Small and medium-sized enterprises (SMEs) make up over 95 percent of the businesses in the APEC region. They generate over 60 percent of total employment. However, less than 20 percent of all SMEs get approved for bank loans. Further, around a quarter of the global population are Muslims. But Islamic-based financial products comprise less than one percent of all financial products globally. Singapore-based entrepreneur Erly Witoyo believes there is a global shortage of Islamic investment products.
At the beginning of the year, Tech in Asia wrote about a startup called Club Ethis, which crowdfunds Indonesian real estate developments in accordance with Sharia principles. Today, Witoyo, the commissioner of Club Ethis, tells Tech in Asia about his new spinoff project. Kapital Boost is an Islamic-based crowdfunding platform for small business asset purchases.
Let’s say your paper business in Indonesia needs a certain machine for its operation. It’s a bit pricey and you don’t have the capital to buy it. Now, you find yourself in a chicken-and-egg situation because you need the machine to make money, and you need money to buy the machine. That’s where Kapital Boost comes in.
Essentially, investors on Kapital Boost give money to the borrower so they can buy an asset on their behalf – let’s say a delivery truck, for example. The business buys the truck and starts using it, although technically it still belongs to the investors. Over time, the SME buys the truck from the investors at cost, plus a profit.
Erly did not share how much of an upmark must be borne by the small business to create a sizeable return on investment for the backers but odds are, it depends on the asset in question. He did say, “We’re awesome because we help small investors earn big returns from small businesses. We support the small guys who make up the largest part of the economy.”
Tapping Muslim investors
“I was a credit analyst for more than 15 years. I started my career with Standard & Poor’s and then went on to investment banks Credit Suisse and Barclays,” explains Erly. “I decided to leave banking to start my own business in an area that has more social impact. My co-founder Umar Munshi and I saw two big problems, which we wanted to solve. The first was the lack of funding options for SMEs in Southeast Asia. The second was the shortage of attractive Islamic-based investments, especially for small investors.”
When we covered Club Ethic in the past, the company positioned itself as a private investment network; one which helped fund real estate developments, startups, and small businesses alike. Today, Erly tells us Club Ethis is solely focusing on real estate, while Kapital Boost is the entity responsible for SMEs. He didn’t mention what happened to the department for funding true startups.
Kapital Boost launched back in July, and Erly says the firm is zeroing in on three key markets: Singapore, Indonesia, and soon Malaysia. In four months, Erly says Kapital Boost was able to complete seven deals and is now working on number eight. So far, the total funds raised by Kapital Boost for borrowers has reached S$200,000 (US$143,091).
“Versus banks we offer a faster and more friendly funding approval process,” says Erly. “Our requirements are less stringent. But we mitigate that by implementing other risk management processes to ensure the default risk on our deals are lowered as much as possible. Versus money lenders – legal or illegal – we offer significantly better financing rates. For investors, we offer a better Islamic investment option for those looking for decent returns.”
Erly clarifies that businesses that receive funding through Kapital Boost don’t necessarily have to be Muslim, but incorporating Islamic-friendly principles not only differentiates Kapital Boost from the competition, but also unlocks a largely untapped market in Southeast Asia.
Hopefully better than the sharks
Kapital Boost competes head-on with Singaporean peer-to-business lending firms like MoolahSense, Capital Match, and Funding Societies. Indirectly, Kapital boost competes with Indonesia’s online money lenders like Tuniaku and UangTeman, although Erly says these platforms focus more on funding individuals, whereas his firm focuses on small business assets.
Without divulging specifics, he also adds that the competitor’s funding amounts are smaller with much higher rates than those of Kapital Boost. The competitors also do not offer Islamic-based funding.
Kapital Boost is completely bootstrapped with 900 registered members, five percent of whom are considered active, meaning they’ve made an investment. Erly hopes to grow that number through more user education and building a track record people can trust.
Kapital Boost monetizes by taking an administration fee from the borrowers as a percentage of the total funding. Erly didn’t disclose the exact percentage. “Over the next three years, we are targeting revenue of over S$2 million [US$1.4 million] based on total funding raised of over S$ 40 million [US$28.6 million],” he adds.
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