How Crowdfunding Can Finance The Future In Bahrain (And Beyond)
While North America and Europe still dominate the global crowdfunding market, the Gulf region's key financial players recognize its growing importance.
This article was co-written with Shireen Al Sayed, Director, Regulatory Policy Unit, Central Bank of Bahrain.
Governments around the world are seeking creative ways to fill funding gaps for startups. Few more exciting financial tools have arrived in recent years than crowdfunding, where large numbers of people make micro-contributions to raise funds for specific projects.
Countries among the Gulf Cooperation Council (GCC) are especially well positioned to benefit from the crowdfunding model. Here, SMEs are increasingly central to economic growth, but they often lack of access to startup capital, which remains a key barrier to entry for many growth businesses.
While North America and Europe still dominate the global crowdfunding market, the Gulf region's key financial players recognize its growing importance. Bahrain and the United Arab Emirates were the first governments to set out formal legislation for the model, and updated their regulatory frameworks recently. As a result, crowdfunding has started building significant regional momentum, across both conventional and Sharia-compliant markets.
The benefits of crowdfunding
Crowdfunding has only existed in its modern online form since 2007, and yet it has rapidly entered the financial mainstream, being used to fund everything from new cryptocurrencies to smartwatches. The model has many benefits 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 fast way to raise money with few upfront fees, typically through one of multiple crowdfunding platforms which operate across the GCC, which include regional platforms as well as global players like Kickstarter and Indiegogo. It can also open up funding to businesses that might typically struggle to access more traditional forms of financing.
Governments in the GCC region are focused on continuing to diversify their economies away from oil-based revenues, and they are leading efforts to expand in sectors including finance, tourism, manufacturing, and technology. Many of the businesses operating in those spaces are well-suited to crowdfunding models.
Bahrain's economy, for example, is supported by small and medium enterprises, which already account for around 30% of GDP and will be an important engine of growth in the future. One of the Kingdom's key targets in its recently announced Economic Recovery Plan -a strategy to bounce back from the COVID-19 pandemic- is to increase financing for the SME sector to ensure that growth continues. State financing can address part of that gap, but the Kingdom's central bank also believes that crowdfunding will play a significant role.
For example, 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 new regulatory framework in April this year that aims to simplify existing rules to make them more user-friendly and create a bigger appetite for crowdfunding as a financing model. It will smooth the path for crowdfunding platform operators, both conventional and Sharia-compliant, to apply for a license and set-up in Bahrain. This will ultimately help SMEs and startups not only in Bahrain, but in the wider GCC and MENA region.
How crowdfunding can power the GCC
The new regulations also have the potential to power Bahrain's burgeoning fintech scene, in which the Kingdom has rapidly established itself as a leading regional player.
Fintech companies require a larger amount of capital than other startups, making investors often hesitant to invest large amounts, as the Bahrain Fintech Bay Ecosystem report 2022 identified. Because some fintech startups are considered risky by traditional regional investors due to regulatory issues, they can struggle to attract funding.
Crowdfunding offers a powerful model to address that funding gap. It also offers startups and SMEs significant visibility and allows them to test the market's appetite for their ideas. Investors who participate in the model often offer advice on how growing companies can develop their offering or market strategy, making it a win-win for all stakeholders.
Bahrain's recent regulations mean crowdfunding is primed to become a key driver of the economy, powering growth across SMEs as well as the innovative sectors that form an increasingly important part of the Kingdom's future.