CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND INFORMATION

The world as it is now has evolved from various levels of financing which can be cited from levies, to taxes to joint investment practices which have all had as an objective of gaining an access to finance which would have as effects of reaping benefits to the providers of those finances. The 21st Century world has had many more complex innovations of financing with many more regulatory bodies being put up with an effort to make sure money which is being used to finance projects or ventures; be it government or private are all in line with the acting system and not a zero-sum game in general. This has also led to the emergence of new forms of finances which are crypto currencies, and most especially joint financing mainly known as crowd funding. Belleflame, Lambert and Schweinbacher (2014, pg.4) argued that “theconcepts of crowdfunding come from a broader idea of crowdfunding which involves using the crowd to obtain ideas, feedback and solutions to develop corporate activities”. Kleeman et al (2016 pg. 6) define it as “when a profit-oriented organization outsources specific tasks for making or selling its products over the internet to the general public in form of an open call”. Mollick (2014) argues that the definitions are incomplete because the objectives of the funders and founders are now well specified as he goes further to say that there are four main goals which funders fund projects. The underlying contracts between the investor and the recipient varies. Belleflamme et al (2010)distinguish between two broad categories of crowdfunding. One category consists ofcrowdfunding based on investments and the other on crowdfunding based on donations and rewards (Belleflamme et al., 2015, p. 12). Kirby and Worner define these as financial return and community crowdfunding (2014, p. 8). The first category consists of crowdfunding models which includes monetary reward for the investor. In this category we find crowdfunding models in where the crowd functions in a similar fashion to a traditional investor. The underlying contract between supplier and recipient of funds can be based upon a loan contract, equity shares in the venture or a fraction of future income (Belleflamme et al., 2015, p. 13). There are various definitions by different schools of thoughts and organisations about what crowdfunding is seen to be;

• “In the financial inclusion context, crowdfunding refers to a market-based financing technique where funds are raised from large numbers of individuals or legal entities in small amounts, bypassing traditional financial intermediaries, and using mobile phones and online web-based platforms to connect with borrowers, whether to fund a business, a specific project, or other needs.” (Global Standard-Setting Bodies and Financial Inclusion the Evolving Landscape (GPFI 2016). From the above definition the emphasis on the raise of funds through a market-based system avoiding financial intermediaries with the use of current technological advancements is very important because there is no bureaucratic barrier to the access to a large amount of capital financing.
• Another definition is given by (IOSCO, 2014) “Crowd-funding is an umbrella term that describes the use of small amounts of money, obtained from a large number of individuals or organizations, to raise funds for a project, business/personal loan or other financing needs through online web-based platforms. Peer-to-peer lending is a form of crowd-funding used to fund loans, which are paid back with interest. Equity crowd-funding is the raising of capital through the issuance of stock to a number of individual investors using the same method as crowd-funding.”
• “Crowdfunding is an Internet-enabled way for businesses or other organizations to
• raise money—typically from about US$1,000 to US$1 million—in the form of either
• donations or investments from multiple individuals.” (World Bank 2013)
• Belleflamme et al., 2010, p. 5; “Crowdfunding involves an open call, essentially through the Internet, for the provision of financial resources either in form of donation or in exchange for some form of reward and/or voting rights”.
• Lambert and Schwienbacher, 2010, p. 4; “An open call, essentially through the Internet, for the provision of financial resources either in form of donation or in exchange for some form of reward and/or voting rights in order to support initiatives for specific purposes”.
• Fiedler and Horsch, 2014, p. 92; “Crowdfunding comprises forms of capital supply, with which capital seeking companies publicly present themselves on specific internet-based platforms to a big group of potential capital providers based on their innovative business idea and offer this group the opportunity to engage themselves with the allocation of funding”.

The definitions above try to give a very simplified understanding of what the crowdfunding ideology is all about. it should be noted that there are four main categories of crowdfunding and we shall discuss them by referring them to as platforms. These platforms would include reward based, equity based, lending and donation-based platforms. These platforms have different objectives and are very much having their own differentiating mechanism on how they operate. Crowdfunding draws inspiration from concepts like microfinance (Morduch 1999) and crowdsourcing (Poetzand Schreier 2012), but it represents a unique category of fundraising, with different vehicles, processes, and goals. Two major forces make crowdfunding possible. First, the widespread adoption of information and communication technology (ICT) has provided the infrastructure to reach millions of investors. At the same time, the general social acceptance of technology-enabled social networks allows investors to interact online and build trust among people with whom they may have few traditional connections. Together these forces are enabling crowdfunding to emerge on a large scale, connecting would-be investors with potential investments.

