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Islamic
Islamic crowdfunding and Shariah crowdfunding
compliance regulation: problems
and oversight
Al Sentot Sudarwanto, Dona Budi Kharisma and
Diana Tantri Cahyaningsih
Department of Business Law, Faculty of Law, Universitas Sebelas Maret,
Surakarta, Indonesia

Abstract
Purpose – This study aims to identify the problems in shariah compliance and the weak oversight of
implementing Islamic crowdfunding (ICF). Shariah compliance regulation is an essential subsystem in
Islamic social finance ecosystems.
Design/methodology/approach – This type of research is legal research. The research approaches are
the statute, comparative and conceptual approaches. The study in this research examines Indonesia, the UK
and Malaysia.
Findings – ICF is one of the fastest-growing sectors of Islamic financial technology (fintech). The Islamic
fintech sector is showing maturity signals with a market size of $79bn in 2021, projected at $179bn in 2026.
Malaysia, Saudi Arabia and Indonesia lead the Index by Global Islamic Fintech (GIFT) Index scores.
However, low shariah compliance is still an issue in implementing ICF. This problem is caused by regulatory
support that is still lacking and oversight of shariah compliance is not optimal. On the one hand, shariah
compliance is the ICF core principle for Shariah Governance.
Research limitations/implications – This study examines the regulation and oversight of ICF in
Indonesia, Malaysia and the UK. Indonesia and Malaysia, a country with the highest GIFT index score in the
world, and the UK, a country with an Islamic finance sector experiencing rapid growth.
Practical implications – The research results on shariah compliance regulation in ICF are helpful as a
comprehensive approach for developing sustainable Islamic social finance ecosystems.
Social implications – Shariah compliance is the core principle of ICF governance. Its implementation can
increase public trust.
Originality/value – Crowdfunding platform and issuers in ICF must implement shariah compliance.
Therefore, it is essential to consider the presence of shariah compliance requirements and a Shariah Supervisory
Board (DPS).
Keywords Shariah compliance, Regulations, Islamic crowdfunding
Paper type Research paper

1. Introduction
Crowdfunding is a method of getting funds from the general public via the internet by using
social media marketing campaigns to publish information, images, videos and information
about a project (Brand, 2021; Wiwoho and Kharisma, 2021). Crowdfunding is a three-way
collaboration between a crowdfunding platform (CFP), issuer and investor (Ramli et al.,
2023). CFP is responsible for establishing and managing internet platforms that allow Journal of Financial Crime
issuers to connect with investors. Issuers are entrepreneurs providing details regarding a © Emerald Publishing Limited
1359-0790
project and carrying out projects which can be in the form of charity or product development DOI 10.1108/JFC-01-2023-0003
JFC businesses. Investors are contributors of funds from projects presented and implemented by
the issuer (Abdeldayem and Aldulaimi, 2022).
In line with the growth of the Islamic economy, crowdfunding is also developing with a
fund management system and system implementation based on Islamic shariah principles.
Crowdfunding with this system is called Islamic crowdfunding (ICF) (Ramli et al., 2023). The
implementation of shariah principles is the main differentiator from conventional
crowdfunding (Abdeldayem and Aldulaimi, 2022). In essence, these shariah principles refer
to Islamic shariah, which is primarily guided by the Al-Quran and Hadith. Shariah
principles prohibit Islamic financial operations that contain elements of maisir (gambling),
gharar (betting) and riba (interest) (Alam et al., 2021).
ICF has a role in the global community’s Islamic finance and social life. ICF plays a role
in the Islamic economic, financial and social ecosystems such as Waqf, Zakat and Sadaqah
(Muryanto, 2022). For example, in Malaysia, ICF platforms such as Global Sadaqah
(globalsadaqah.com), pitchIN (pitchin.my) and SimplyGiving (simpliygiving.com) have also
contributed to handling Covid-19. The funds collected are channeled to buy medicines,
medical devices, masks etcetera.
In the UK, Maydan Capital is an example of an equity-based CFP that offers investment
according to Islamic principles (halal investment) to investors for startup companies.
Maydan Capital conducts a rigorous selection and screening process for prospective
companies to be funded. One of the absolute criteria for prospective companies is the type of
business that does not conflict with Islamic shariah. Operations of the business such as
gambling, the liquor industry, riba and selling illicit goods are examples of business
activities that cannot be funded by Maydan Capital.
In early May 2021, the Government of Dubai launched an ICF platform called Dubai Next.
The CFP functions to raise funds to finance creative projects that comply with shariah
principles. The website is operated as a nonprofit by the Dubai Government agency small and
medium enterprises (SMEs) and follows a format similar to Kickstarter, a pioneering US-based
CFP for creative projects. Before it gets started generating funds on the site, Dubai Next must
examine and approve the proposed campaign. Investors and campaign supporters must be
based in the UAE and make their contributions through the Smart Dubai payment channel.
In Indonesia, the Financial Services Authority (OJK) noted that as of August 19, 2022, the
total funds collected in crowdfunding securities reached IDR 567.45bn and had been used by
266 SMEs. The number of securities crowdfunding has reached 11 CFP. This number has
increased compared to last year’s seven CFP. Meanwhile, the number of investors reached
120,422. This figure has increased compared to last year, reaching only 93,733 investors
(CNN Indonesia, 2022).
However, the implementation of shariah compliance is an important issue in ICF
operations. Investors and the public often ask questions including:
 first, what is the difference between conventional crowdfunding and ICF;
 second, how is the operational oversight mechanism for ICF so that it is always in
accordance with shariah principles; and
 third, who ensures and evaluates the issuer’s business and operations so that they
do not conflict with Islamic law.

