Can Crowdfunding Learn From The Islamic Banking Business Model?

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Crowdfunding has been helping many people and business startups get that financial nudge that they need to get their operations started. It is not a secret that initial capital investment remains to be one of the biggest hurdles entrepreneurs need to overcome and social funding has been serving a gap in the financing industry. But are there any lessons the industry can learn from how Islamic Banking works?

Islamic banking has been a silent part of the finance world and accounts only to a small amount of the total assets globally. But they are one of the most looked upon models of business and their growth is phenomenal. To define Islamic banking is that it is an institution that upholds the framework of their religion. This is based on the Qura’n and Sunna and the business models aims to achieve Islamically acceptable objectives when it comes to handling money.

There are many people who would have second thoughts about Islam with all the terrorist activities around the world. But you need to understand that those are not Islam people but radicals using their religion for something else. Islam in itself means “peace” in Arabic and they are guided by teachings that are far from those radicals.

Islamic banking and crowdfunding

There are a lot of activities forbidden to Muslims like usury based financial lending, gambling and even liquor. But here are some unique characteristics of Islamic banking and we will see how it equates with crowdfunding.

  • Usury is forbidden. Known as Reba in Islam, earning usury is forbidden and Islamic banking is to avoid this activity. This would be a difficult part with crowdfunding because some of the most used ways to compute for earnings for investors is through interest on future earnings. It is harder to pin down an exact amount that is why an interest rate is much better to gauge the returns. With this, there are not a lot of government mandates that distinguishes excessive interest from normal interest or what the Islamic Banks refer to as Fa’eda.
  • Earning on mark-up or Murabaha. In lieu of Reba, Islamic banks earn their profit through a mark-up above their margin. This can come from financing facilities that it provides to its consumers like housing and other purchases. Crowdfunding is a bit different as it provides returns on investment using an interest on earnings over time. Traditional banks do the same where they can only guarantee a minimum rate of increase on money over time. Murabaha can accept installment payments with a little over the margin until the item gets paid off.
  • Ijara or leasing agreement. This is an agreement with the Islamic Bank where they purchase something for the customer and then they lease it back to the same. It is possible that part of the payments being done in installment basis be credited to the purchase of the item.

There are a lot of things crowdfunding and even the banking system can learn from the Islamic bank particularly how they handle interest and has strict rules in observing only the normal rates or Fa’eda and prohibiting usury or Reba. This simply means that people can earn but not to the extent of charging too much from another short of describing it as extortionate interest.

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This article is written by the Crowdfunders Editorial Team. In Asia, Crowdfunders.Asia is a leading portal on providing news related to crowdfunding, start-up, property and business. It is operated by CoAssets.com. CoAssets is South East Asia’s first listed and largest real estate crowdfunding platform. If you have any Crowdfunding news or stories to share, please email [email protected]

 

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