Crowdfunding: An emerging financing alternative

The financial sector's landscape has experienced a revolutionary change in recent years. The information technology (IT) revolution, such as the advent of the internet, cloud computing, androids, and iPhones, is the main driver of fintech innovation.

By utilising the advent of IT, many new and innovative financial products and services, termed fintech, have spawned in this sector. "Crowdfunding" is one of the fintech models that utilise internet-based communication technologies. 

Crowdfunding is a way of collecting funds from a large number of public - crowds - using an internet-based (web-based) platform. When a new business cannot easily qualify for a bank loan or raise capital by issuing shares, it can use a crowdfunding platform to raise money. 

A crowdfunding process begins with an entrepreneur submitting a campaign to a crowdfunding platform. The entrepreneur provides the required information to the platform. The program then evaluates the business's risks according to a set of rules developed in an organised way. 

On the other side of the platform, individual and institutional investors (crowds) seek investment opportunities. When they find a business suitable for investment, they communicate with the platform. Upon receiving a query, the platform notifies the entrepreneur to provide business details and projections of returns and risks. 

When convinced, the investors directly provide funds to the entrepreneur through the crowdfunding platform channel. The platform gets a predetermined commission or fees from the entrepreneur when the deal is closed. 

Modern crowdfunding mechanisms are developed based on a few earlier experiences. During the 18th century, book publishers and authors used to publish books when they received adequate subscriptions from prospective readers. 

Although subscription money is collected after publishing the books, this pre-sell provides a guarantee to the authors and publishers. Another example is collecting $1.6 million for the construction of the Statue of Liberty in 1885 through a campaign by a local newspaper when the US government failed to provide funds for the project. 

A few popular crowdfunding models using the web-based platform are credit-based, equity-based, reward-based, and charity-based crowdfunding. 

Under the lending-based model - known as peer to peer (P2P) or marketplace lending - platforms act as non-deposit taking intermediaries to facilitate online credit to individuals or business owners from the backers (investors). The backers under this model receive interests and the platform provider earns a predetermined fee or commission from the entrepreneur. 

Under equity-based crowdfunding, a start-up or SME makes an open call to sell a specified number of unlisted shares via the platform. 

Reward-based crowdfunding is for the pre-sale of products or services, which funders expect to receive within a certain timeframe. An earlier example of pre-sale of books falls under this category. 

Under charity-based crowdfunding, individuals provide funds through the platform without expectation of monetary return for the funds raised. Funders can provide funds either in the form of a one-time donation or subscription. 

Bangladesh has a long tradition of using the principle of charity-based crowdfunding for funding religious and social events without using web-based platform. Although web-based crowdfunding platform first started in 2005 by KIVA in the USA, in our country, the model started after 10 years. 

The first crowdfunding platform is Project.co, launched in 2015 as a reward-based platform, but closed in 2017 due to the lack of popularity. Few other platforms are GoRiseMe (launched in 2015), Oporajoy.org (2018), and FundsSME (2018). 

The government launched a new donation-based platform - Ekdesh on May 15, 2020, under a2i project to donate to the Prime Minister's Relief Fund. Ekdesh collected Tk1,327,021 from 1,500 donors until December 31, 2020. 

Another recent example of web-based crowdfunding is using Facebook for the construction of a field hospital in Chattogram for treating Covid-19 patients. 

Although expansion is low in Bangladesh, the global expansion of crowdfunding is highly promising. Global crowdfunding statistics 2020 report shows that $34 billion has been raised every year by the platforms. Among them, Asia is the second. 

The statistics show that every crowdfunding campaign is backed by 47 backers, and an individual campaign raises an average of $568 via crowdfunding platforms. By 2030, the global crowdfunding market is estimated to be about $300 billion. 

In order to increase global financial competitiveness, Bangladesh needs to find out what are the causes of low levels of crowdfunding. We noticed a few causes. 

First, we have a low level of financial literacy on digital financial services development as the relevant policy-making bodies such as Bangladesh Bank and science, IT-related ministries have not developed any guidelines or initiatives to disseminate fintech innovations. 

Second, trust in technology-based financing is very low in our country due to a few incidents of illegal multi level marketing (MLM) companies created in the past. 

For example, UniPay combined MLM with crowdfunding concept and offered a double return in 10 months. UniPay illegally raised several million takas, and then disappeared, resulting in the loss of valuable money from investors. It created fear about technology-based financing. 

Finally, the regulatory framework has yet to be developed for equity-based and lending-based platforms. Also, funds can be raised for illegal purposes like terrorist financing. 

Therefore, relevant policy-making bodies and regulators need to develop adequate guidelines and rules for all the relevant parties of crowdfunding and they need to ensure strict adherence to those rules and regulations. This will increase trust in crowdfunding and eliminate the possibility of abusing the platform. 

Besides, proper manpower development is essential, for which universities can come forward by developing a proper curriculum on financial innovation, offering degree and training programs on fintech. 

Crowdfunding has a huge potential in our country because our next generation is going to be more tech-savvy and they want more personalised products and services. We expect that relevant bodies will come forward to tap this potential. 

Dr Shahadat Hossain is an Associate Professor of Finance at the University of Chittagong.