Why Somalia Needs Crowdfunding Platforms for Direct Diaspora Investment

Why Somalia Needs Crowdfunding Platforms for Direct Diaspora Investment

Somalia needs Direct Foreign Investment but more importantly it needs its Diaspora to invest. It is estimated thought that there are 1.5 million Somali Diaspora living in USA, Canada, Europe and Middle East. It is estimated that remittances account for £1.5 billion per annum and outweigh the aid provided to the region. This figure represents over half of Somalia’s GNI and exceeds international aid, which averaged an annual US$834m between 2007 and 2011.

What is crowdfunding?

Crowdfunding is where a large number of individuals network and pool money to invest into a project, typically via the internet. This new method has the potential to challenge the status quo of investment finance, allowing investors the freedom to spread small amounts across different industries and provide eEntrepreneurs with a readily accessible source of capital and access to the knowledge base of the Diaspora diaspora. The crowdfunding model is based on three types of actors: the project initiator who proposes the idea and/or project to be funded; individuals or groups who support the idea; and a moderating organization (the “platform”) that brings the parties together to launch the idea.

In 2013, the crowdfunding industry raised over $5.1 billion worldwide. A May 2014 report, released by the United Kingdom-based The Crowdfunding Centre showed, more than US$60,000 dollars were raised on an hourly basis via global crowdfunding initiatives. Also during this period, 442 crowdfunding campaigns were launched globally on a daily basis.

Crowdfunding in Africa

With the advent of technology crowdfunding, which utilizes the same concept of money from several small sources to finance a business, has taken over the mantle. Several crowd funding sites have come up to assist African start-ups raise funds to jump starting their businesses or move to the next level. This These include StartMe, FundFind and ThundaFund in South Africa; StartCrunch in Nigeria; M-Changa and Babandu in Kenya; and SlizeBiz in Ghana..

What is crowdfunding and why is it needed?

Crowdfunding websites typically allow project creators to post online profiles describing their ventures and investors then contribute to the projects. While crowdfunding has its origins in the creative and non-profit sectors, it has emerged as a platform for start-ups to fund business ventures as a direct consequence of the difficulties faced in raising funds from banks, which have proved less willing to lend in recent years. It is highly relevant model for Somalia and its dDiaspora for a rather different reason, namely the total destruction of financial system over 25 years.

Crowdfunding typically works as follows:

Project creators pitch a project and run a fundraising campaign with a deadline and target amount Investors investors register their willingness to invest via ‘pledges’. After the deadline has passed, pledges are paid to the project creators if the initial target is reached or exceeded. In the event that the target is not reached, pledges are automatically cancelled.

Types of Crowdfunding Investments

Equity-based crowdfunding, whereby investors receive share ownership in exchange for monetary contributions. Debt-based funding (also known as “peer-to-peer lending”) where sponsors typically provide the projects with loans that deliver a rate of interest.

Why Somalia Needs Crowdfunding Platforms for Direct Diaspora Investment


Crowdfunding offers a far wider pool of individuals an opportunity to invest in businesses with smaller minimum investments. It is highly suited to Diaspora type of networking and investment where people from the various regions of Somalia are dispersed across the globe.

Remittances and Investment by Somali Diaspora

It is estimated that 13% of the annual remittances of $1.2 billion are earmarked for direct investment (Chalmers & Hassan 2008 Survey of Diaspora). This figure is likely to increase as percentile as more Diaspora direct investments are made in times of increased stability. DDI is a part of a larger transnational superstructure contributing to the integration of societies into the global economy via an interconnectedness of donations, small and large investments, trade, tourism, and unilateral transfers (Orozco 2004). Countries with mature diaspora networks also seek to encourage domestic companies to expand abroad through the diasporas. Others have dedicated Diaspora Ministries and Investment Management Entities.

Diaspora investments have the potential to bring to emerging markets knowledge and skills, superior technology, and improved business practices, in addition to financial capital. Positive externalities—spillover effects—take place when local firms observe and imitate practices of foreign investors.

Key areas that Diaspora members assess before making any investments include:
• Commercial Viability
• Management
• Financial Performance
• Regulated status and Governance and Vision
• Market / Products
• Institutional Culture
• Asset Growth

Research into crowdfunding in Africa has found that the location of projects does not correlate with the success of fundraising and start-ups in Africa have an equal footing with their counterparts in more developed markets.

Crowdfunding can provide Somali entrepreneurs not only with the capital that banks (both domestic and international) are unwilling to lend, but also give start-ups in the region access to the investor contacts and mentorship needed for them to succeed in their ventures. It allows the aggregation of a base of investor for future expansion. This is very much a different dynamics in the traditional bank-industry relationship.

Crowdfunding offers numerous advantages such as allowing start-ups to gauge the “pre-trial” demand for their projects during the ‘campaign stage’ and provide an opportunity to receive detailed early feedback on project ideas without the full cost of market research. Furthermore it gives far reaching global access to ideas and markets.

Initial crowdfunding operations in Africa were largely donation-based, however sub- Saharan Africa in particular has developed an investment-based crowdfunding climate and there has been steady growth over the last three years with the number of platforms doubling each year.

Combined with mobile money technology, crowdfunding can overtake the traditional financial structures and microfinance in allowing Somali Diaspora to invest in their home regions. Somalia is slowly recovering from civil unrest and is undergoing a unique and positive transformation in all sectors and industries of its economy.

Kahiye Alim
International public and private lawyer based in London. He has particular interest in Diasporas and investment financial flows and disruptive fintech.

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