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The Horn of Africa States (“HAS”) Financing Development Projects through Crowdfunding (An Alternative to Traditional Financing)

September 23, 2023

By Dr. Suleiman Walhad
September 24th, 2023

Developmental projects such as rail and road building, port building, bridge building, airport building, industrial projects, and others in developing countries are mostly financed through either grants/aid from developed countries or financed through traditional financing (banks, both Islamic and non-Islamic). When it comes to using banking as a source of financing, it usually requires fulfillment of strenuous conditions that sometimes disqualify many countries from obtaining any financing to carry out developmental projects of any kind. Countries are classified through rating systems in the hands of developed countries, which probably wish to keep some countries as poor as they are to enable them to exploit the resources of those needy countries. Many such poor countries are considered too poor to meet their obligations in case of a default. A perfect example is the way the French exploited the uranium resources of Niger and the resources of other countries such as Mali, Gabon, and Burkina Faso. In the case of Niger, while the uranium price in international markets was some US$200 per kilo (Read Sama Tv, article by Faizan Ali, an article entitled Niger France Uranium: African country increases uranium price to US$200 per kilo on September 10th, 2023), France was paying 80 cents per kilo until then. If that is not robbing what would robbing be?

An alternative way of sourcing finance has been developing over the past couple of decades, which includes among others crowdfunding, which originally was designed for small projects of individuals raising funds for humanitarian purposes, but which has over the years developed into a mode of financing for start-up businesses and even major projects. Crowdfunding enables an individual or an organization to raise funds from a large number of people. This could be either priced at a low cost or no cost to the individual or organization raising the funds and hence it is much cheaper than traditional finance whose main purpose is to make profits. The funds are usually raised through social media platforms, and they could be friends, family members, or even people unknown to the party raising the funds.

There are generally 5 types of crowdfunding which include donation-based crowdfunding (usually deployed for personal purposes or humanitarian targeting purposes), Reward-based crowdfunding (for start-up businesses where a donor is rewarded through awards such as a free item, prizes paid by the fundraiser or partner parties, or free products or services offered by the fundraiser), equity crowdfunding (where donors receive for their donations a percentage ownership of the company being set up through the donations), Debt crowdfunding (where instead of a percentage in equity, a fundraiser promises to pay back the donation at a later date(s)), and investment crowdfunding, particularly real estate (where an individual or an organization would raise funds from investors, say to purchase an apartment building, and where the investors are repaid on a quarterly basis from the revenues generated by the property).

We add to these five types of crowdfunding processes “Developmental Crowdfunding”, which would allow populations of countries, including both its individuals and organizations participate in raising funds for developmental projects, for which traditional finance and or grants/aid are unavailable. The Grand Ethiopian Renaissance Dam or the GERD is a perfect example of such developmental crowdfunding, and it succeeded in the construction of the now-famous largest dam in the African continent on River Abaya (the Blue Nile). The funding included both rewards (revenues paid by the government to financiers and/or free funds contributed by some of the organizations and citizens of Ethiopia). Many individuals and organizations in the Horn of Africa States outside Ethiopia also contributed to the project.

The development of high tech, the internet, and other platforms such as television networks, radio, and others had a seismic impact on the way people communicate, receive information, and conduct business. These new platforms have enabled the development of crowdfunding. They have enabled people to be able to connect those who have funds and those who need them. Indeed, they have enabled governments and their organizations to be able to communicate and deliver messages that can have serious impacts on how people in a country behave and see/measure the performance of their governments.

In the Horn of African states, the developmental processes of the last century have been stalled/curtailed by the chaos that followed the collapse of those governments, past. The civil strives and clan/tribal conflicts (competition for power) that followed, and the resulting chaos such as the hunger, starvation, and disruption of lives in the region, have been a painful process, which still marks the region. Despite these insurmountable problems, the region has survived, and though conditions are still bleak, it has the potential to reverse the ills it suffered from and move on to the path of development, creating sustainable development for future generations.

The process of development comes from within, a will to change oneself for the better, and lay down a path for future generations to follow. Development of the region is not necessarily to benefit the present living generation, but the future generations to make them proud of what their parents have left for them so that they can add more to them, in their turn.

The region is wealthy by any standard, but the wealth remains unexploited, which makes the region look poor despite being resource-rich. The long maritime coast of the region, its extensive temperate clime, the large population and hence manpower, and the sub-soil riches in the form of minerals, including oil and gas, gold, platinum, diamonds, iron ore, copper, nickel, coltan/columbite, uranium, and others, its geostrategic location, makes many countries envy the region and hence the cause of much of its troubles. But the future of the region is bright, and it is on the onus of its leaders both ruling and opposition parties to ensure that the resources are exploited for the good of the region.

Developing the region’s potential resources would not be easy and this is why we propose that it should rely on itself first and use its own internal resources. This could be the deployment of the financial resources of its banking and finance systems, or the resources and finance held at individual levels and its organizations/businesses or otherwise, in carrying out development projects in the region.

The world of traditional financing and the apparently declining economic systems of much of the Western world have caused regulators and governments in many countries to be more strict in expanding credit and finance not only in developing countries but also in the developed world. Many banks and traditional financiers have disappeared from the scene over the past two decades and this trend continues today. This has prompted the search for alternative financing and crowdfunding is one of the key products that has come into the picture.

The HAS region requires rail and roads, ports, airports, fishing fleets, agricultural development projects, mining for minerals, and many other enriching projects. These all-need financing and the best possible way to carry out these projects is through crowdfunding, where the citizenry of the region and its governance organizations, banking, and finance institutions all work together to raise funds for these projects. This crowdfunding could be through a mixture of citizen donations, donations from the existing institutions of governance, investment crowdfunding, and/or debt crowdfunding.

Ethiopia has already tested the process, and this could be repeated in various other projects, but this time in concert with other SEED countries. There is no doubt the region would be able to raise funds for any project, provided there is a will from the governing parties and opposition parties acting in concert. Regional crowdfunding should not be seen as a one-time project as happened in the GERD project but should become a standard in financing all developmental projects without resorting to multilateral institutions such as the IMF, the World Bank, or even the African Development Bank or traditional international banking.

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