Crowdfunding is loosely defined as the practice of funding a project or venture by raising money from a large number of people who each contribute a relatively small amount, typically via the internet. The Dubai Financial Services Authority’s (DFSA) initiative to set up a regulatory framework for crowdfunding is expected to boost the availability of finance for small and medium enterprises (SMEs) and startups that are the backbone of the UAE and many regional economies.
While SMEs have been widely recognised as significant contributors to the UAE economy, making up around 85 per cent of businesses, contributing to nearly 60 per cent of the UAE’s gross domestic product and employing 60-65 per cent of the work force, finding funding through banking channels has been challenging. The introduction of the regulation comes at a time when crowdfunding has become an increasingly important route for SMEs to access financing. Global loan-based crowdfunding is forecast to reach more than $300 billion (Dh1.1 trillion).
Despite the consistent efforts of the UAE government and the central bank to secure more bank financing for SMEs, the results have been less-than-encouraging with total bank loans for the sector accounting for less than 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 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 venture capital 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 are keen to secure a slice of this burgeoning sector.
The UAE has been quick to realise this and has initiated steps to foster this nascent segment. The new regulatory framework from the DFSA will no doubt help in the development of this alternative funding source while protecting the investors and those who seek funding.
