This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on March 7- 13, 2016.

Crowdfunding has become a formidable asset class for both investors and entrepreneurs. While such platforms initially seemed insignificant, by 2011, some US$1.5 billion had been raised to fund more than a million campaigns in North America and Western Europe. 

Today, crowdfunding is a part of the financial services segment known as financial technology (fintech). And it is seeing exponential growth in investments.

According to Massolution’s 2015CF — Crowdfunding Industry Report, the global crowdfunding industry leapt from US$6.1 billion in 2013 to US$16.2 billion in 2014 and further to US$34.4 billion in 2015. Massolution is a research, advisory and implementation firm that specialises in crowdsourcing solutions for private, public and social enterprises. 

Technology is the key driver and enabler of crowdfunding as the speed and ease of online transactions makes it universally appealing. Another appealing factor is its low investment cost, making it an attractive proposition for the middle and upper middle-income group and small business owners. 

There are four types of crowdfunding — debt, equity, rewards and donations. There are also new variants and concepts such as Islamic crowdfunding, which is the use of shariah-compliant crowdfunding platforms. 

According to the “Shariah compliant crowdfunding” article on www.islamicfinancenews.com, crowdfunding platforms bypass the banking system by providing investors with direct and quicker access to individuals and businesses that need funds. 

“In most cases, investors take a direct risk with the venture for which they are providing funding. This model of financing is deemed to be compliant with shariah principles. Thus, crowdfunding is seen as a perfect fit for Islamic finance due to its community-based model,” she adds.

Higher bank interest rates for property development have seen the emergence of real estate crowdfunding. And as interest rates continue to rise, developers will need to look beyond traditional financing for their projects, according to a Crowd101.com article entitled “Crowdfunding 2016 predictions: The next real estate boom?”

According to Massolution’s report, real estate crowdfunding is gaining momentum and is estimated to reach upwards of US$3 billion in projects funded by the end of this year.

EthisCrowd.com is the world’s first Islamic real estate crowdfunding platform. It caters for a niche community of investors who want to contribute to real estate developments that have a social impact. 

Ethis Pte Ltd founder and head honcho Umar Munshi started the platform in 2014 after discovering that there was a chronic problem of widespread poverty and inequality in Indonesia, having spent seven years doing business there. “There were few options for those in need and I felt that there needed to be a sustainable way to help them, thus social impact investing,” he says.

To date, EthisCrowd has successfully crowdfunded more than S$3 million for real estate projects in Indonesia. It currently has nine projects listed, ranging from RM100,000 to S$480,000 (RM1.4 million) and delivering a profit rate 4% to 33%. The company mainly provides bridging capital for developers via its platform.

What makes crowdfunding platforms Islamic?

Two aspects makes a crowdfunding platform Islamic — compliance and structure. EthisCrowd engages Islamic scholars in Singapore to ensure the platform is compliant with shariah laws. 

“When we started, we engaged two scholars. Now, we are going through a shariah audit by PERGAS, the Singapore Islamic Scholars and Religious Teachers Association [to ensure that the structure of crowdfunding deals is shariah-compliant],” says Umar. 

“Our head of business and shariah development Ahmad Sabree, from Georgia in the US, is a shariah graduate [of the International Islamic University of Malaysia], which helps too,” he adds.

“To us, shariah compliance is a must. It is our minimum standard. But of course, at the same time, we want it to have an impact on society. This [qualitative aspect] is very important to us.

“Second, there is the technical aspect. The crowdfunding project is structured without any fixed interest. This is in line with the basic principle of risk-sharing. Sharing risks means sharing rewards; it is fairer for both [the investor and developer]. That is what makes it Islamic.”

Third is the social aspect. “For example, we have three main activities — affordable housing, eco-friendly developments and wakaf (community endowment assets),” says Umar. “In our view, being ethical or socially responsible is also a part of shariah, even though it does not differentiate between what is shariah and what is not.” 

There are more similarities than differences between Islamic and conventional crowdfunding. Save for the structural differences, it is similar also in terms of responsible finance, impact investment and green investment. 

“All this is found in the concept that we believe is a more Islamic way of doing things. But this doesn’t mean it is for Muslims only. We don’t exclude anyone,” says Umar.

He adds that he decided to feature only real estate developments to keep his platform focused. “We don’t want to be a jack of all trades. We want to focus on a specific market.”

State of the real estate industry

For its Indonesian projects, Ethis partners PT Ethis Indo Asia, a licensed development company it set up to manage its property projects there. The company’s concentration on Indonesian projects is attributed to market demand. Ronald Wijaya, country head (Indonesia) of Ethis and managing director of PT Ethis, says poverty is rampant in Indonesia and there are few social impact projects, especially in housing. 

Due to rising real estate prices in Jakarta, the lower income group would rather live on the outskirts than in the city, observes Ronald. So, the outskirts of Jakarta is where the company is focusing its efforts.

“In terms of profit margin, the capital gain from the land is high because the land is cheap. After the infrastructure has been put in place, its value skyrockets. This benefits investors while providing necessary housing for the needy — a win-win situation,” he says.  

Despite the recent slowdown in the Indonesian economy, such as the weakening rupiah and slow commodity market, there is still positive growth in other aspects of its economy. This will continue to create demand for housing. 

“What we are focused on is the lower middle-income market, which is not exposed to external shocks. They will always need houses and there will always be a shortage of houses,” says Ronald.

Umar says that according to an Indonesian government study, the country has a shortage of 15 million houses — a backlog that will take many years to clear. 

Umar and Ronald say the Indonesian government is very supportive of affordable home projects — it launched the 1 Million Houses project last year. The IDR10 trillion project is aimed at providing adequate housing for low-income citizens. More than half the houses will be built using state funds. 

The Housing Loan Liquidity Facility, a government-backed mortgage for low-income citizens, will also be partly financed with state funds. EthisCrowd contributes to this project by crowdfunding for more than 5,000 affordable houses in the vicinity of Jakarta — 1,200 houses in Kampung Islami Thoyibah, 1,000 houses in Cianjur and more than 3,000 houses in Depok Dream Village. 

“It is more a socio-political campaign/agenda/objective that the government has initiated. This project has no target year of completion. With a RM350 down payment, low-income earners can buy a house. Their instalment has a lower rate of about 5% a year,” says Ronald.

EthisCrowd wants to expand to as many countries as possible. It launched two crowdfunding projects in Malaysia last month.

One project is a government construction project for flood victims in Jerantut, Pahang. The project is under the Public Works Department (JKR). The campaign was oversubscribed in four days.

“The construction order was to build 10 houses for flood victims. As the contractor needed some cash flow because of various concurrent projects, we provided the investment [via our platform] and then shared the profit with investors,” says Umar. 

The other project is for the purchase of a discounted commercial unit at Awqaf Corporate Park in Putrajaya. 

In terms of the potential of Malaysia’s real estate market, Umar impresses on the need to be very selective and focused because EthisCrowd needs to plan a good exit. “Not all segments can allow us to have a good exit. Usually, when we launch a campaign, the investors want to know how this is going to finish, what the tenure is like, what is the likelihood of it being completed on time … so we need to plan that part [before putting up the projects].”

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