Shariah compliant crowdfunding: Recent regulatory developments in the Gulf

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1. IFN SECTOR CORRESPONDENT Shariah compliant crowdfunding : Recent regulatory developments in the Gulf LAW By Dr Nicolas Bremer In early October 2019, both the Central Bank of the UAE and the Saudi Arabian Capital Market Authority took steps to promote crowdfunding in their jurisdictions. With these measures, both authorities seek to support SMEs, which continue to face problems in procuring funding from conventional lenders. According to figures from the UAE central bank, between 50% and 70% of loan applications made by SMEs to banks in the Emirates are denied. In many cases, the difference between reward and equitybased crowdfunding models and Islamicdriven platforms are virtually non-existent Consequently, UAE-based SMEs have increasingly sought to procure financing through alternative means including crowdfunding. The UAE central bank has now reacted to this trend and seeks to further formalize the regulation of crowdfunding and platforms offering crowdfunding services. As part of this effort, the central bank published a draft of the Regulations for Loan-Based Crowdfunding in early October and requested concerned parties to comment on the statute. The new regulations address licensing and regulation of crowdfunding platforms in the UAE including all free zones except the financial free zones — the Dubai International Financial Centre (DIFC) and the Abu Dhabi Global Market (ADGM). © Crowdfunding platforms operating in the DIFC are subject to the crowdfunding regulations issued by the Dubai Financial Services Authority. In fact, in many cases, the difference between reward and equity-based crowdfunding models and Islamic-driven platforms are virtually non-existent. The ADGM has — thus far — not issued regulations addressing crowdfunding. While the new crowdfunding regulations of the UAE central bank are designed to primarily address conventional finance-based crowdfunding, the draft regulations also provide for the option of Shariah compliant crowdfunding. In reward-based crowdfunding, a promoter presents a project, requesting financing in exchange for a reward that is proportional to the amount of funds provided by the investor. In particular, the draft regulations oblige Islamic crowdfunding platforms to ensure that their Shariah advisors are competent. In addition, Islamic crowdfunding platforms will have to comply with the provision on Islamic finance institutions and Shariah compliant lending of UAE Federal Law 14/2018 on the Central Bank and Organization of Financial Institutions and Financing Activities. No specific crowdfunding regulations exist in Saudi Arabia. Nonetheless, the crowdfunding market is moving in the Kingdom. In July 2019, the Saudi Arabian Capital Market Authority took a first step in establishing a domestic crowdfunding offering by issuing experimental permits for financial technology to two crowdfunding platform operators. These experimental permits can be issued by the Capital Market Authority under the Royal Decree M/30 of 2/6/1424H on the capital market to allow undertakings employing innovative financial technologies to develop such technologies under less stringent regulations. Thus, investors do not collect interest on their investment but rather receive a consideration for their funding. In equity crowdfunding, investors acquire an interest in the venture and thus participate in its gains and losses. However, aside from the financing structure, Shariah compliant crowdfunding platforms require additional consideration. The project the investors are funding must be Halal — thus Shariah compliant. Hence, to satisfy the requirements of Islamic finance, crowdfunding platforms must not only observe Islamic law with respect to the consideration provided in exchange for investment but also ensure that the project they are funding is Shariah compliant. Thus, for instance, enterprises involving the production, sale or promotion of alcohol, pork or pornography or other products or services considered Haram cannot be subject to Shariah compliant crowdfunding. Nonetheless, due to the participatory methods employed, structuring crowdfunding in a Shariah compliant manner is comparatively easy. The CMA in early October followed up by issuing experimental permits to three additional companies: Buthoor Solidarrity, Afaq and Emkan Al Arabiya. Furthermore, the growing market share of crowdfunding in key jurisdictions in the Middle East such as Saudi Arabia and the UAE offers opportunities to crowdfunding platforms that abide by Islamic finance principles. Certain crowdfunding structures such as reward or equity-based financing employ participatory methods similar to those utilized in Shariah compliant lending and thus lend themselves to Islamic finance. Dr Nicolas Bremer is a partner at Alexander & Partner. He can be contacted at nb@ alexander-partner.com. 23 6th November 2019