it is difficult to identify the exact demand for entrepreneurial finance at any given time, itis widely agreed that there is a considerable discrepancy between the supply and demand for such finance (GEM, 2006; Winborg, 2005 cited in Winborg, 2009; Lam, 2010; Macht and Weatherston,2014). The Breedon Report (2012) estimates that in the UK, the difference between supply and demand of bank lending to early-stage and small businesses total led £27 billion in 2007-2012, predicted to increase to £106 billion by 2017. This phenomenon is often referred to as the ‘fundinggap’, and is cited as the primary reason that many entrepreneurs attempt to succeed with little or noexternal funding at all (Ebben and Johnson, 2006), requiring a range of activities on behalf of the entrepreneur, referred to as ‘bootstrapping’ (Carter and Van Auken, 2005; Winborg and Landstrom,2000).

The market for SME financing is in decline, crowdfunding is in a state of consistent growth. 2012 saw an increase of 81% up to $2.7 billion of funding being raised via online crowdfunding platforms, distributed amongst over one million projects. This reached $5.1 billion globally in 2013; up from $530 million in 2009 (Massolution, 2013). Whilst these figures are all-inclusive, comprising four types of crowdfunding and a range of global platforms, it is reasonable to assume that reward-based crowdfunding for early-stage businesses has also enjoyed considerable growth. It is clear that new ventures rely on financial capital in order to succeed, and that those who do not receive funding from more traditional sources seek alternative options, often with suboptimal results (Mosey and Wright, 2007). The issue of access to finance for early-stage and small businesses has also been exacerbated by the post-2008 global recessions (Harrison, 2013), and the ‘funding gap ‘very much remains. Yet, the post-2008 economies have also seen the rise of crowdfunding as a legitimate source of finance for businesses of all sizes, stages and industries (Schweinbacher and Larralde, 2012).

1.2 Statement of the Problem

The use of alternative sources of finances especially with the idea of crowdfunding by many economies have become an important way in fostering their economies in this new era of finance. This has caused many organizations and most start-ups to see light and advance possibly in many emerging and emerged markets. This off course has been a success in this economy because the stability of their economies has given them an edge in their implementation and use, but can this be the case for developing countries and the Sub- Sahara African economies? The lack of revolutionary changes in the field of finance in this part of the globe has made capital financing for governments and private enterprises a serious stumble to investments and the worst-case scenario appears where these economies cannot make use of the new edge of alternative financing. Economists have to look at a greater picture of the problem of financing by asking themselves; What can Crowdfunding do to the growth of Sub- Sahara African economy in terms of increase in national income? The answer to all this would lie in accessing the importance of the various platforms of crowdfunding. The research also guides into knowing what they do and secondly to investigate how much they are beneficial to financing. Finally, the research would also expose as to how they can be recommended to this developing economy.

1.3 Research Questions

the research questions in the study is composed of one main research question and two specific research questions. These research questions are outlined below.

1.3.1 Main Research Question

The main research question is;

What are the determinants of crowd funding platforms and what are their effects on economic growth in Sub- Sahara Africa?

1.3.2 Specific Research Questions

The specific research questions to our study are;

Do financial market returns, access difficulty to capital financing, infrastructures and ease of telecom technology, Ease of starting a business, infrastructure of financial intermediaries and government regulations determine the creation of crowdfunding platforms and what are their effects on the economic growth of Sub- Sahara Africa?

1.4 Research Objectives

The research has 2 research objectives which guides it. There is one main research objective and two specific research objectives.

1.4.1 Main research objective

The main research objective to the study is;

To critically examine the determinants of crowd funding platforms and their impact on the economic growth of west and Sub- Sahara African

1.4.2 Specific Objectives

The specific objectives of our study are given below as;

To examine if financial market returns, access difficulty to capital financing, infrastructures and ease of telecom technology, Ease of starting a business, infrastructure of financial intermediaries and government regulations determines the creation of crowdfunding platforms and how it impacts the economy of Sub- Sahara African

1.5 Hypothesis

We have a main hypothesis and one specific hypothesis

1.5.1 Main hypothesis

The main hypothesis to the study is as follows

Ho: Crowdfunding platforms have no determinants and they have no effect on economic growth of west and Sub- Sahara African

1.5.2 Specific Hypothesis

Our specific hypothesis which are still expressed in the null form as the main one is given below;

H1: Crowdfunding platforms have no determinants and they have no effect on economic growth of Sub- Sahara African