CROWDFUNDING AS A MODE OF ALTERNATIVE FINANCING: PERSPECTIVES OF DEVELOPMENT IN UZBEKISTAN

CROWDFUNDING AS A MODE OF ALTERNATIVE FINANCING: PERSPECTIVES OF DEVELOPMENT IN UZBEKISTAN

Umidjon Yorqulov

Assistant teacher, Tashkent State University of Economics,

Uzbekistan, Tashkent

ABSTRACT

Current work aims to investigate the concept of ‘Crowdfunding’ and its development perspectives in Uzbekistan. As a method of raising capital through the collective effort, crowdfunding aims to fund a project or venture with small donations from many people. Thus, such a phenomenon is giving an avenue for the development of alternative finance products. Particularly, development of crowdfunding in Uzbekistan, where more than 436 thousand micro firms and small business operate, is hoped to bring potentially huge both-side benefit to investors and business owners, contribute to the development of entrepreneurship and, in its turn, economics of Uzbekistan.

Keywords: Crowdfunding, alternative finance, crowdsourcing, crowdlending, small and medium enterprises, fintech, SME in Uzbekistan, types of crowdfunding.

Definition of crowdfunding

Crowdfunding is a method of raising capital through the collective effort of friends, family, customers, and individual investors. Businesses, organizations, or individuals fund a project or venture with small donations from many people. By receiving the necessary boost to cash flow, these ventures can get off the ground or launch new projects. Most of these campaigns happen via internet platforms, have set timeframes for when money can be raised and disclose specific monetary goals.

According to Belleflamme, Lambert and Schweinbacher(2014), instead of raising the money from a very small group of sophisticated investors, the idea of crowdfunding is to obtain it from a large audience (the “crowd”), where each individual will provide a very small amount.

In several papers, authors put question on whether crowdfunding’s origination is connected with crowdsourcing development. (Rouzé, V. 2019).  

Rouze in his article addresses to the history of the market for books in Europe in the sixteenth century to make for an interesting starting point. Beginning in this period, two methods of financing emerge which have clearly collaborative elements. Firstly, publishing associations  and cooperatives were established, where individuals came together in the form of a mutual fund to share the financial risk associated with printing and distribution, as well as potential profits.

Secondly, the same period saw the development of publication by subscription, a model initiated in England in the seventeenth century, and an obvious forerunner of the modern cultural crowdfunding model. Publication depended on the number of subscribers and, in particularly successful cases, the amount raised made it possible to reprint the book for what we would now call the ‘traditional’ market.  For example, this system was used to publish Jane Austen’s novels. Furthermore, the model also met with great success in the US, even up to the end of the nineteenth century. (Rouzé, V. 2019). 

This is a model very close to that of those gift-counter-gift platforms that offer different tiers of reward depending on the amount given.

The journal Officiel (which publishes all official national laws and decrees) validated the translation of crowdfunding by financial participatif (participative funding), hence hinting at more individualized usage but keeping with a sense of homogenization. The Quebec French usage of the term “sociofinancement” (social funding) is also worth noting. (Rouze, V. 2019).

Advantages of alternative finance

To begin with, alternative financing refers to all modes of financing that are not traditional while by traditional finance we refer to methods of receiving finances from conventional banks.(F.Adam, 2020). Subsequently, there was a rapid growth of finance providers which are beyond banks in the last decade.

Nowadays, alternative finance products incorporate technological ecosystems.  Consequently, technology driven alternative finance allows to:

