In the world of finance, leverage and crowdfunding are two concepts that play an important role. Leverage refers to the use of borrowed funds to increase the potential return on an investment, while crowdfunding is a method of raising funds from a large number of people to finance a project or venture. This article aims to educate the general public on how crowdfunding can bring leverage and the benefits that can be obtained from both concepts, including in the context of Islamic securities crowdfunding and the development of Micro, Small and Medium Enterprises (MSMEs).
Definition of Leverage
Leverage is a financial strategy that involves using borrowed funds to increase the profit potential of an investment. With leverage, a person or company can control a larger asset than they could purchase with their own funds. For example, an investor could buy a property worth one billion rupiah with only a down payment of two hundred million rupiah and borrow the rest from a bank.
The advantage of using leverage is the potential to earn bigger profits. However, leverage also carries risks, as if the value of the investment goes down, the loss suffered can be much greater than if using only one’s own funds. Therefore, understanding the risks and managing leverage wisely is essential in a financial strategy.
Definition of Crowdfunding
Crowdfunding is a fundraising method that involves many people contributing a certain amount of money to finance a project or venture. Crowdfunding platforms such as Kickstarter, Indiegogo, and GoFundMe allow individuals or companies to present their ideas to the public and ask for financial support. There are several types of crowdfunding, including donation, reward, equity and debt-based crowdfunding.
Crowdfunding is becoming increasingly popular as it provides an opportunity for creative and innovative projects to obtain funding that may not be possible through traditional methods such as bank loans or venture capital. With crowdfunding, many small projects can be realised, from independent films, to new technology products, to social enterprises.
Islamic Securities Crowdfunding
Islamic securities crowdfunding is a type of crowdfunding that complies with Islamic sharia principles. In Islamic securities crowdfunding, fundraising is done through the offering of sharia-based securities, such as sukuk (Islamic bonds) or Islamic stocks. This concept avoids riba (interest), gharar (uncertainty), and maysir (gambling), which are prohibited in Islam.
By using Islamic securities crowdfunding, MSMEs can access funds from investors who seek halal and shariah-compliant investments. This provides opportunities for MSMEs to gain financial leverage without violating sharia rules.
How Crowdfunding Delivers Leverage
Crowdfunding brings leverage in a unique way. When a person or company uses crowdfunding to raise funds, they are essentially utilising funds from a large number of people to finance their project. This is similar to the concept of leverage in finance, where funds from other parties are used to achieve a larger goal.
For example, a startup company that needs funds to develop a new product could use a crowdfunding platform to raise funds from thousands of small investors. That way, they can develop and launch their product without having to use all their own funds or take out a large loan from a bank. This provides leverage for the project owner, as they can control a larger project with small contributions from many people.
In the context of Islamic securities crowdfunding, leverage is also obtained through Shariah-compliant means. MSMEs that want to expand or finance their projects can offer sukuk or Islamic shares to the public through crowdfunding platforms. This way, MSMEs can get the funds they need without having to rely on interest-bearing bank loans, which are prohibited in Islam.
The benefits of leverage through crowdfunding are also felt by the small investors who contribute. They get the opportunity to support projects they believe in and potentially earn financial rewards or exclusive products. In the context of Islamic securities crowdfunding, investors also get the assurance that their investment is in accordance with Shariah principles, giving them peace of mind and more confidence in investing.
Practical Context
For example, an MSME in manufacturing that wants to expand its production capacity can offer sukuk through an Islamic securities crowdfunding platform. The funds raised from many investors can be used to purchase new machinery or expand the factory. Thus, the MSME gains financial leverage by utilising small contributions from many investors.
One successful example of Islamic securities crowdfunding is the Noor Energy 1 project in Dubai. Noor Energy 1 is a renewable energy project consisting of a solar power plant using Concentrated Solar Power (CSP) technology. The project was funded through sukuk offered to the public through a crowdfunding platform. The funds raised enabled the project to proceed without violating Shariah principles and provide significant economic and environmental benefits to the surrounding community.
Leverage and crowdfunding are two complementary concepts in the modern financial world. Crowdfunding enables the use of leverage in innovative and accessible ways, providing opportunities for projects to gain funding and grow. By understanding how leverage and crowdfunding work, people can utilise both concepts to achieve their financial goals and support innovation.
By utilising crowdfunding, anyone can be part of big change with a small contribution, providing powerful leverage to turn brilliant ideas into reality. Islamic securities crowdfunding in particular, provides a Shariah-compliant avenue for the development of MSMEs, connecting them with investors committed to halal investment, and creating a win-win ecosystem for all parties.
Wallahu a’lam
References:
1. “What is Leverage?” Investopedia. [Link](https://www.investopedia.com/terms/l/leverage.asp).
2. “Crowdfunding Explained: How it Works and What It Means for You.” Forbes. [Link](https://www.forbes.com/sites/forbesagencycouncil/2020/02/14/crowdfunding-explained-how-it-works-and-what-it-means-for-you/?sh=7b3a2f9c1622).
3. “Islamic Crowdfunding: The Next Frontier for Islamic Finance.” IslamicMarkets.com. [Link](https://islamicmarkets.com/articles/islamic-crowdfunding-the-next-frontier-for-islamic-finance).
4. “Noor Energy 1 CSP Project.” DEWA. [Link](https://www.dewa.gov.ae/en/about-dewa/news-and-media/press-and-news/latest-news/2018/07/dewa-signs-agreements-with-consortium-led-by-acwa-power-and-silk-road-fund-to-implement-the-4th-phase-of-mohammed-bin-rashid-al-maktoum-solar-park).