The Dubai Financial Services Authority (DFSA) has today launched a regulatory framework for loan and investment-based crowdfunding platforms. The DFSA noted this is the first such framework in the Gulf Cooperation Council (GCC) member countries. The new crowdfunding regulatory approach is part of the DFSA’s roadmap to create an innovation-friendly ecosystem, in line with the UAE Government’s National Innovation Strategy.
[clickToTweet tweet=”The new #crowdfunding regulatory approach is part of the DFSA’s roadmap to create an innovation-friendly ecosystem” quote=”The new #crowdfunding regulatory approach is part of the DFSA’s roadmap to create an innovation-friendly ecosystem”]
The DFSA crowdfunding regulations are described as having the ability to catalyse growth in the financial technology (Fintech) industry in the UAE and the region. The regulations are designed to ensure clear governance for Fintech businesses and provide appropriate protection for their customers. They also formalize the DFSA’s approach to regulating crowdfunding platforms which had operated through interim arrangements since 2016.
Ian Johnston, Chief Executive at the DFSA, commented on the announcement;
“We are pleased to be the first in the GCC region to formalize a tailored regime for loan and investment crowdfunding platforms, which represent an increasingly important source of financing for the SME sector. By creating a clear set of rules for operators, we hope to encourage the sustainable development of this industry and is part of our contribution to the UAE Government strategy to develop the SME sector.”
DFSA representatives said the introduction of the regulation comes as crowdfunding is becoming an increasingly important route for small and medium sized enterprises (SMEs) to access financing. Global loan-based crowdfunding (IE P2P Lending) is forecast to reach more than USD $300 billion and global equity-based crowdfunding more than USD $93 billion by 2020.
As with most other countries, SMEs contribute dramatically to the UAE economy. In fact in 2014, SMEs represented approximately 85% of UAE businesses while contributing 60% to the UAE gross domestic product (GDP). SMEs employ 60 to 65% of the UAE work force. In Dubai specifically, SMEs represent 95% of all firms accounting for 42% of the workforce and 40% of the total value of Dubai’s economy.
Fostering a vibrant small business community is vitally important to the region. Yet data provided the Khalifa Fund shows that 50% to 70% of SMEs have had their loan applications rejected by banks. Loans to SMEs account for just 4% of outstanding bank credit which is below the MENA average of 9.3%. Authorities have recognized that conventional lenders are less inclined to support SMEs putting the economy into a quandary. Thus crowdfunding can play an important role in economic growth and sustainability.
The UAE government has taken a major role in establishing initiatives and programs to help with sources of funding for SMEs. Initiatives include the Mohammed Bin Rashid Establishment for SME Development and the Khalifa Fund. Given the significant role that SMEs play in the UAE economy, crowdfunding is expected to grow further in importance in the UAE as entrepreneurs seek alternative sources of funding.
[clickToTweet tweet=”In the UAE economy, #crowdfunding is expected to grow further as entrepreneurs seek alternative sources of funding” quote=”In the UAE economy, #crowdfunding is expected to grow further as entrepreneurs seek alternative sources of funding”]
The DFSA’s crowdfunding framework follows the launch of its Innovation Testing License in May. This new license allowa qualifying Fintech firms to develop and test concepts from within the Dubai International Financial Centre (DIFC), without being subject to all the regulatory requirements that normally apply to regulated firms. This is similar in approach to the UK Fintech Sandbox initiative that recognized the need to allow entrepreneurs to test new services without falling afoul of existing rules.
The DFSA’s innovation strategy is aligned with the National Innovation Strategy set out by UAE Vice President, Prime Minister and Ruler of Dubai, His Highness Sheikh Mohammed Bin Rashid Al Maktoum. The country understands the importance of creating an innovation-friendly ecosystem and access to capital is the first step.
An updated crowdfunding regulatory regime, also follows the launch of the FinTech Hive at DIFC, which is designed to bring together the next generation of leaders and entrepreneurs to address the growing needs of the region’s financial services industry, using innovative technology solutions. FinTech Hive intends to catalyze growth and efficiency in a variety of areas including trade finance, alternative finance and Shari’ah-based services.