East Africa is not getting the most out of one of the world’s most innovative financial development because it lacks rules on crowdfunding. The latter is gaining traction as small and medium sized firms look to raise money from online platforms.
Crowdfunding is the raising of small amounts of money from many benefactors (the crowd) through an online platform, often using mobile phone technology, which is then loaned out to selected businesses. The funders do not seek financial returns in most cases but seek leverage to pre-buy products and to receive special perks like sharing revenues.
The money can also be sourced in the form of donations, rewards, debt and equity, and often comes with consumer risks. Kenya, Uganda, Tanzania and Rwanda are yet to have regulations governing this alternative lending model.
According to Joe Huxley, FSD Africa regional strategies co-ordinator, “The East African crowdfunding market is nascent, but shows signs of growth. Creating the right rules and incentive structures to ensure this growth is carefully managed, produces positive development gains is a key task.”
The amount raised on various platforms in Kenya, Uganda, Rwanda and Tanzania reached $17.8 million in the first quarter of 2016, putting it on course to surpass the $37.2 million raised in 2015.
A report by FSD Africa, CCAF and Anjarwalla & Khanna Advocates shows that more than $250 million was raised through various alternative finance channels between 2013 and 2015.
“East Africa was the largest alternative finance regional market across Africa in this same period,” said the report, Crowdfunding in East Africa: Regulation and Policy for Market Development.