Bahrain’s new crowdfunding regulations obviate retail market; only allowing person-to-business financing

The Central Bank of Bahrain (CBB) has begun to formally regulate Islamic and conventional crowdfunding businesses in its efforts to become a regional Shariah fintech center.

Apart from having to comply with existing rules on anti-money laundering, combating financing of terrorism and consumer protection among others, under the new crowdfunding rules, any firms operating a digital financing platform are required to be licensed in Bahrain and to have a minimum capital requirement of BHD50,000 (US$131,701). At the moment, only person-to-business financing is permitted in the Kingdom; business being SMEs with a paid-up capital not exceeding BHD250,000 (US$658,657).

“These SMEs may be based in Bahrain or outside; however, in the case of foreign SMEs, the platform operators have to clearly mention the cross-border and jurisdictional risk financiers have to take,” noted the CBB.

On the flip side, only ‘expert’ and ‘accredited’ investors are allowed to participate in crowdfunding, with retail investors prohibited from this asset class on the basis of its “high-risk” nature.

“[Expert and accredited investors] can lend up to 10% of their net assets to a single borrower/fundraiser (and sign a self-declaration form to this effect),” the regulator explained.

Reviewing the regulations, it is clear that the CBB has placed high importance in consumer protection. It is mandatory that in the event of any unsuccessful fundraising campaign (failing to meet 80% of the funding target), any monies received would need to be refunded to investors within seven calendar days. The central bank is also limiting the amount that can be raised by businesses: BHD100,000 (US$263,403) a year with tenors of less than five years.

Releasing its regulations two weeks after the Dubai Financial Services Authority, the CBB has been particularly vocal about developing the Shariah peer-to-peer financing space.

“We expect Bahraini entrepreneurs to benefit from the global crowdfunding trend, which provides a viable alternative to bank financing. In particular, the CBB is keen to see Bahrain dominate the Shariah compliant financing-based crowdfunding market in the region,” said Khalid Hamad, the executive director at the CBB. “The demand for Shariah compliant financing is already high and we expect to see it reflected in the crowdfunding market as well.”


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