Therefore, it is interesting to discuss the problems and oversight regarding the

implementation of shariah compliance in ICF.
Shariah compliance can be an ICF indicator of the implementation of shariah principles
in delivering financial services. Shariah compliance can help to prevent and reduce the use
of ICF for money laundering, terrorism financing and fraud. Shariah compliance is part of Islamic
implementing a risk management framework and creating a compliance culture in crowdfunding
managing ICF risks (Sutedi, 2009). In this regard, it is essential to conduct research in
attempt to detect issues in the implementation of shariah compliance and the weak
supervision of the implementation of ICF.
Several studies discuss Islamic financial technology (fintech) and recommend regulatory
and policy assistance to stimulate and accelerate the development of Islamic fintech
(Muryanto, 2022). Several studies have also discussed shariah compliance, with the findings
indicating that shariah compliance is the top priority of Islamic fintech and the important
features that make them Islamic (AlAbbad et al., 2019). Then, several studies examine the
potential of crowdfunding for money laundering, terrorism financing and fraud (Teichmann
et al., 2022). Concerning the background above, there needs to be research discussing
shariah compliance implementation and weak supervision of the implementation of ICF.
Then, based on literature studies, there has yet to be research that as a new concept in
Islamic finance, ICF platform develop tactics and legal substance to ensure the
implementation of shariah compliance.

2. Literature review
2.1 Definition and types of Islamic crowdfunding
Crowdfunding is a type of financial service that uses a financing strategy known as
democratic fundraising. It is because the financing scheme is carried out by collecting funds
on a small scale but from a vast number of people to acquire a significant quantity of funds
(Bangun, 2021). An internet-based forum or platform manages the implementation of
crowdfunding to provide easy access for people interested in these innovations (Gerber et al.,
2013).
In contrast to conventional crowdfunding, ICF is a crowdfunding system based on
Islamic law (Azganin et al., 2021). This method was created in response to Islam’s
prohibition on lending or collecting loans at exorbitant interest rates, as well as prohibitions
on engaging in illegal businesses (Muryanto et al., 2021). ICF assists with social fundraising
and offers halal investment solutions to investors who want to join in ICF but also want
shariah-compliant products. ICF has the ability to be the next financial innovation in the
Islamic finance market. The ICF will take the form of five action plans, namely:
(1) Zakat based;
(2) Waqf based;
(3) Qard-alhasan based;
(4) Mudharabah based; and
(5) Murabaha based (Abdeldayem and Aldulaimi, 2022).