• Instant reach – by using a crowdfunding platform one can have access to thousands of accredited investors who can see, interact with, and share fundraising campaign.
• Presentation – by opening a crowdfunding campaign, the business owner provides all sufficient information to look at the business from the top level—its history, traction, offerings, addressable market, value proposition, and others
• Public Relations & Marketing – from the launch till the end, the campaign can be shared and promoted through social media, email newsletters, and other online marketing tactics.
• Validation of Concept – Presenting the concept or business to the crowd affords an excellent opportunity to validate and refine the offerings. As potential investors begin to express interest and address with questions, the business owner can quickly refine the mistakes.
• Minimization of organizational costs - through putting all communication on the platform, all needed information can be presented online in a much more accessible format leaving with more time to run the business instead of fundraising.
• Reduction of transactional costs - usage of technological platform decreases all incurring costs for transportation and transaction.
• Efficiency: one of the biggest advantages about online crowdfunding is its ability to centralize and streamline all fundraising efforts. By opening a single, comprehensive profile to which can funneled with all prospects and potential investors,  the need to pursue each of them individually can be eliminated.
• Reduction of  intermediation - intermediary entities are usually fully eliminated from communication between investors and campaign owners.
• High transparency – the whole system of crowdfunding is mainly based on transparency concept.
• Both side operations – crowdfunding platforms allows to work both on receiving and investing.  (F.Adam, 2020)

History of origin of alternative finance

What are the reasons of a such sudden boost of alternative finance in the last decade?     

The Global Financial Crisis in 2008 was the primary driver of the development of alternative finance. However, even before the Global Financial Crisis of 2008, banks were not actively interested in financing small and medium enterprises. There are number of reasons behind that. 

Initially, from banks perspective, servicing small business entities implies small turnovers which consequently mean generally smaller profits. The question arises: why would banks invest their time and energy providing funds for small and medium enterprises whereas they also hold for the opportunity to providing loans and servicing to big companies which account for yearly turnover let’s say of 5 million pounds?

Secondly, there have been increased regulations put to the banks after the Global Financial Crisis. Subsequently, regulatory regimes came heavy on the banks and that, in its turn, has tightened the potential power of banks. Consequently, complying with regulations became even more expensive and time-consuming for the banks. Thus, banks got to be interested in servicing large businesses.  

Thirdly, lending small loans for small enterprises is associated with more high risks, unsecured finances and lack of collateral. Entering into such risky contracts is not in the interest of banks.

Fourthly, small businesses tend to have weak cash flows therefore it is hard for them to make reasonable cases to the banks whereas it would be much easier to present portfolio in the alternative finance platforms. Furthermore, in usual cases banks pay very little interest to depositors whereas investors at crowdfunding platforms get usually much more for the risk entertained.

Fifthly, businesses having poor credit history it is more likely and easier potentially to get finances from such platforms because investors have risk appetite. From investors perspective, they have a lot to gain from putting their money into crowdfunding campaigns. Initially, it is easy to invest in a crowdfunding campaign. Investors can put money into a project or company through a direct online process. Second of all, equity crowdfunding allows investors to fund multiple campaigns, which helps them to expand their financial opportunities and diversify their portfolios. (Adam F., 2020).

Types of crowdfunding

There are mainly three types of crowdfunding:

1. Donation-based crowdfunding – Any crowdfunding campaign in which there is no financial return to the investors or contributors.

2. Rewards-based crowdfunding – Any crowdfunding campaign that involves individuals contributing to a business in exchange for a “reward,” typically a form of the product or service that a company offers.

3. Equity-based crowdfunding – Any crowdfunding campaign that allows contributors to become part-owners of the company by exchanging capital for equity shares. (What is Crowdfunding? Clear, Simple Answer Here., 2020).

Development perspectives of crowdfunding in Uzbekistan

Currently, the Republic of Uzbekistan pays considerable attention to the development of small businesses. Measures are being taken to radically simplify and increase the transparency of licenses, permits and the provision of public services. In addition, measures of legal protection of business entities, their financial support have been strengthened. (stat.uz, 2018.).

