Dubai: The Dubai Financial Services Authority (DFSA), the independent regulator of financial services conducted in or from the Dubai International Financial Centre (DIFC), has launched its regulatory framework for loan and investment-based crowdfunding platforms — the first such framework in Gulf Cooperation Council (GCC) countries.
The regime forms part of the authority's regulatory roadmap to create an innovation-friendly ecosystem, in line with the UAE Government’s National Innovation Strategy.
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 work force.
Data provided by the Khalifa Fund shows that approximately 50-70 per cent of SMEs have had their applications for funding from conventional banks rejected and loans to SMEs account for just 4 per cent of outstanding bank credit in the UAE, significantly below the Middle East and North Africa (Mena) average of 9.3 per cent.
“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.
"By creating a clear set of rules for operators, we hope to encourage the sustainable development of this industry and is part of our contribution to the UAE Government strategy to develop the SME sector,” said Ian Johnston, chief executive of the DFSA.
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.
The DFSA’s crowdfunding framework follows the launch of its Innovation Testing Licence in May.
That restricted financial services licence allows qualifying financial technology (fintech) firms to develop and test innovative concepts from within the Dubai International Financial Centre (DIFC), without being subject to all the regulatory requirements that normally apply to regulated firms.
The DFSA said its crowdfunding regulations have the ability to catalyse growth in the fintech industry in the UAE and the region, by targeting the specific requirements of crowdfunding platforms. The regulations ensure clear governance for fintech businesses and provide appropriate protection for their customers.