In the world over, the relative inaccessibility of credit has led to the emergence or reinforcement of alternative real estate financing avenues for both developers and buyers. One of these emergent alternatives is crowdfunding.
This option of financing has proved a success because it is a viable investment option for all: high net worth investors, institutional investors and small-scale investors. Here in Kenya, though it has not been adopted, the current socio-economic situation heralds lucrative prospects for crowdfunding.
Crowdfunding is, in the simplest terms, soliciting for money from the general public (the crowd), which is used to fund a particular activity or venture. Given the need for wide reach to potential funders, crowdfunding is almost entirely done online through social media and other platforms created for this purpose.
Crowdfunding takes four forms:
- Reward-based crowdfunding: where lenders fund borrowers for projects in return for a non-monetary token
- Donation-based crowdfunding: where lenders give to borrowers for a charitable cause
- Debt-based crowdfunding (peer-to-peer lending): where lenders fund borrowers in expectation of repayment of the loan with interest
- Equity-based crowdfunding: where lenders become investors in ventures/businesses in exchange for ownership in the business. Reward- and donation-based crowdfunding have seen the most success since the advent of crowdfunding.
Does Crowdfunding work in Kenya?
In Kenya, we have seen examples of these through platforms like M-Changa and social media fundraising appeals (donation-based crowdfunding) and Chama/merry go round (peer to peer lending). Debt and equity-based crowdfunding have also been seen at a macro level and it has mostly been used to prop up family-based start-ups and small businesses but it is slowly gaining traction especially for the technology-based start-ups.
In countries like the United States and the United Kingdom, they have been using crowdfunding to tap into the potential of debt- and equity-based crowd-funding in financing real estate development.
Various platforms work to match lenders/investors with projects that they invest in after rigorous vetting and compliance processes to reduce the risk involved. The appeal that these opportunities have for investors is the diversification of their investment portfolios. While creating easy access to and multiple streams of funds necessary for developers’ projects.
Is crowdfunding regulated?
Crowd-funding is not legislated/regulated in Kenya. Nevertheless, some legislation can be interpreted as applicable, especially for debt- and equity-based options.
Under the Capital Markets Act, a crowdfunding platform/business involving the sale of debt or equity can easily be caught under the CMA regulation where the entity is a regulated entity. Units of debt and ownership in a company (such as a development company) are securities if offered to the public and tradable between lenders/investors. Where the entity offering is regulated, licensing will be required under the Act
Crowd financing opportunities are often targeted at the general public online. Accordingly, offers to take part in crowd-funding activities can be construed as public offers. For which the offeror must first submit a prospectus to the Capital Markets Authority which in turn gives the necessary approval.
The National Payments System and the Money Remittance Regulations under the Central Bank of Kenya Act are also likely to be relevant. When dealing with crowd financing platforms as the platforms act as a conduit for money between the borrowers and the lenders/investors. These Acts would apply uniquely depending on the set up of each platform.
The other way crowdfunding for real estate that would work is a Real Estate Investment Trust (“Reit”) based crowd-funding. For this to happen though, the Capital Market Authority would need to rethink the rules and regulations governing Reits and seriously consider reducing the minimum investments allowed.
The Bottom Line
As crowd-funding gathers traction in Kenya, it is anticipated that it will be regulated and later, even legislated. There is room for exponential growth because crowdfunding is not only limited to local funders. But it has international appeal for funders looking for new economies and sectors to grow their wealth. This will be a major boom for the real estate sector, sparing developers the agony of dangerous and bureaucratic traditional credit facilities.