Dubai: The Middle East region is not entirely new to crowdfunding initiatives. However, the recent efforts of the Dubai International Financial Centre (DIFC) and its regulator, the Dubai International Financial Services Authority (DFSA), are giving it a formal framework that sets out the rules of the game.
Crowdfunding is a generic term used to refer to the use of small amounts of capital from a large number of individuals to finance a new business venture. It makes use of the easy accessibility of vast networks of people through social media networks and crowdfunding websites to bring investors and entrepreneurs together. This innovation in financing has the potential to increase entrepreneurship by expanding the pool of investors from whom funds can be raised beyond the traditional circle of owners, relatives and venture capitalists.
Dubai’s initiative to have a regulatory framework for crowdfunding is expected to boost the availability of finance for small to medium-sized enterprises in the UAE and the region, where the availability of bank financing to SMEs and start-ups are scarce.
“We are the first in the GCC region to formalise a tailored regime for loan and investment crowdfunding platforms, which represent an increasingly important source of financing for the SME sector,” said Ian Johnston, chief executive of the DFSA.
The DIFC’s initiatives to foster a robust fintech ecosystem and DFSA’s efforts to introduce timely regulations are expected to encourage innovative financing solutions to SMEs.
“Six months on from Eureeca becoming the first equity crowdfunding platform to be licensed by the Dubai Financial Services Authority to operate with a representative office in the DIFC, we have already seen the country’s innovative ecosystem go from strength to strength,” said Sam Quawasmi, co-CEO and co-founder of Eureeca.com, an equity crowdfunding platform with offices in Dubai, London, Amsterdam and Kuala Lumpur.
The introduction of the regulation comes as crowdfunding is becoming an increasingly important route for small to medium-sized enterprises (SMEs) to access financing. Global loan-based crowdfunding is forecast to reach more than $300 billion (Dh1.1 trillion) and global equity-based crowdfunding more than $93 billion by 2020.
SMEs are significant contributors to the UAE economy. In 2014, they made up around 85 per cent of businesses in the UAE, contributing to nearly 60 per cent of the UAE’s GDP and employing 60-65 per cent of the UAE workforce.
In Dubai, SMEs represent nearly 95 per cent of all establishments in the emirate, accounting for 42 per cent of the workforce and contributing around 40 per cent to the total value of Dubai’s economy.
Data from the Khalifa Fund shows that approximately 50-70 per cent of SMEs have had their applications for funding from conventional banks rejected.
Despite the consistent efforts by the UAE government and the Central Bank of the UAE to get more bank financing for SMEs, the results have been less than encouraging, with total bank loans to the sector in the country accounting for under 5 per cent last year. The trend is understandable in the context of a big build-up in bad loans on bank balance sheets during the past two years.
Clearly banks have to protect their shareholders’ interests while managing exposures related to riskier assets. While venture capital (VC) funding and angel funding are other options for SMEs, tapping a wider investor base through crowdfunding platforms is proving to be an attractive option for both entrepreneurs and investors in managing risks and costs.
The trend is clearly catching the imagination of a new class of investors who are willing to bet on entrepreneurs with viable business models. Indeed, in 2016, equity raised from crowdfunding passed VC funding for the first time, and, by 2025, the World Bank estimates that global investment through crowdfunding will reach $93 billion. No wonder established business owners and fledgling entrepreneurs alike are keen to secure a slice of this explosive industry.
The UAE government has an ambition to enhance the contribution and performance of the SME sector. Initiatives include the Mohammad Bin Rashid Establishment for SME Development and the Khalifa Fund. Given the significant role that SMEs play in the UAE economy, crowdfunding is expected to grow further in importance in the UAE as entrepreneurs seek alternative sources of funding.
“By creating a clear set of rules for operators, we hope to encourage the sustainable development of this industry and [this] is part of our contribution to the UAE Government strategy to develop the SME sector,” said DFSA’s Johnston.