2.1.1 The Islamic crowdfunding zakat-based model. Zakat is worship that has the aim of
helping less fortunate people. Zakat is a religious practice in which Muslims give 2.5% of
their wealth to be donated to those in need (Raja, 2021). The ICF Zakat-based model is
dedicated to productive projects that encourage the underprivileged to create projects and
donate instead of waiting for Zakat funds (Abdeldayem and Aldulaimi, 2022).
2.1.2 The Islamic crowdfunding waqf-based model. Waqf is an act of worship when a
portion of property is given over to be used forever or for a set period of time for the benefit
of the people (Ascarya et al., 2022). The Islamic Waqf system is used by the ICF Waqf-based
model to create initiatives and project ideas requested by benefactors for endowment, with
the goal of being halal and leading to social and development advantages. Crowdfunding
JFC projects may follow educational, health or other developing paths (Abdeldayem and
Aldulaimi, 2022).
2.1.3 The Islamic crowdfunding qard-alhasan-based model. This model CFP intends to
encourage and assist low-income families and young entrepreneurs as issuers in launching
microprojects to boost their income. Financing platforms offer good loans to give people
with items and services that satisfy their needs without relying on aid or benefits
(Abdeldayem and Aldulaimi, 2022).
2.1.4 The Islamic crowdfunding mudharabah-based model. Mudharabah is exclusively
available as an investment instrument, not as a finance option (Ishak and Rahman, 2021).
The ICF Mudharabah-based model is ideal for Islamic investment formulas and is based on
the principle of risk and profit sharing. It considers real assets without gambling errors or
deluded speculations, as well as local rules for investors in terms of money-making
operations and investment nature (Abdeldayem and Aldulaimi, 2022).
2.1.5 The Islamic crowdfunding murabaha-based model. Basically, murabaha is a
process of buying and selling goods when the original price and profit have been known and
agreed upon by both parties beforehand (Ismal, 2014). In this model, capital from the group
is pooled as assets to buy all of the resources required to establish the campaigner’s business
and make it accessible to the campaigner for a cost other than engineering. This approach is
a safer method for P2P lending practices but does not involve interest and complies with all
shariah requirements (Abdeldayem and Aldulaimi, 2022).

2.2 Definition of shariah principle and shariah compliance

In essence, shariah principles are Islamic shariah principles that are principally guided by
the Al-Quran and Hadith. Islam as a religion is a notion that governs human life in a
comprehensive and universal way, both in regard to the Creator and in respect to ourselves
(“HabluminAllah” in Arabic) and in relations with fellow human beings (“Hablumminannas”
in Arabic) (Alam et al., 2017; Hanif, 2019). Shariah is an element of Islamic teachings that
governs a Muslim’s life both in and out of worship (“habluminAllah” in Arabic) and in the
field of muamalah (“hablumminannas” in Arabic) which is the actualization of the creed that
becomes his belief. Meanwhile, muamalah itself covers various areas of life, including those
related to the economy or property and commerce (Alam et al., 2021).
The shariah principles prohibit sharia financial operational activities that contain the
following elements:
2.2.1 Maisir. Maisir is a French word that means “easy.” Maisir, as the phrase implies, is
to benefit without having to labor hard. Maisir is frequently referred to as gambling because
it is a simple way to get money (Alam et al., 2021; Alam et al., 2017). In gambling, a person
can win or lose. Gambling is forbidden in Islamic finance because gambling exposes a
person to abnormal profit and loss conditions (Hanif, 2019).
2.2.2 Gharar. Gharar means betting in the language. Gharar is defined as something
containing uncertainty, betting or gambling. Any transactions whose goods are still unclear
or out of reach include buying and selling gharar. Gharar transactions include, for example,
purchasing birds in the air or fish in the water, as well as purchasing animals while still in
their mother’s womb. The ban of gharar because it has a harmful impact on life (Alam et al.,
2017).
2.2.3 Riba. The meaning of the word riba is interest. Meanwhile, according to technical
terms, riba means taking additional assets or capital illegally. Religious leaders agree that
the law of riba is unlawful (“haram” in arabic) (Alam et al., 2017). As a result, the primary
goal of the riba prohibition is to prevent the concentration of wealth in a few parties,
including banks and individuals (Suharto, 2018).
 In Islamic finance, shariah compliance is an indicator to provide guarantees for the Islamic
compliance of shariah financial service providers with shariah principles are being crowdfunding
implemented in their activities. The existence of the principle of shariah compliance will
have an impact on the supervision of the operational activities of the Islamic financial
service provider so that there is no violation of shariah principles in operational activities
(Usman et al., 2021).
Shariah compliance is a fundamental aspect that differentiates the conventional financial
industry from the Islamic financial services industry. Shariah principles guarantee that each
transaction and operation conducted by Islamic banking is by shariah provisions and free
from gharar (uncertainty), riba (interest) and haram elements. Therefore, compliance with
shariah principles must be implemented (Nurhisam, 2016). The scope of implementing
shariah compliance covers not only the operational activities of financial service institutions
but also techniques, systems and corporate identity. Thus, all financial service institutions’
activities, including the use of technology, are governed by Islamic law (Sutedi, 2009). In
addition, with certainty that the concept of shariah compliance has been implemented, the
business activities of Islamic financial service institutions must be monitored (Mohammad
Heykal, 2021; Muryanto, 2022).

