The power of crowdfunding: Just what the leasing industry needs

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1. SPECIAL REPORT The power of crowdfunding : Just what the leasing industry needs Like every person has to go through different stages of life, every industry has to go through its industry life cycle”, according to Avadhut Nigudkar, the founder and chief contributor at FinanceWalk. To that end, the leasing industry has had a fairly prolonged life cycle, considering that the earliest record of equipment leasing occurred in the ancient Sumerian city of Ur about 2010 BC (Crutcher, 1986). In this article, YOUSSEF ABOUL-NAJA looks at what crowdfunding can bring to the leasing industry LEASING By Youssef Aboul-Naja Perhaps one of the reasons why leasing has stuck around for such a long time is the inherent flexibility of its product base in addressing financing needs, and the willingness of practitioners to test the boundaries of such flexibility. Within such a context, the time has probably come to update today’s so-called modern flavor of leasing which has been in use since the 1960s. But where does one start with the modernization process? A reasonable approach would entail focusing on industry bottlenecks. Considering that leasing is built atop a leveraging model, financing requirements represent a potential impediment given the struggle companies go through to secure additional funding; essentially, the growth of leasing companies is strongly correlated with its available funds. Accordingly, reimagining the funding channels should provide the industry with a catalyst for future sustainability, even if such a reworking is framed within the simplistic confines of only introducing an additional funding source. Current funding channels include capital funding (equity) and banking lines. Forward-thinking companies, in possession of a superior portfolio, may even securitize portions of it by issuing bonds/Sukuk. But that’s about it. Ijarah companies have it worse considering that willing funding sources still need to be put through a screen for Shariah compliance, further reducing the number of viable options. To expand the limited traditional funding pools, one must turn to more modern tools, specifically, crowdfunding which, to the uninitiated, is the practice of funding a project or venture by raising a lot of small amounts of money from a large number of people, typically via the internet. This not-so-new financing mode has since © It’s now a widely accepted notion that the crowd element of crowdfunding creates more value than the funding aspect got a technological facelift and has been successfully applied at both the individual and corporate levels. Examples that come to mind, to name a few, include: - - - - - - KickStarter and Indiegogo (US): raising funds for personal projects by preordering future products Shekra and Yomken (Egypt): raising funds through taking an equity stake in start-ups Eureeca (UK) and Beehive (UAE): global equity crowdfunding platforms geared toward SMEs AqarFunder (Egypt) and Ethis (Singapore): crowdfunding geared toward real estate investments SeedUps (Canada): raising funds by taking an equity stake in start-ups Islamic Crowdfunding Alliance: a group of nine companies, each focused on providing crowdfunding solutions geared toward the Muslim community/ SMEs, and In July 2014, over US$8 billion was contributed exclusively by Egyptian citizens to finance the extension of the Suez Canal. According to an industry report, crowdfunding has grown rapidly, from US$5.1 billion in 2013 to US$16.2 billion in 2014. A report commissioned by the World Bank projected that it could be worth almost US$100 billion by 2025. 18 So this means crowdfunding platforms are already there and in use. Leasing companies just need to securitize portions of their portfolios, and offer them to the masses. Of course, the way I presented the concept does sound too good, and simple, to be true. Tapping into the crowdfunding market will be shrouded by many jurisdiction-specific and legal issues. But conceptually speaking, applying such a solution does serve as a win/win situation for leasing companies and investors alike: companies get to tap a constant flow of cheaper funds (compared with equity/ banking lines), while investors get access to yet another investment option. The added bonus is that if crowdfunding is treated as a Mudarabah structure, then it should be Shariah compliant. Consider the following untapped potential: In a World Bank report from April 2015, the global financial institution cited a statistic that stated that 5% of the world’s unbanked population cite religious reasons for their status. In predominantly Muslim countries like Turkey and Uzbekistan, the number jumps to around a quarter of all adults (McSpadden, 2016). Leasing companies need to push regulators to open this funding solution to them. Nick NM Yap, the founder of smart, wireless music system ROCKI, said: “It’s now a widely accepted notion that the crowd element of crowdfunding creates more value than the funding aspect. The crowdfunding process of crowd input, engagement and activation creates a secret sauce that lifts the product/ project with an X-factor.” The leasing industry needs to get onto the crowdfunding wave to sustain its future momentum and sustainability. Any public opinion or media appearance is the author’s independent personal opinion and should not be construed to represent any institution with whom the author is affiliated. Youssef Aboul-Naja is an Ijarah specialist at a supranational banking institution. He can be contacted at yaboulnaja@gmail.com. 15th June 2016