other words, crowdfunding must avoid the promotion of forbidden substances and activities such as gambling, alcohol and animal fats. It’s not just about wine, beer or pork; make-up and even clothes may contain prohibited items.

Differences can even be found with the so-called Western “ethical” platform. Boundaries are still somewhat blurred since “no legal definition or list of platforms exists, nor any figures about their turnover,” says Umberto Piattelli, partner of the international legal practice Osborne Clarke.

The boundaries of what is considered “ethical” are empirical. “What changes is the aim,” maintains Piattelli, “The ethical quality is to be found in the project, or in the individual, association, company or institution, like those dealing with crowdfunding donations or social lending to support charity projects.” Some examples are Rete del Dono, Produzioni Dal Basso or DeRev.

But while generalist and ethical platforms have the same fundraising system, Islamic platforms require stricter financing rules .This includes prohibiting interest as we saw earlier, and “halal” projects which are automatically certified, not case by case. For this reason, according to Piattelli, “The concept of ‘ethical’ is not comparable with Islamic platforms.”

A growing number of Sharia-compliant platforms have emerged recent years. Among them are Ethiscrowd, which focuses on equity crowdfunding and real estate; Kapitalboost, which targets small and medium enterprises; Lounchgood which is the best known and most generic. It works like Kickstarter, dealing with both equity and reward-based projects, and so far it has managed to raise over $16 million.

In some sectors, the concept of social impact is essential, for instance when it comes to renewable energy. Lounchgood, for example, has finalized a number of green projects, such as Lighting Up Gaza, aimed at illuminating the Strip with small solar-powered lamps when there is no electricity.

“For Islamic crowdfunding, green energy is a sector with good participation rates and excellent prospects for long-term development,” says Zakaria Abouabid. That’s why he believes that Sharia-compliant crowdfunding will work “also for major infrastructure projects, provided that they have a clear territorial impact.”

Read more: http://www.crowdfundres.eu/news/crowdfunding-sharia-compliant/

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crowdfunding, sharia, religion, finance, islam, investment, renewables, sustainability
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