3. Methodology
Legal research is defined as research that systematically explains the rules controlling a
certain legal category, analyzes the relationship between regulations, clarifies legal issues
and anticipates the future evolution of law (Marzuki, 2019). The statute, comparative and
conceptual approaches were applied in this research. A statute approach is one that
examines all acts and regulations that are linked to the legal issues under consideration
(Marzuki, 2019). This study analyzes various legislation governing ICF, fintech, shariah
principle and shariah compliance to answer the problems studied.
A comparative approach is used as well in this study. The comparative approach is the
activity of comparing the laws of one country with the laws of other countries or the laws of
a particular time with the laws of another time (Marzuki, 2019). The statute being compared
in this study consist of ICF regulations enforced in Indonesia, Malaysia and the UK. The
results found through the statute and comparative approaches will be used as material for
analysis to develop regulatory concepts to implement shariah compliance in ICF. The
concept is built through a conceptual approach.
The legal materials used in this research include:
 Indonesia Capital Market Act 1995 (CMA 1995);
 Indonesia Job Creation Act 2020 (JCA 2020);
 Malaysia Capital Markets and Services Act 2007 (CMSA 2007);
 Malaysia Islamic Financial Services Act 2013 (IFSA 2013);
 United Kingdom Financial Services and Markets Act 2000 (FSMA 2000); and
 United Kingdom Finance Act 2007 (FA 2007).

The technique of obtaining legal materials was carried out by literature study techniques
(Kharisma and Hunaifa, 2022). The literature research method was used to read, examine,
review and take notes on books, laws, rules, papers and publications about the
crowdfunding and shariah compliance regulation.
The data were collected through focus group discussion (FGD) and observations
supported with literature data. After that, field studies were done to confirm the result and
JFC to collect more data. The participants of the FGD were several staffs of the Legal
Department of the Financial Services Authority (OJK), the Indonesian Ulema Council (MUI),
the Indonesian Committee on Shariah Economics and Finance (KNEKS), the Indonesian
Shariah Fintech Association (AFSI), the Indonesian Fintech Association (AFTECH),
academics and other stakeholders.
The data were then analyzed qualitatively with an interactive model. The process of
analysis is basically carried out simultaneously with the process of data collection (Sutopo,
2002). There are three main components that are interrelated and cannot be separated from
data collection activities, as shown in Figure 1.

4. Result and discussion

4.1 The characteristics and parameters of shariah principles in operational Islamic
crowdfunding
In ICF operations, there are several characteristics that distinguish it from conventional
crowdfunding. Some of these characteristics in Figure 2 become the parameter of fulfilling
shariah compliance. If the issuer at any time does not meet these requirements, the securities
issued will automatically no longer be shariah securities.
4.1.1 The issuer must comply with the terms and criteria of shariah principles. In
Indonesia, based on the Fatwa of the Indonesian Shariah council (DSN) number 40/DSN-
MUI/X/2002 concerning the capital market and the Fatwa of DSN number 135/DSNMUI/V/
2020 concerning stocks, the shariah criteria for issuers are (see Table 1).
4.1.2 The DPS in the organizational structure of the crowdfunding platform.
Understanding the implementation of ICF can be seen in Figure 3. The difference with
conventional crowdfunding is that ICF has a Shariah Supervisory Board (DPS) whose job
and responsibility is to supervise and audit the implementation of shariah principles in ICF
operations (Zainuddin, 2021). DPS is in the organizational structure of the CFP. DPS is
independent and has an equal position with commissioners and directors in the CFP.
4.1.3 The shariah screening process at the stage of issuing Islamic securities. Issuers
must go through several stages before issuing securities through ICF. There are five stages
in Figure 4.
The application of shariah compliance in the issuance of shariah securities is in the second
stage, namely, the feasibility test and business selection (Figure 4). After the documents are
complete in the first stage, the CFP will conduct a feasibility test in the second stage. For the
issuance of shariah stocks, an assessment of two aspects will be carried out, which includes an

Data collecon

Data reducon Data Display

Conclusion/
Figure 1. Verificaon
Interactive model of
analysis
Source: Mattew and Huberman (1992)
 Islamic
crowdfunding

