New rules for debt-based crowdfunding in Saudi Arabia are set to boost the country’s SME and start-up space.
In January 2021, the Saudi Central Bank (SAMA) issued new rules for engaging in debt-based crowdfunding (DBC) activities in Saudi Arabia. The regulation provides a licensing framework for DBC activity and sets certain minimum standards for the key players involved: DBC companies, the lenders and the beneficiaries.
Global trends
The Saudi development reflects the global rise of crowdfunding in recent years. Across the world, developments in financial technology (fintech) are changing the way people interact with financial services – allowing faster payments, more secure transactions, user-friendly interfaces, and reducing costs.
Crowdfunding – defined as the practice of funding a business project by raising small amounts of money from a large number of people, typically through the internet –represents one category of fintech.
Debt-based crowdfunding is based on loans and differs from equity-based crowdfunding, as the borrower does not have to give away a stake in his/her company.
By raising capital through innovative and digital solutions, crowdfunding is seen to potentially enable and widen financial access to previously underserved populations.
According to the Cambridge Centre for Alternative Finance, the global crowdfunding market volume grew 44% between 2016 and 2017 to reach $418 billion. In 2020, crowdfunding raised $304.53 billion worldwide.
Developing and emerging markets are set to drive global growth in crowdfunding in the coming years as online capital raising is still relatively small in these countries. Another driver for growth may be the continuing gaps in traditional methods of raising capital (e.g. through banks and finance companies), particularly for small businesses, as well as the broader turn towards digitalization in a post-pandemic world.
Against this backdrop, SAMA’s new regulation on DBC in Saudi Arabia is highly positive. Here are 4 key takeaways:
1. Clarify rules and procedures for DBC companies
The new regulation defines DBC companies as joint-stock companies licensed to engage in DBC activity through a digital platform. In addition to outlining licensing requirements, the regulation also requires DBC companies to maintain a minimum capital of SAR 5 million.
2. Due diligence measures for lenders
Under the rules, a lender’s contribution shall not exceed 25% of the finance amount requested, with the total amount of contribution capped at SAR 50,000 for each institutional beneficiary and SAR 200,000 annually for all finance options offered through the DBC platform. These caps will not apply to special lenders who need to fulfill additional criteria, such as having assets with a net value of at least SAR 3 million.
3. Credit limits and rules applicable to institutional beneficiaries
Under the rules, DBC companies can only assist in the provision of financing to institutional beneficiaries (e.g. small businesses and SMEs) and not to private individuals. In addition to due diligence for institutional beneficiaries, the rules outline certain credit limits such as the total amount of credit granted to each institutional beneficiary cannot exceed SAR 7.5 million.
4. SMEs and fintechs in KSA to get a lift
The SME and fintech ecosystem in Saudi Arabia is heating up. According to estimates, in Q3 2020 the total amount of credit awarded to SMEs went up more than 50% when compared to Q3 2019, showing strong appetite for growth.
The recently announced new rules for DBC in Saudi Arabia will provide more opportunities for startups and SMEs to access capital and will facilitate their expansion plans.
By supporting the diversification of financing channels, the new DBC rules support entrepreneurship, innovation and economic development in Saudi Arabia in line with the Kingdom’s Vision 2030.