McKinsey & Company

McKinsey on Society


Voices Entrepreneurship Without Boundaries

Why crowdfunding appeals to the Middle East

Jason BestPrincipal
Crowdfund Capital Advisors

Jason W. Best is cofounder and principal at the Florida-based Crowdfund Capital Advisors, which works with policy makers, investors and entrepreneurs on crowdfund investing strategy around the world. has ranked Best as one of the ten most influential people in crowdfunding. He is an architect of the 2012 US Jumpstart Our Business Startups Act, a published author, and entrepreneur-in-residence at the University of California Berkeley. Click here to read CCA’s recent research report on Middle East crowdfunding, prepared for the World Bank.

Aamir RehmanManaging Director
Fajr Capital Advisors

Aamir A. Rehman is managing director at Fajr Capital Advisors, a specialist firm focusing on investment flows and Islamic finance in Muslim majority markets. He is an expert on corporate strategy, Islamic finance, and the Middle East, and is the author of Gulf Capital & Islamic Finance: The Rise of the New Global Players and Dubai & Co.: Global Strategies for Doing Business in the Gulf States. Click here to read a recent Fajr Capital Advisors white paper on crowdfunding in the Middle East.

The TakeawayA boom of crowdfunding platforms in the Middle East is helping to give entrepreneurs easier access to capital — to a degree that may help address economic inequality and political instability.

In December 2012, Loulou Khazen Baz launched Nabbesh (Arabic for “search”), the Middle East’s first online skills marketplace. Her goal was to provide young Arab professionals with direct access to flexible employment opportunities. When Baz needed expansion capital six months later, a new crowdfund investing platform called Eureeca, based in Dubai, gave her a three-month window to meet her all-or-nothing target of $100,000. It took her only 12 days and 23 investors to do so, with individual contributions ranging from hundreds to tens of thousands of dollars.

Crowdfunding isn’t just the latest business fad to hit the Middle East. In a region where capital markets remain under-developed (with limited venture capital and public offerings), it’s a powerful financing tool that could empower a new class of entrepreneurs and investors. In the Middle East, unequal access to capital is not simply a problem for small and growing companies. It’s also an important driver of economic inequality and political instability in a region where many talented, well-educated young citizens have limited prospects for jobs that take full advantage of their talents. Access to funding is too often based on family networks and relationships, rather than the merits of the proposal. At the Milken Institute’s 2012 Global Conference, leaders from across the Middle East and beyond agreed that “a lack of economic opportunity was a major, if not the main, catalyst for the start of the Arab Spring.”

“Crowdfunding isn’t just the latest business fad to hit the Middle East. In a region where capital markets remain under-developed, it’s a powerful financing tool that could empower a new class of entrepreneurs and investors.”

By enabling crowdfund investing, governments in the region can harness the power of the social Web to provide more equal access to capital, reduce friction in the process of investment, and improve communication between investors and entrepreneurs. Because crowdfund investing platforms promise efficiency, transparency, and market validation, they can also be an appealing vehicle for individual and institutional investors, as well as public sector investment funds that focus on small and medium-sized enterprises (SMEs).

Elements of crowdfunding

Crowdfunding is a simple but transformative concept. An entrepreneur proposes a business, charitable, or creative project on a crowdfunding Web site. If convinced, tens, hundreds, or even thousands of individuals commit relatively small amounts of capital to support the idea. Taken together, these contributions are often enough to propel the project from the idea stage to commercial reality. The crowdfunding industry is in its infancy, but it topped $3 billion in global transactions in 2012 and may exceed $5 billion by the end of 2013.

To date, the most common model for crowdfunding has been rewards-based platforms like the US-based Kickstarter or Indiegogo, where supporters of a film project might receive an autographed DVD in exchange for their $100 contributions. By contrast, businesses on lending platforms like the UK-based Funding Circle allow contributors to lend money at specified interest rates and terms.

Another variant is the investing platform, where funders receive equity in the business in exchange for their contributions. Their capital is not guaranteed, but funders have the potential of realizing significant financial rewards if the business is a hit. Because equity-based campaigns entail the issuance of securities, crowdfund investing is both the most complex form of crowdfunding and the one that holds the greatest economic potential.

Early developments in the Middle East

These are early days for crowdfunding in Middle East markets, but the rate at which new platforms are being launched suggests that the phenomenon is catching on.

Several online crowdfunding platforms are already up and running in the region. They include rewards-based platforms like Aflamnah, which is based in Dubai and mainly funds films and other creative projects, and the Cairo-based nonprofit Yomken, which doubles as an online shop.

