Why crowdfunding is important for the UAE

The UAE Cabinet on Monday approved the use of crowdfunding in both public and private sectors

View of the interchange and Dubai skyline. Pawan Singh / The National

The UAE government has approved the use of crowdfunding as the Emirates aims to open more streams of funding for smaller businesses and broaden the country's liquidity pool.

Sheikh Mohammed bin Rashid, Vice President and Ruler of Dubai, said the Cabinet approved crowdfunding activity for both the public and private sectors.

“Crowdfunding is one of the best means to support the financing of new innovative business ideas … it will open a door for young people and entrepreneurs to finance their ideas,” he said on Twitter.

The National looks at the concept of crowdfunding and the possibilities it presents.

What is crowdfunding?

Crowdfunding — a type of alternative finance — refers to the practice of funding a project or venture by raising small amounts of capital from a large group of people, usually through the internet.

The global crowdfunding market is predicted to triple in size to $39.8 billion by 2026 from $13.9bn in 2019, according to Statista. The concept, which originated in the US, is gaining traction in the GCC's six-member economic bloc.

Why is it important for SMEs?

Start-ups and small and medium enterprises are moving towards crowdfunding as they explore funding options.

Abu Dhabi and Dubai are home to a number of tech start-ups that have based their headquarters in the UAE due to its business-friendly legislation.

The SME sector represents more than 94 per cent of total companies and employs over 86 per cent of the private sector workforce in the UAE, according to a Dubai Chamber report released in November 2020.

Within Dubai, SMEs account for 95 per cent of companies and employ 42 per cent of the workforce, contributing 40 per cent of the emirate’s economy, the report added.

Khalifa Fund data shows that nearly 50 per cent to 70 per cent of the SME 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 Middle East and North Africa average of 9.3 per cent.

Conventional lenders are sometimes unwilling or unable to support SMEs given their limited assets or lack of a track record.

Hence crowdfunding could help the UAE to support SMEs.

Where does the UAE stand in crowdfunding so far?

In May, Sheikh Hamdan bin Mohammed, Crown Prince of Dubai, launched “Dubai Next” — a digital crowdfunding platform for supporting entrepreneurs and start-ups.

The initiative was aimed at stimulating “positive competition and encouraging youth to put forward innovative ideas as well as obtain community support through crowdfunding”, Sheikh Hamdan said at the time.

In September 2020, Dubai SME, part of Dubai's Department of Economic Development, said it was partnering with peer-to-peer lending platform Beehive to allow individuals to invest in SMEs in the country through crowdfunding.

In August 2017, the Dubai Financial Services Authority launched a regulatory framework for loan and investment-based crowdfunding platforms.

UAE start-ups leading in crowdfunding

The Dubai-based equity crowdfunding platform Eureeca led $1.3 million funding in pay-per-minute car rental platform Udriv in January last year.

Eureeca is one of the first global equity crowdfunding platforms that enables members of its investor network to buy shares in growth-orientated businesses.

Dubai's fresh snack company Fruitful Day is among smaller businesses that have used crowdfunding. The firm raised Dh3m ($816,771) in two successive funding rounds in November 2020, attracting investors from as far away as Switzerland and Singapore, as well as from Saudi Arabia and the UAE.

UAE start-up Rent-a-Towel, which currently rents towels and bed linen to 20 Dubai hotels, has invited sustainability-conscious small investors to part-fund inventory through a Germany-based crowdfunding platform.

Dubai-based Stake allows people to buy small stakes in properties starting from few hundred dollars. Described as a “digital-first property investment and asset management company”, Stake aims to fix the problems of property ownership “by democratising property investment”.

It finds competitively priced apartments in prime locations with high demand on the secondary market — avoiding potential new-build delays. It enables members to invest as little as Dh500. Investors receive regular dividends from rental income, in addition to expected long-term capital appreciation.

GCC getting serious about crowdfunding

Last January, the Saudi Central Bank rolled out new rules governing crowdfunding-based activities.

At that time, the kingdom's central bank set a minimum capital requirement of 5 million Saudi riyals ($1.33m) for entities looking for a licence for crowdfunding activities. It updated the crowdfunding rules in January.

The Central Bank of Bahrain has also rolled out crowdfunding regulations.