Shariah
Screening

Shariah
Supervisory
Board

Shariah
Issuer agreement
(Akad) Figure 2.
Parameters of shariah
compliance in ICF
Source: Figure created by authors

No Criteria for shariah securities issuer

1 The type of business, goods, services provided and the contract (akad) and management method
of the issuer company issuing shariah securities may not violate shariah principles
2 Types of business activities that violate shariah principles include:
a. Gambling and games that are classified as gambling or trading are prohibited;
b. Conventional financial institutions (riba), including conventional banking and insurance;
c. Manufacturers, distributors and traders of food and beverages that are haram;
d. Producers, distributors and/or providers of goods or services that damage morale and are
harmful (mudarat); and
e. Make investments in issuers that at the time of transaction the level (nisbah) of the
company’s debt to conventional financial institutions (riba) is more dominant than its capital

3 The issuer is required to sign and comply with the terms of the contract (akad) in accordance
with shariah for the issued shariah securities
4 Issuers are required to ensure that their business activities comply with shariah principles and
have a shariah compliance officer Table 1.
Criteria for shariah
Source: Table created by authors securities issuer

assessment of the business aspect and an assessment of the shariah compliance aspect of the
business managed by the prospective issuer.
The process of shariah screening is carried out to ensure that the prospective issuer’s
business complies with shariah principles. The process of this shariah screening as
described in shariah principles on securities, will include an assessment of the prospective
issuer’s business, the akad used and the financial management mechanism.
4.1.4 Akad in the issuance of Islamic securities. Akad is an agreement that is in
accordance with shariah principles. The contracts used in the issuance of securities are
different and are adjusted to the type of securities offered. Akad in ICF is divided as follows:
JFC

Figure 3.
Islamic
crowdfunding
structure

Figure 4.
Stages of issuance of
Islamic securities

4.1.4.1 Stocks. Akad used in the issuance of stocks is the syirkah (partnership) musahamah.
Syirkah musahamah is one form of development of the syirkah’inan. In shariah, syirkah’inan
is a cooperation contract between two or more parties for a particular business in which each
party contributes funds/capital with the condition that profits are shared according to an
agreed ratio or proportionately, while losses are borne by the parties proportionally.
Therefore, syirkah musahamah can be defined as a syirkah’inan akad in which the
ownership portion of the capital of the partners or investors is based on the paid-up capital
expressed in units of stocks with the responsibilities of the partners according to the portion
of their respective capital. Syirkah musahamah prohibits cancellation of a syirkah akad from
one of the partners until the syirkah is dissolved.
4.1.4.2 Sukuk. Akad made in the offering of sukuk are divided into two according to the
type of sukuk offered, that are: musyarakah akad and mudharabah akad. Musyarakah sukuk
are sukuk that use musyarakah akad. Musyarakah akad is a contract in which the sukuk
holder and the sukuk issuer enter into a cooperation akad (partnership) for a particular
business project. In this akad, each party contributes business funds/capital (ra’s al-mal)
provided that profits are shared according to the agreed ratio or proportionally according to
the amount of capital, while losses are borne by the parties proportionally.
 Mudharabah sukuk are sukuk that use mudharabah akad. Mudharabah akad is a Islamic
business cooperation agreement between the capital owner (shahibul mal) who provides all crowdfunding
the capital and the manager (mudharib) and the business profits are shared between them
according to the agreed ratio in the akad.