The Middle East also hosts three new platforms dedicated to equity investing. Dubai-based Eureeca is looking to replicate its early success with Nabbesh into an international pipeline of successful businesses. Eureeca matches eligible businesses with crowdfunding as well as more traditional angel investors and venture capital firms. In addition to the $100,000 that it raised from the crowd, Nabbesh also raised $100,000 in angel investment and another $100,000 in venture capital. Launched in May 2013, Eureeca is now looking to extend its services into Lebanon.

Zoomaal already operates in Lebanon, which offers one of the region’s more favorable environments for entrepreneurs and investors. The country boasts a dynamic entrepreneurship scene, and the government is developing a sound legal framework for the crowdfunding sector. Zoomaal has raised venture capital from investors in important Arab markets, including Jordan, Egypt, Saudi Arabia and Lebanon. (Disclosure: Zoomaal is a client of Crowdfund Capital Advisors, a U.S.-based advisory firm that Jason Best co-founded.)

Finally, Cairo-based Shekra is the first investing platform designed to comply with Islamic law (the Shari‘a). It creates financial instruments that have been approved by Shari‘a experts and declines businesses such as alcohol and tobacco that contradict Islamic precepts. To date, three Arab start-ups have conducted successful crowdfunding rounds through Shekra: the online supermarket Minbetna, a retail financial application called Qptimizer, and the online counseling service Nofoos. Investors must be invited to join Shekra, which necessarily limits its size in the short term. But the platform has international ambitions for which its Shari‘a credentials will come in handy.

Crowdfunding and Shari’a

Islamic commercial law strongly favors equity over debt financing, which suggests that crowdfund investing platforms are especially well suited to Muslim-majority countries. In our view, crowdfund investing and Islamic financial services are inherently compatible and mutually reinforcing. For one, the two ideas have similar goals and philosophical foundations. Crowdfund investing is designed to build communities, encourage risk sharing, democratize wealth, and channel capital to real economic activity. Islamic finance is based on similar principles.

In application, too, each idea has much to offer the other. On a like-for-like basis, many capital providers and capital seekers in Arab markets have demonstrated a preference for financial services that meet Shari’a requirements. This preference is strongest in debt-based financing because the Shari’a prohibits interest (riba). Even in equity financing, however, we predict that the most successful Middle Eastern crowdfunding platforms will accommodate investors and entrepreneurs who wish to conduct their business affairs in accordance with Islamic financial law.

In turn, crowdfund investing fills a gap in the spectrum of Islamic financial services available to SMEs in the Middle East. While the Islamic financial services industry has successfully designed interest-free alternatives to debt-based SME financing (typically based on Islamic trade instruments), Islamic equity financing for this segment has been more elusive. Crowdfund investing offers a transparent, cooperative, and cost effective way to provide Shari’a-compliant equity financing. This has broad implications for capital markets in the Islamic world. In addition to the independent crowdfunding platforms that we focus on in this article, we may well see the next generation of Islamic financial institutions introduce elements of crowdfund investing to their own customers.

A note of caution

All new crowdfund investing markets face a range of technical and regulatory challenges. To work properly, crowdfunding requires adequate technology and protocols for international money transfers. Regulation must be put in place to deter money laundering and other forms of fraud. In general, governments need to create regulatory frameworks that provide sufficient structure and protections while allowing enough space for an orderly and robust market to form.

In addition, the Middle East crowdfunding sector faces specific challenges. For one, the region’s entrepreneurial ecosystem is relatively undeveloped compared to markets where crowdfund investing has already worked. Capital markets are shallower, and there are fewer mentorship and training opportunities available to aspiring entrepreneurs. Investors and entrepreneurs in the Arab world must also contend with onerous regulatory restrictions on employment and business ownership. In some countries, structural incentives favor public sector employment over private sector entrepreneurship.

Looking ahead

While these are all valid concerns, none of them are insurmountable. Regional governments can either take steps to accelerate crowdfund investing in their markets, or wait for other countries to take the lead. Those who seize the opportunity now have much to gain. Crowdfunding can create novel partnership opportunities for institutional investors and governments, allowing them to achieve broader impact with existing funds. For the first time, institutions can tap crowdfunding technology to support co-investments in entrepreneurs and SMEs that have demonstrated traction in their own communities, and then measure their outcomes over time. For a region faced with the daunting challenge of creating almost as many jobs as currently exist, we think a range of new solutions will be required. Crowdfunding is one potential solution that is worthy of serious exploration.

E-mail alerts

Get our latest knowledge emailed to you

Follow us