Kapital Boost is an Islamic crowdfunding platform based in Singapore, serving small businesses in the region. Although Islamic crowdfunding is a niche area, it has the potential to grow quickly given the large Muslim population in Singapore, Malaysia and Indonesia. We met up with Erly Witoyo, the founder and partner at Kapital Boost recently to understand more. Below are excerpts of our discussion.
Give us a quick introduction to Kapital Boost
Kapital Boost was set up to offer SMEs in Southeast Asia an alternative form of financing to bank loans. We recognise that SMEs play an important role in the development of communities and economies. Yet, most have limited or no access to bank financing. This limits their ability to grow. The lack of financing is also a common cause of business failure. Through Kapital Boost, we provided businesses without bank financing access the ability to raise capital at a competitive cost versus other non-bank financial institutions.
Our second objective in starting Kapital Boost was to address the shortage of attractive investment options for Muslim investors. Muslims make up about a quarter of the global population. However, Islamic-based financial assets make up less than 1% of total financial assets. Most Muslims in Singapore looking for Islamic-based investments tend to put their money in Islamic banks, but this offers them very low or sometime negative returns on a net (of inflation) basis. Investing through Kapital Boost can earn them annualised gross returns of 18-24%.
What is Islamic crowdfunding?
Islamic crowdfunding is similar to other types of crowdfunding. At Kapital Boost our aim is to match investors looking for attractive investment opportunities with SMEs in need of capital for expansion.
The key difference with Islamic crowdfunding is the financing structure used. In our case we utilise a structure called Murabaha. This is a trading-based financing – investors first purchase the assets, which they will then sell to the borrowing SME in the near future at ‘cost plus a profit margin’.
The other key difference in Islamic Crowdfunding is that we screen SMEs to ensure their business is ethical and allowable under the Islamic law. So businesses in sectors such as alcohol, gambling, or adult entertainment will not be eligible for crowdfunding via Kapital Boost.
Can you give us an example on how Islamic crowdfunding works?
The first deal we did was for PT Produsen Batik, an Indonesian batik and textile producer. The company required funding for the purchase of fabrics to fulfill a purchase order for scarves from PT Tupperware.
Through Kapital Boost crowdfunding, investors collectively purchased SGD50,000 worth of fabrics required by Produsen Batik. Investors assigned the company as an agent to purchase the fabric from suppliers. The company also agrees beforehand to buy the fabrics from investors at cost (SGD50,000) plus a 7% profit margin three months later. To ensure the correct use of funds, the company is required to provide a receipt of the purchase to investors.
Kapital Boost agreed to help Produsen Batik with the needed funding because of the strength of the company’s business and financial profile, and its existing purchase order with Tupperware. We knew that as long as the company can produce the requested scarves to PT Tupperware, there will be cash inflow in the near-term. This can be prioritised for payment to Kapital Boost members (investors).
We were also comfortable with the company given its membership with Tangan di Atas (TDA), the largest SME association in Indonesia, who is our partner. TDA was willing to vouch for Produsen Batik’s capability and track record. If we had faced issues in getting payments from Produsen Batik, we could also have asked for TDA’s assistance.
To be continued…
(Due to the length of the article, the second part of this interview will be published in a follow-up post.)