Crowdfunding - A Significant Contribution to Financial System Development in Developing Countries?

This paper aims at answering the question whether crowdfunding represents an instrument that can make a significant contribution to financial development and inclusion in developing countries from a financial system perspective. Essentially, we argue that financial underdevelopment does not enhance but hamper crowdfunding’s potential in developing countries. We further suggest that if crowdfunding platforms in developing countries were to develop, and if the founders were to ask for support from the development finance community, pilot projects involving donors, technical assistance providers and international financial institutions (IFIs) are conceivable. Those pilot projects may be designed in order a) to learn about the concrete conditions in setting up such a platform in a developing county context, and b) to monitor, support and possibly enforce the use of mechanisms that limit moral hazard and adverse selection risks for local investors and thus enhance and safeguard the reputation of the platform.