4.2 Problems and oversight of shariah compliance in Islamic crowdfunding

4.2.1 Regulatory support is still lacking. The problem with ICF development is about
regulation. Some countries that excel based on Global Islamic Fintech (GIFT), such as
Indonesia, Malaysia and the UK, still need regulations designed to accommodate shariah
compliance in ICF. This condition is a significant problem that needs to be resolved
immediately because shariah compliance is closely related to public trust in investing in the
shariah financial market.
In Indonesia, the implementation of ICF is not subject to the CMA 1995 because it does
not meet the criteria as a capital market. The stock offerings were made not through stock
exchanges but through CFP. Then, the company stocks offered are also not listed on the
stock exchange so that the issuer cannot be categorized as a public company but a closed
company. Therefore, the procedures for organizing ICF do not refer to the procedures for
organizing the capital market as stipulated in the CMA 1995. The implementation of ICF is
only regulated in the OJK Regulations.
The inapplicability of the CMA 1995 in the implementation of ICF has had several
impacts on weak investor protection. First, issuers have no obligation to submit reports to
the OJK but only submit reports to CFP. Second, issuers have no obligation to apply the
principle of transparency. For example, reports, data, information and corporate actions
must be listed on the company’s website so that the public can access them. Meanwhile,
issuers in ICF do not have this obligation.
The regulations of the OJK which form the legal basis for implementing ICF also do not
regulate shariah compliance as shariah entity governance that is mandatory to implement.
This condition is also a serious problem because there are no guidelines for implementing
shariah compliance in the implementation of ICF.
In the UK, ICF is not explicitly regulated through legislation (Singer, 2021). The initial
implementation of Islamic financial services is limited to the Finance Act of 2007. This act is
the key piece of legislation governing Islamic financing in the UK. The 2005 Finance Act
defines Islamic financial transactions as an alternative financial arrangement and takes a
very simple method to incorporating Islamic financial instruments into the conventional
legal framework.
Conditions in the UK are the same as in Indonesia and Malaysia. The main problem with
the development of ICF is a matter of regulation. Existing regulations are not designed to
accommodate shariah principles, especially shariah compliance. The developing Islamic
fintech business has the potential to be hampered due to the absence of regulatory support
(Singer, 2021).
4.2.2 Oversight of Shariah compliance is not optimal. Oversight of ICF operational
activities is essential to ascertain whether CFP implement the law or shariah compliance.
Shariah Governance, shariah criteria for financial contracts and DPS credentials must be
regulated and monitored in their application. It is a legal challenge to ensure shariah
compliance from ICF providers anywhere.
In the UK, for example, the Financial Conduct Authority (FCA) and the Prudential
Regulatory Authority (PRA) are in charge of ICF regulation and supervision. The FCA is the
conduct regulator in charge of overseeing Islamic finance in the UK, and all Islamic banks in
the country must be authorized and licensed by the FCA. The PRA is in charge of the
JFC prudent regulation of banks, development agencies, credit unions, insurance companies and
substantial investment businesses in the UK, including Islamic banks.
However, the regulators in FCA and PRA lack adequate knowledge about shariah
compliance. Some of the existing staff lack sufficient knowledge about Islamic finance
(Singer, 2021). This condition resulted in ICF oversight of the need to be more optimal. The
application of shariah compliance in the Islamic fintech industry is an issue that is often
questioned.
In Indonesia, ICF supervision is in two authorities: OJK and DSN. OJK is an authority
whose goal it is to organize an integrated regulatory and supervisory system for all
activities in the financial services sector, including ICF. DSN has the task of ensuring the
application of shariah compliance by Islamic financial institutions.
Conditions in Indonesia are the same as in the UK. The absence of regulations that
accommodate shariah compliance is a problem that causes ICF’s operational supervision to
be less than optimal. On the one hand, oversight of the implementation of shariah
compliance has an essential function as a guarantee for halal products while protecting
investors are being protected from the moral hazard of financial intermediaries and the
