Crowdfunding and Financial Inclusion
“Crowdfunding” typically describes a method of financing whereby small amounts of funds are raised from large numbers of individuals or legal entities to fund businesses, specific projects, individual consumption, or other needs. It involves bypassing traditional financial intermediaries and using online web-based platforms to connect users of funds with retail funders. Crowdfunding has the potential to transform retail financial services as the use of technology, increasing connectivity through mobile phones and other devices, the legal and regulatory framework, and constantly changing economic conditions allow new and innovative firms to compete with incumbents. This competition could foster economic growth and entrepreneurship, especially in countries with less developed financial systems.
In this paper, the authors argue that crowdfunding is a phenomenon that can play an important role in financial inclusion if an enabling and safe environment is in place. Examples of how crowdfunding may potentially benefit financially excluded and underserved people include:
- Improving access to finance to unserved and underserved borrowers;
- Creating cheaper, community-based insurance products;
- Facilitating access to digital investments by people who currently have limited or no options to get financial returns on their savings.
The paper aims to map the crowdfunding phenomenon globally, explain its main characteristics and modalities within the framework of financial inclusion, and highlight the areas that require further attention of policy makers.