CBB sets new crowdfunding rules for SMEs

Manama : The Central Bank of Bahrain (CBB) yesterday introduced a new regulatory framework allowing small and medium sized businesses in Bahrain and in the region to raise conventional or Shari’a compliant financing through crowdfunding. 

The norms allows a borrower/fundraiser to raise a maximum of BD100,000 through crowdfunding in a year, with a financing tenor not exceeding 5 years.     

Retail investors, however, are not permitted to participate in the funding, the Central Bank said citing “high-risk nature”. 

The regulatory authority has also set the minimum capital requirement for the crowdfunding platform operators at BD50,000, and allows only  Person to Business (P2B) lending/financing. 

The move, a first in the Kingdom, also requires that firms operating an electronic financing/lending platform must be licensed in Bahrain under the CBB Rulebook Volume 5 – Financing Based Crowdfunding Platform Operator. 

The general regulations are the same for both conventional and Shari’a compliant financing based crowdfunding platforms. For the latter, an additional requirement is to ensure that the financing structure is Shari’a compliant by engaging a Shari’a advisor or outsourcing this function to a third party.  

“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 Shari’a compliant financing-based crowdfunding market in the region. The demand for Shari’a compliant financing is already high and we expect to see it reflected in the crowdfunding market as well,” said Khalid Hamad, Executive Director at the CBB.  

Key takeaways

1.Minimum capital requirement for platform crowdfunding platform operators is BD 50,000.

2.Only Person to Business (P2B) lending / financing is permitted. 

3.SMEs with paid up capital not exceeding BD250,000 can raise funds. 

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

5.It is the responsibility of the lenders/financiers to perform their own creditworthiness assessment on        borrowers/fundraisers. 

6.Crowdfunding platform operators have to comply with the CBB rules on Anti Money Laundering, Combating Financing of Terrorism (AML/CFT), consumer protection, etc.

7.Only Expert and Accredited investors are allowed to provide financing through these platforms; they can lend up to 10% of their net assets to a single borrower/fundraiser (and sign a self-declaration form to this effect). 

8.Platform operators have to clearly and publicly disclose their fees, charges and commissions. 

9.Platform operators may provide financing to borrowers/fundraisers who use the platform subject to obtaining the required license from the CBB to provide credit and adequate disclosure. 

10.If a borrower/fundraiser is unable to raise at least 80% of its crowdfunding offer size the attempt would be considered unsuccessful and any monies received would have to be refunded within seven calendar days.