misuse of investor assets, while transparency and communication are being increased.
Compared to Indonesia and the UK, Malaysia has a comprehensive regulatory and
institutional oversight system. In Malaysia, ICF is regulated and supervised by the
Securities Commission Malaysia (SCM). The regulation governing CF is the CMSA 2007. In
2016, SCM issued changes to the guidelines on markets. In the new guidelines, shariah
compliance requirements become one of the main substances to regulate ICF. The guideline
requires the presence of a DPS and a Shariah Compliance Officer to test the issuer’s shariah
compliance, examine the contract and the underlying documents.
4.2.3 Risk of change in status of shariah securities to non-shariah securities. Shariah
securities in ICF that have been recorded in the Shariah securities list on the CFP can at any
time change their status to become non-shariah securities. These changes can occur if the
issuer violates shariah principles. As a result, shariah securities were excluded from the list
of shariah securities by CFP.
However, problems arise when investors want to resell stocks that have changed their
status to non-shariah. In ICF, the secondary market is limited. Stock trading on the
secondary market in ICF has a time limit for transactions, as well as the period of stock
ownership. In Indonesia, based on OJK regulation number 57 of 2020, the implementation of
stock trading in the secondary market only applies to stocks that have been distributed at
least one year before stocks trading and can only be done two times within a period of 12
months. In contrast to the secondary market on the Stock Exchange, a stock holder can
freely sell the stocks they own every day without having certain time limits. Including there
is no holding period (share ownership period) within a certain time frame anyway. Apart
from there being no guarantee that the securities offered comply with shariah principles, the
risk of investing in ICF is higher because the liquidity of stocks is not as high as the liquidity
in the capital market.
4.2.4 Risk of default and financial crime. The risk of default is part of the investment risk
and risk of returns which are a burden to investors. Investment risk must be faced by
investors acting as shareholders and or Sukuk in the form of possible losses on the
continuance of the issuer’s or project’s business activity, which is the basis for issuing
stocks or Sukuk. Then, the risk of yield is caused by the rate of return paid by issuers to
investors who act as shareholders or Sukuk changes.
According to a study conducted in the UK, more than 50% of startups fail in their fifth
year of business. According to other data, one out of every five enterprises funded through
equity crowdfunding (ECF) has failed, causing investor losses. The case of failure of the Islamic
Rebus company became one of the biggest failures in the implementation of ECF activities crowdfunding
in England. It started with the Rebus Group, which received an injection of GBP 816,790
from 100 investors through the ECF Crowdcube platform to finance the company’s
expansion. Rebus Group has pledged to refund investors ten times their money in three
years. However, they lost investments ranging from GBP 5,000 to GBP 135,000, causing
their business to fail (Palin and Williams, 2016).
In Malaysia, micro, small and medium enterprises (MSME) face a failure probability of up to
60% (Abdullah et al., 2015). The business failure rate in MSME and the number of startup
enterprises is still relatively high, up to 70%–90%. It increases the probability of default by
issuers, which is still very high. Therefore, implementing shariah compliance is a must to
mitigate the potential risk of default in ICF’s operational activities.
Second, the potential for financial crime. Shariah compliance has an urgency to be
implemented in ICF, one of which is because of the potential for financial crime. All parties
can commit these crimes in ICF’s operational implementation. According to the findings of
research conducted by the National Risk Assessment from the Center for Financial
Transaction Reports and Analysis stated that the capital market is a sector that is
vulnerable to money laundering, accounting scandals and terrorism financing (The
Financial Action Task Force, 2021).
There are two types of fraud that can occur. First, CFP have the potential to commit
fraud by supplying false information, such as concealing the financial state of the company
from investors. Second, the unclear allocation of funds makes administrators potentially
misuse funds according to the initial intention of selling the previously raised capital
(Buysere et al., 2012). These irresponsible CFP use ICF for personal gain by offering stocks
in their services.

