With the cost of funds continuing to be a significant barrier to investment and growth for businesses, including real estate, many innovative ideas have evolved that offer alternatives to lending from traditional financial institutions. One of those alternatives is crowdfunding. In this interview, ROLANDO IGBINOBA, Founder/CEO of Propcrowdy Limited, explains how the Securities and Exchange Commission (SEC) approved this intermediary initiative. He also highlights its benefits for real estate investors, low- and middle-income homebuyers, and small businesses. he talks to CHUKA UROKO. Extracts:
Your company just got SEC approval for a crowdfunding initiative, which is no small achievement for us. What’s next in terms of what to expect from you?
The license is not the end. It is only a means for it. This is because we have been able to demonstrate that it is possible to obtain the license. Many more people will be licensed. Now, the real hard work begins.
The next thing for us is how to make people understand that crowdfunding is safe now in Nigeria. We are embarking heavily on consumer education and advocacy to bring MSMEs and low- and middle-income retail investors into crowdfunding as an alternative funding/investment channel.
We hope that many MSMEs looking to raise money will come to the platform. On the other hand, the platform is ready to welcome retail and institutional investors who want vetted, safe and secure investment outlets for their hard-earned money. We have created a funding/investment waiting list on our website for those who want to enjoy the benefits of crowdfunding.
Crowdfunding means a group of people coming together to raise funds; What measures have you implemented to address the trust issues associated with crowdfunding in Nigeria?
As you know, the case for crowdfunding was made worse by the emergence of unregulated agtech platforms, which no longer exist, thanks to the Securities and Exchange Commission (SEC). The first and most critical mechanism put in place is that the SEC created regulations on crowdfunding. What we did at Propcrowdy was to seek a license as our first order of business and 100 percent voluntarily submit to regulation.
In obtaining this license, especially being the first to do so, we have been subjected to extensive scrutiny and have been ensured by the SEC that we fundamentally comply with the strict provisions of the Crowdfunding Rules.
Our risk management infrastructure is comprehensive. Some that come to mind are investors’ principal insurance; deposit of investor funds in a custodian bank that will only be disbursed based on a milestone; approval of all listings by the SEC; thorough due diligence on all fundraisers, including promoters; collateralization of property titles and other documents of interest; etc.
These and many other mechanisms have been put in place to inspire investor confidence and minimize risk. This is not to say that they are 100 percent fail-safe, but measures have been put in place to ensure that confidence in the market only appreciates over time.
The initiative targets, on the B2B side, small and medium scale developers whose primary goal is to build affordable housing for the average Nigerian, but who are too cash strapped to achieve this goal.
Since this initiative is also for Nigerians in the diaspora, how will you address currency challenges in the financial system?
Solving currency problems in the financial system will not be achieved through crowdfunding alone. But crowdfunding will be an important and critical lever. We know that one of the challenges we face with FX, in a broad sense, is that the demand is significantly less than the supply.
With a regulated crowdfunding space, more structured remittances will flow into the country. When this happens, MSMEs that until now lacked capital will have more capacity to produce and grow their products and services, and this, in turn. it will lead to the export of their products which, in turn, will generate more foreign currency inflows into the country. So, at Propcrowdy we see ourselves as an exchange and/or market that generates the productive capacity of MSMEs. And, of course, MSMEs are the engine of economic development in any country.
Why do you consider Propcrowdy as an exchange or a marketplace?
We are authorized as a Crowdfunding Intermediary (CFI). Basically, this means two things. First, anyone can go to the platform to raise capital as long as they meet the minimum requirements stipulated by the Securities and Exchange Commission (SEC).
Second, retail investors can go to the platform to search for investments of their choice and they will be able to make those investments on the platform immediately. The reason they will be able to do this is because Propcrowdy as the CFI would have gone to the trouble of vetting the fundraisers and making sure they comply with SEC guidelines.
So there’s a whole dimension of the risk management protocol that’s been put in place. Although it is important to mention that investors should take full responsibility for understanding the risk they are putting themselves into.
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FinTech has aggressively spread globally using technology in finance, while real estate technology (Proptech) is now emerging. What is the future of real estate crowdfunding in Nigeria, especially for the low and middle income class?
First, let’s contextualize this. Arguably, there is currently a housing deficit of 20 million units. If the average cost of producing these units is N5 million, it will be a N100 billion market. What is the market capitalization of the Nigerian Stock Exchange (NGX)? Around N28 trillion. So you’re potentially looking at market potential that’s 4 times the capital market.
That being said, SEC rules allow retail investors to invest no more than 10 percent of their income, while institutional investors and high net worth individuals have no limit. With real estate crowdfunding, retail investors who normally would not have been able to participate in real estate investing now have the opportunity to do so.
Also, developers, on the other hand, can solicit investment by taking advantage of the huge categories of investors available on social media. A major game changer in crowdfunding for real estate is that investors can now invest much lower amounts of capital to own properties on the crowdfunding platform and can earn profits from it.
For example, on the Propcrowdy platform, you can invest as little as N10,000. In short, crowdfunding has a great future and is here to stay. This is already evident in emerging climates and more developed markets.
Overall though, the future of real estate crowdfunding in Nigeria, especially for the low and middle income class, is likely to be influenced by a number of factors, including government policies and regulations, economic conditions and technological advancements. . There may also be challenges to growing this platform, such as a lack of awareness of the concept among the general public.
Looking at the estimated N100 trillion funding gap in real estate, do you think crowdfunding will address the challenge?
Crowdfunding will not create a N100 trillion gap overnight and it is certainly not the only channel to close this funding gap. But it is a new and innovative route out of the traditional banking system. The crowdfunding initiative opens an alternative window to finance real estate and other related projects and allows developers to have more access to cash at a lower cost and with greater speed.
The initiative’s target on the B2B side is small and medium-scale developers whose primary goal is to build affordable housing for the average Nigerian, but who are too cash strapped to achieve this goal.
Propcrowdy creates a viable and sustainable solution for this class of developers by connecting them with financing from low- and middle-income people who, in turn, become stakeholders in the projects (in the most direct sense) and potentially grow and expand your portfolio by investing in this asset class. In essence, it tears back the veil and allows ordinary Nigerians to enter the “holy of holies” of the real estate market in Nigeria.
You mentioned the benefits of this initiative for SMEs, developers and low-income people. What benefits are there for the housing sector in general?
The benefits are enormous. As well as democratizing real estate investment, it also puts the power back in the hands of the people as to what should be the focus of developers: luxury properties that allow the country’s housing deficit to continue to grow, or affordable housing that gives the average working Nigerian the opportunity to have decent housing at a more affordable price, thus reducing the housing deficit.
Our Crowdfunding Broker license gives a wider range of Nigerians the opportunity to view the projects offered on the Propcrowdy platform, evaluate them, and fund the projects that specifically meet their investment needs. This improves access to affordable housing. This alone may not eradicate challenges in the housing sector, but it does help reduce problems.
SEC rules state that you can only fund N100 million per transaction on a Crowdfunding platform. As for the huge funding gap in the market, isn’t this a small drop?
Yes, but these are small drops that can form an ocean. We agree with the SEC on this cap based on the various conversations we’ve had and the spirit behind the rules, especially if you look historically at how Ponzi schemes and some of the agtech platforms have operated in the country. So in working with the SEC, we’re starting from the known to the unknown.
As regulators, they want to look at the markets and understand them. Interestingly, the rule also provides for some level of flexibility on a case-by-case basis. So beyond just regulating the market, the SEC is very open to innovations developing the crowdfunding space. We believe that once we have proven ourselves as a trader, the cap will increase.