Does Crowdfunding Sound the Trumpet for the Decadence of Traditional Banks?

Crowdfunding might be here to stay but long standing financial institutions have little to fear.

The third and final piece in our Crowdfunding as an alternative for SME funding touches on the contrast between traditional banking and crowdfunding and the solution to the challenges of crowdfunding. (Here are the first and second part of the series)

 

Crowdfunding might be here to stay but long standing financial institutions have little to fear. Statistics show that only a minute percentage of lending is carried out on crowdfunding platforms across the globe.

It should also be recalled that the key role of banks is financial intermediation, i.e. deposit taking/gathering savers’ wealth on one side to distribute it to those who require capital/avail credit facilities on the other side. Lending is therefore only one portion of the activities of banks.

The regulatory framework surrounding deposit taking makes it virtually impossible for a non-financial institution to venture into this arena. This means that even crowdfunding platforms require the existence of traditional banks to hold the funds they gather from donors.

Beyond pivotal intermediation, banks play a societal role in every economy. Not only do they symbolize safety of savings to all citizens, they are also the backbone of most payment systems – they process all electronic payments on a daily basis and of international trade through which a country’s economic fabric enhances its competitiveness and creates employment opportunities.

Is it all rosy then in the world of crowdfunding? Far from yes.

One of the pitfalls entrepreneurs potentially encounter by going through the crowdfunding route, is the risk of losing focus. Free or cheap money can be easily wasted. Also for those opting for equity funding, they face the risk of being exploited by more astute venture capitalists who could usurp the business idea in the long run. Some crowded ventures have recorded failure rates in terms of execution.

The loss of intellectual property is an equally real threat faced by entrepreneurs who choose the crowdfunding option. Their ideas are exposed to the public with the real possibility of being stolen. Also in question, is the extent to which intellectual property rights are enforceable on this side of the globe. An unequivocal commitment on the part of the judiciary is key to address this concern.

Another limitation to the uptake of crowdfunding in Nigeria and in most countries of West Africa is the limited income available to the under 30’s. This segment of the population is unfortunately the most active online especially social media.

The major downside however, is the legal and regulatory vacuum that exists in most African countries around this scheme. The concern is not merely about a plethora of laws that will deter entrepreneurs or limit their sourcing reach, but rather about the lack of formal expertise required to accompany and help SMEs navigate the waters of more complex structures such as equity and lending crowdfunding. It would be a pity to see great business ideas die in the boardrooms due to the disparate objectives of directors, the majority of whom are unknown to the entrepreneur and got voting rights  by virtue of their capital contribution.

Key to the success of an equity or lending crowdfunding campaign is the ability to attract the right investors/lenders. In the West African context, there is still a missing link between  upright investors and genuine  entrepreneurs.   For the pairing to take place, due diligence and accountability are fundamental elements required to ensure a mutually beneficial partnership between the parties. Opportunities exist in this lacuna it is our belief that there is a door of opportunity, wide open as a matter of fact, for a credible institution, through collaboration with a well-established non-governmental/not-for-profit organization, to create a platform for the SMEs to reach the crowd. The structure is paramount to the success of crowdfunding in Africa and in Nigeria especially, where trustworthiness in financial dealings may represent a cause for serious concern on the part of contributors.