4.3 Regulation and oversight of shariah compliance in the Islamic crowdfunding

Shariah compliance is a new portfolio optimization paradigm, significantly increasing
public trust (Derigs and Marzban, 2009). Derigs and Marzban (2009) research results have
strengthened the view that the existence and concept of shariah compliance in the Islamic
finance business is a societal requirement. In the ICF context, implementing shariah
compliance is one of the keys to gaining public trust to invest in the shariah financial
market. The guarantee regarding the implementation of shariah compliance for ICF’s
operational activities will increase trust while building a reputation that there are significant
differences between conventional and shariah crowdfunding. Thus, the goal of expanding
the ICF industry to explore the economic potential for societal benefit has been attained.
Therefore, the commitment to implement shariah compliance by CFP toward the fatwa of
the National Shariah Board must be managed effectively and efficiently.
Shariah compliance cannot be disregarded in ICF implementation. The implementation
of shariah compliance is a form of compliance with shariah principles as well as an indicator
to assure ICF’s compliance with shariah principles is being implemented in ICF operations.
With the principle of shariah compliance, it will impact the supervision of the operational
activities of the ICF so that there is no violation of shariah principles in ICF operations.
4.3.1 Establishment of shariah compliance regulation. Shariah compliance regulation is a
legal framework that must exist in ICF governance. In addition to ensuring shariah
compliance, shariah compliance regulations also serve as guiding principles for ICF
governance CFP, issuers and investors, as well as consumer protection in the Islamic capital
market.
JFC In the banking context, the Shariah Banking Act has a positive impact on the
development and expansion of Islamic banking in Indonesia (Nastiti and Kasri, 2019). The
Shariah Banking Act has proven to be an essential infrastructure in the Islamic financial
ecosystem in Indonesia (Kharisma, 2020). A comprehensive legal approach has overcome
various challenges in the Islamic banking sector. Therefore, the same thing can be done to
encourage the growth and development of ICF through establishing shariah compliance
regulations.
Indonesia, Malaysia and the UK have the challenge of establishing shariah compliance
regulation as one of the essential ecosystems in the ICF, which is currently proliferating.
Regulatory support is a regulatory framework and subsystem in the fintech ecosystem that
must exist (Kharisma, 2020). Shariah compliance regulations have evolved into an umbrella
statute for the implementation and governance of Islamic fintech.
The design of shariah compliance regulations must regulate the governance of ICF
implementation based on shariah principles and the DPS supervision of shariah compliance.
These regulations are still characterized by Islamic finance but follow the development of
digital technology. Some of the main substances that need to be included in the shariah
compliance regulations for ICF are Shariah Governance, standard shariah contracts, shariah
supervisory board, technical guidelines for the implementation of the antimoney laundering
and combating the financing of terrorism programs, shariah securities secondary market,
investor and issuer education and settlement of shariah disputes.
4.3.2 Strengthening the oversight aspect of Islamic crowdfunding. One of the problems in
implementing shariah compliance is the suboptimal supervision carried out by the relevant
authorities. In the UK, for example, experts in the FCA and PRA lack adequate knowledge of
shariah compliance. In addition to regulatory issues, ICF oversight in the UK has not been
optimal because the staff at FCA and PRA lack sufficient knowledge about Islamic finance
(Singer, 2021).
On the one hand, in Shariah Governance, it is required to have a DPS, which
institutionally performs the function of overseeing Islamic financial operations so as not to
deviate from the demands of Islamic shariah. DPS must exist in every company that
organizes ICF as a council of economists and scholars in charge of fiqh mu’amalah (Islamic
commercial jurisprudence). DPS must stand alone and closely monitor how the forms of
contracts carried out by ICF platforms comply with Islamic shariah provisions.
Unlike the supervisory authority’s employees, each DPS member must be knowledgeable
with the Islamic religion, technology and Islamic financial organizations. That is, a person
elected as a member or chairman of the DPS is someone with expertise in shariah muamalah
and finance in general. These regulations are in place to give a comprehensive examination
and oversight to defend the shariah of ICF products.
Several DPS duties in ICF operations include:
 providing shariah-related advice and ideas to ICF company directors,
commissioners, business executives and branch office heads;
 carry out active and passive supervision, particularly in the application of shariah
compliance rules, and give direction/supervision of ICF;s products/services and
business activities to ensure conformity with shariah principles;
 as an intermediary between CFP and the Financial Services Authority, providing
plans and suggestions for the development of CFP products and services that
necessitate research and regulation; and
 reporting to the central bank and the Financial Services Authority on the business
operations and developments of the ICF firms it supervises.
4.3.3 Standardization of Shariah Governance for Islamic crowdfunding. Corporate Islamic
governance is positioned in the philosophy of monotheism in the Islamic shariah worldview crowdfunding
and aspires to benefit humanity. Shariah Governance serves to instill trust in an Islamic
financial organization among stakeholders. Increasing shariah compliance can help the
Islamic financial industry grow rapidly (Haqqi, 2014).
In the context of the ICF, Shariah Governance standards or Shariah Governance acts as a
technique to strengthen the shariah compliance of every Islamic fintech platform. It adheres
to the principles of good corporate governance, which emphasize transparency and
responsibility (responsibility), independence (independence) and justice (fair).
Shariah Governance standards in ICF is a guideline for all CFP. This framework ensures
that the ICF institution’s operating environment complies with shariah principles. Several
standards in Shariah governance for ICF institutions, include the following (Muryanto, 2022):
 Shariah Supervisory Board: appointment, composition and report;
 Shariah review;
 Internal Shariah review;
 Audit and Governance Committee for Islamic Financial Institutions;
 Independence of Shariah Supervisory Boards;
 Statement on Governance Principles for Islamic Financial Institutions; and
 Corporate Social Responsibility Conduct and Disclosure for Islamic Financial
Institutions.

5. Conclusions
ICF in several countries has proven to have an important role as a source of funding for
startups and encourages the growth of the Islamic economy. The application of Islamic
shariah is a characteristic of ICF that distinguishes it from conventional models. However, in
order for issuers and CFP to actually carry out shariah principles, shariah compliance is
required. The application of shariah compliance can be a strategy to mitigate various
potential risks that may occur. Therefore, to ensure the fulfillment of shariah compliance
several strategies that can be implemented to overcome include establishment of shariah
compliance regulation, strengthening the oversight aspect and standardization of Shariah
Governance.

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Corresponding author
Al Sentot Sudarwanto can be contacted at: alsentotsudarwanto@staff.uns.ac.id

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