Business Crowdfunding Syariah Islamic Economics Islamic Finance

Roles of Custodian Banks in Securities Crowdfunding

Devin Halim Wijaya17 September 2024

0 2 5 minutes read

Securities crowdfunding (SCF) is a method of raising funds that allows small and medium-sized enterprises (SMEs) to receive financing from the general public through digital platforms. In this model, investors can provide capital to businesses or projects in exchange for equity or other financial instruments. Behind the scenes of SCF, custodian banks play a crucial role in ensuring the security, transparency, and regulatory compliance of asset and fund management.

Custodian banks are responsible for safeguarding, securing, and managing the financial assets involved in the SCF process. Their presence not only provides investors with asset protection but also ensures that all transactions are conducted in accordance with legal requirements. This article will explore in greater detail the key roles and functions of custodian banks in the securities crowdfunding ecosystem, particularly in terms of asset protection and fund management.

Also read: Leverage and Why Crowdfunding Can Deliver It

What is a Custodian Bank?

A custodian bank is a financial institution responsible for the safekeeping and management of financial assets owned by individuals or institutions. The primary duties of a custodian bank include storing securities such as stocks and bonds, as well as other financial instruments.

Additionally, custodian banks ensure that all transactions involving these assets, including ownership transfers, dividend payments, and distribution of investment returns, are executed securely and in compliance with applicable regulations.

Custodian banks act as neutral overseers who safeguard investors’ assets from risks such as fraud, manipulation, or misuse. With custodian banks in place, investors can feel more secure, knowing that their assets are safely held by institutions monitored by financial regulators.

Functions of Custodian Banks in Securities Crowdfunding

In the context of securities crowdfunding, custodian banks perform several essential functions that contribute to the success and credibility of SCF platforms.

1. Asset Storage and Protection

One of the most fundamental functions of custodian banks is to store and protect the assets invested by the public through SCF platforms. The funds collected from investors are held in custodian banks, ensuring that these funds are safe. Custodian banks ensure that only authorized parties can access the funds and that the funds are used only for their intended purposes.

The presence of custodian banks minimizes the risk of asset loss or fund mismanagement. This is critical in SCF, where investor confidence in the security of their funds is a key factor in the success of crowdfunding campaigns.

2. Transaction Settlement

Custodian banks are also responsible for settling transactions involving financial assets, whether they are shares or other financial instruments. When investors decide to invest through SCF, custodian banks ensure that the transfer of ownership is carried out correctly and in accordance with regulations. Additionally, custodian banks handle the administrative processes required after transactions occur, such as recording the shares purchased by investors.

In securities crowdfunding, transparency and accuracy in transaction settlement are crucial to maintaining investor trust. Custodian banks act as neutral parties to ensure that there is no manipulation in the transfer of asset ownership and that the entire process follows established rules.

3. Reporting and Regulatory Compliance

Another important function of custodian banks is to provide regular reports to investors and ensure that all transactions are conducted in accordance with applicable regulations. This reporting includes details of investment portfolios, transactions, and fund management. With regular and clear reporting, investors can track the progress of their investments transparently.

Custodian banks also act as overseers, ensuring compliance with all regulations imposed by capital market authorities. In SCF, this role is vital for maintaining investor confidence in the platform and ensuring that no harmful practices occur.

4. Payment Processing

In addition to storing and managing assets, custodian banks also play a role in processing payments related to investments, such as distributing dividends, processing interest, margin, or ujrah (fees), or returning capital to investors. Custodian banks ensure that all payments are made on time and according to the agreements between investors and the companies being funded.

In SCF, these payments may take the form of profits distributed by the company to investors, or dividend payments from shares held. Custodian banks ensure that investors receive the payments they are entitled to in a timely and transparent manner.

Also read:What are the differences between Securities Crowdfunding (SCF) and Stock Exchanges?

Benefits of Using Custodian Banks in Securities Crowdfunding

The use of custodian banks in SCF provides several significant benefits, particularly in terms of security, transparency, and regulatory compliance. The key benefits of using custodian banks in SCF include:

Asset Security: Custodian banks ensure that all funds and assets invested by the public are protected from the risk of misuse or loss. This provides a sense of security for investors, which in turn increases their participation in SCF platforms.
Transparency: With regular and clear reporting, investors can monitor how their funds are being managed, including information on transactions, dividend distributions, and portfolio developments. This transparency is essential for maintaining investor trust in SCF platforms.
Regulatory Compliance: Custodian banks ensure that all transactions occurring within SCF platforms comply with applicable regulations, including those related to investor protection and asset management. This regulatory compliance helps maintain the platform’s credibility and protects investor interests.
Accurate Transaction Settlement: The settlement of transactions is conducted carefully and in accordance with procedures, ensuring that investors do not need to worry about errors or manipulation in the management of their assets.
Timely Payment Distribution: Custodian banks are responsible for the distribution of profits, dividends, or capital returns in a timely manner, ensuring that investors receive their due payments without delays.

In SCF, the presence of custodian banks helps create a more secure and reliable system where investors can allocate their capital without concerns about the potential risks involved in fund management.

Conclusion

Custodian banks play a crucial role in supporting security, transparency, and regulatory compliance in securities crowdfunding platforms. With their primary functions as asset custodians, transaction managers, and payment processors, custodian banks help maintain trust between investors and the companies being funded. As a result, the use of custodian banks not only protects the interests of investors but also strengthens the SCF ecosystem as a credible and safe fundraising method.

Also read: How Islamic Securities Crowdfunding (SCF) Contributes to Environmental, Social, and Governance (ESG)