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This text was co-written with Shireen Al Sayed, Director, Regulatory Policy Unit, Central Bank of Bahrain.
Governments around the globe are in search of creative ways to fill funding gaps for startups. Few more exciting financial tools have arrived lately than crowdfunding, where large numbers of individuals make micro-contributions to lift funds for specific projects.
Countries among the many Gulf Cooperation Council (GCC) are especially well positioned to learn from the crowdfunding model. Here, SMEs are increasingly central to economic growth, but they often lack of access to startup capital, which stays a key barrier to entry for a lot of growth businesses.
While North America and Europe still dominate the worldwide crowdfunding market, the Gulf region’s key financial players recognize its growing importance. Bahrain and the United Arab Emirates were the primary governments to set out formal laws for the model, and updated their regulatory frameworks recently. Because of this, crowdfunding has began constructing significant regional momentum, across each conventional and Sharia-compliant markets.
The advantages of crowdfunding
Crowdfunding has only existed in its modern online form since 2007, and yet it has rapidly entered the financial mainstream, getting used to fund every little thing from recent cryptocurrencies to smartwatches. The model has many advantages for businesses and investors in any market. For investors, the model can offer high returns and a healthily diversified portfolio.
Meanwhile, for businesses, convenience is a key advantage. The model represents a quick solution to raise money with few upfront fees, typically through certainly one of multiple crowdfunding platforms which operate across the GCC, which include regional platforms in addition to global players like Kickstarter and Indiegogo. It may also open up funding to businesses that may typically struggle to access more traditional types of financing.
Governments within the GCC region are focused on continuing to diversify their economies away from oil-based revenues, and so they are leading efforts to expand in sectors including finance, tourism, manufacturing, and technology. Most of the businesses operating in those spaces are well-suited to crowdfunding models.
Related: For The MENA Startup Ecosystem To Grow, A Regulatory Framework For SMEs To Develop into Creditworthy Is Needed
Bahrain’s economy, for instance, is supported by small and medium enterprises, which already account for around 30% of GDP and shall be a crucial engine of growth in the long run. Considered one of the Kingdom’s key targets in its recently announced Economic Recovery Plan -a technique to bounce back from the COVID-19 pandemic- is to extend financing for the SME sector to make sure that growth continues. State financing can address a part of that gap, however the Kingdom’s central bank also believes that crowdfunding will play a big role.
For instance, Beehive -the GCC’s first regulated peer-to-peer lender- has already funded SMEs in Bahrain including Mira Packaging Factory, a biodegradable paper cup manufacturer which used the funds to diversify its products.
Bahrain’s Central Bank recognized the importance of crowdfunding by introducing a recent regulatory framework in April this yr that goals to simplify existing rules to make them more user-friendly and create an even bigger appetite for crowdfunding as a financing model. It should smooth the trail for crowdfunding platform operators, each conventional and Sharia-compliant, to use for a license and set-up in Bahrain. This may ultimately help SMEs and startups not only in Bahrain, but in the broader GCC and MENA region.
How crowdfunding can power the GCC
The brand new regulations even have the potential to power Bahrain’s burgeoning fintech scene, wherein the Kingdom has rapidly established itself as a number one regional player.
Fintech firms require a bigger amount of capital than other startups, making investors often hesitant to take a position large amounts, because the Bahrain Fintech Bay Ecosystem report 2022 identified. Because some fintech startups are considered dangerous by traditional regional investors because of regulatory issues, they’ll struggle to draw funding.
Crowdfunding offers a strong model to handle that funding gap. It also offers startups and SMEs significant visibility and allows them to check the market’s appetite for his or her ideas. Investors who take part in the model often offer advice on how growing firms can develop their offering or market strategy, making it a win-win for all stakeholders.
Bahrain’s recent regulations mean crowdfunding is primed to turn into a key driver of the economy, powering growth across SMEs in addition to the modern sectors that form an increasingly essential a part of the Kingdom’s future.
Related: Sheikh Hamdan Launches Digital Crowdfunding Platform Dubai Next To Boost Funding For Modern Startups