A draft regulation for crowdfunding
The Central Bank of the U.A.E. (CBUAE) adopts the crowdsourcing technique to enhance the regulatory framework of the UAE financial sector and support the development of financial technology businesses (FinTech).
The CBUAE proposed a draft regulation for loan-based crowdfunding platforms (CFPS) (PDF, 250 KB) operating in the UAE. The regulation seeked to establish an appropriate framework for loan-based crowdfunding businesses and create a balance between market development, risk mitigation and consumer protection.
Through a public consultation, CBUAE invited the public; particularly those who intend to operate a CFP in the UAE, existing licensed financial institutions and other stakeholders to propose ideas or share comments and insights that would enhance the regulation.
Crowdfunding in the UAE
In the UAE, fundraising activities for charities and social causes are regulated and done through state-based registered channels. However, fundraising for loans and investments, or debt-based funding is a new concept which is currently applied on a narrow basis and yet to be regulated and introduced at a wider level. In the UAE, the following entities regulate financial services or activities:
The need for crowdfunding to support SMEs in the UAE
Data provided by Khalifa Fund shows that approximately 50-70 per cent of the Small and Medium Enterprises (SMEs) applications for funding are rejected by conventional banks. Loans to SMEs account for just 4 per cent of the outstanding bank credit in the UAE, below the MENA average of 9.3 per cent.
Conventional lenders are sometimes unwilling or unable to support SMEs given their limited assets or lack of a proven record of company operations. This makes it difficult for SMEs to do business and finance provisions can be expensive or inflexible.
Yet, SMEs contribute nearly 60 per cent of the UAE’s GDP and this is estimated to grow to 70 per cent by 2021. Hence, crowdfunding is needed in the UAE to support SMEs.
Crowdfunding in Dubai (DIFC)
Recently, Dubai Financial Services Authority (DFSA) launched a regulatory framework for loan and investment-based crowdfunding platforms, which is considered the first framework in GCC. The introduction of the regulation intends to license, organise and protect the rights and obligations of all parties involved in specific crowdfunding activities which provide finance solutions for small and medium-sized enterprises (SMEs) in the UAE.
The regime forms part of DFSA’s regulatory roadmap to create an innovation-friendly ecosystem, in line with the UAE Government’s National Innovation Strategy. DFSA crowdfunding regulations intend to accelerate growth in the financial technology (FinTech) industry in the UAE and the region by targeting the specific requirements of crowdfunding platforms. The regulations ensure clear governance for FinTech businesses and provide appropriate protection for their customers. They also formalise DFSA’s approach to regulating crowdfunding platforms which had operated through interim arrangements since 2016.
The impact of SMEs on the UAE's economy
According to Ministry of Economy, the SMEs sector represents more than 94 per cent of the total number of companies operating in the country and provide jobs for more than 86 per cent of the private sector's workforce. In Dubai alone, SMEs make up nearly 95 per cent of all companies, employing 42 per cent of the workforce and contributing around 40 per cent to Dubai's GDP.
The UAE Government has an ambition to enhance the contribution and performance of the SME sector. It is taking a major role in establishing initiatives and programmes to help with sources for funding SMEs. Initiatives include:
Models of crowdfunding
Common types of crowdfunding include:
- Donations model where funders donate a sum for a cause and do not expect any returns
- Rewards model where funds are asked for in exchange for a future reward
- Crowd-sourced equity funding (CSEF) where the investors receive shares in a company in exchange for the fund they provided
- Debt or peer-to-peer lending model where the lenders provide loans to borrowers and expect it to be paid back with interest at an agreed rate, or a rate fixed by the crowdsourcing platform.
Examples of crowdfunding platforms in the UAE are:
What is crowdfunding?
Crowdfunding is the practice of funding a project by raising money from a large number of people through licensed online platforms. Typically, crowdfunding consists of three parties:
- the person raising funds
- the party providing the crowdfunding platform
- the public providing funding through the platform.
Updated on 12 Feb 2020