Nowadays, population of Uzbekistan accounts for more than 33,5 million people possessing with 46% of  Central Asian population. Meanwhile, Uzbekistan accounted for 436 thousand micro firms and small businesses operating in the country with annual number of newly created small business depicting 93214 in 2021(stat.uz, 2021). SME activities accounted for 56,5% of overall GDP(stat.uz, 2019) and show a tendency to further increase with such growths for SME numbers. In comparison. SME dedication to the GDP of Kazakhstan is about 29.5%. (strategy2050.kz). Interestingly, annual number of newly opened small business enterprises in 2020 almost doubled(1.9 times) per annum in comparison to the number in 2019 reaching 92874 SMEs. The number of newly opened SMEs accounted for 93214 in 2021. Such tendency shows rapid development of small and medium business sector in Uzbekistan what indicates to the potential rise of demand for financing of such enterprises through alternative financing methods. Furthermore, latest survey conducted by Jakhongir Imamnazarov on the topic “Application and implementation of Islamic finance products in Uzbekistan” in summer of 2020 showed that 61% of 2235 surveyed entrepreneurs and 75% out of 4938 individuals expressed interest to use the financial opportunities, services that Islamic financial organizations would provide.  The results of the survey clearly highlight the overall openness and interest for alternative finance opportunities of the population. 

Furthermore, the fundraising call to support population suffered from the flood of Sardoba water reservoir in Sirdarya region in June of 2020 announced by educational platform Islom.uz, “Hilol-nashr” publishing house and “Grand ta’lim” non-governmental educational organization in social media platforms succeeded to raise 120 million sums overnight and over 1 billion soums in 8 days. Moreover, the call for collecting products for daily sustainability (flour, rice, oil, potatoes, sugar and others), matrasses and clothes urged people to bring social aid of about 100 tons. Such tendency once again shows the motivation of Uzbek population for mutual support and readiness for collaboration.

Examples of successful crowdfunding platforms

Crowdfunding applications have been widely u0sed for the support of startups and small and medium-size entrepreneurship. Namely, the the crowdfunding platform “ Circle up”  helped to raise $260 million dollars for 196 startups. Current platform is equity capital oriented crowdfunding platform. It provides a platform to network with experts, retailers, and entrepreneurs. Small and medium enterprise owners or potential business people can also connect with accredited investors, who have a net worth of at least $1 million and an annual income of at least $200,000. Moreover, the platform “Circle up” integrated access to special market insights using “Helio” ( platform’s proprietary machine-based learning technology) for making company strategies. The platform is highly suitable for entrepreneurs, however, the selection process is fairly competitive, and typically you also need to have a revenue of at least $1 million to be listed on the site.

The crowdfunding platform Kickstarter is a rewards-based donation platform that has been helping companies raise money since 2009. It has been used to raise more than $5 billion for more than 182,000 projects. Part of what makes Kickstarter so successful is how simple the site is to use. The campaign owner sets a monetary goal and the amount of time wanted to reach it, and tells campaign's story. Then owners share projects with the community with the hope to find likeminded contributors. (The 7 Best Crowdfunding Sites of 2020, 2020). 

Indiegogo is a reward-based platform that offers two kinds of funding. Fixed funding allows to set a goal for a certain amount of money, and if the target is not reached, then all funds are returned to donors. Flexible funding allows campaign owner to collect any amount of monetary support, all of which can be kept whether the goal is reached or not.

In the case of Islamic crowdfunding platforms in India, the system is designed to contribute to halal fundraising from Indian Muslim investors that are putting their cash in halal crowdlending platforms. Such platforms are funding Sharia compliant projects which are initiated through Indian Small and medium business entities.  Interestingly, halal fundraising is not covering only profitable projects where investors and borrowers share the profit, but it covers also social causes contribution to promote educational or health related projects in India.

Conclusions and proposals

The current investigation clearly shows that there is a room for the development of crowdfunding platforms in Uzbekistan. The republic of Uzbekistan as a rapidly developing country and accounting for more than 436000 SME firms shows an urgent increase of demand for small and  medium firms financing. Studying the developments in alternative finance, disruptive finance projects and fintech market worldwide, we can conclude that there is an market to realize equity-based crowdfunding platform that, potentially, can be beneficial for economy development through investment into SME projects. 

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