This article first appeared in Forum, The Edge Malaysia Weekly on May 12, 2025 - May 18, 2025
On May 28 last year, Prime Minister Datuk Seri Anwar Ibrahim announced the formation of an inaugural Malaysian social exchange. A social exchange provides a platform where social entities (SEs) such as non-governmental organisations (NGOs) can secure capital from impact investors and various other funders while simultaneously demonstrating their social impact. By fostering a marketplace specifically tailored for investments with social significance, a social exchange has the potential to mitigate funding shortfalls, enhance financial accessibility for SEs and, ultimately, facilitate their growth and sustainability. As for the impact investors, a social exchange provides a source of legitimate SEs and credible social projects. The prime minister’s announcement culminated in the launching of the Social Exchange Pilot Programme (SEPP25) by Securities Commission Malaysia (SC) on Jan 17, 2025, with five NGOs.
Discussions surrounding an exchange-type funding platform where SEs can list their investment opportunities for socially responsible investors began in the 1990s and gained traction in the early 2000s. This shift was fuelled by a growing interest in social entrepreneurship and venture philanthropy, alongside an increased discourse on measurable outcomes and accountability in the non-profit sector. In June 2003, the world’s first social exchange was launched by Bovespa, the Brazilian Stock Exchange. The Bovespa named this innovative model a social stock exchange (SSE) and used its expertise, rules and infrastructure to connect NGOs seeking funds to investors wishing to invest in social development programmes and projects. The Bovespa’s SSE acted as a catalyst for similar initiatives worldwide. Countries such as Brazil, Portugal, South Africa, Jamaica, the UK, Canada, Singapore and India followed suit and established their own local social exchanges. The creation of social exchanges not only creates investment opportunities for listed SEs but also ensures and enhances their visibility and credibility. Investors, on the other hand, save time and costs associated with searching for social-impact delivering investments, as they receive objective information about social projects or entities featured on the social exchange.
Nevertheless, it is noteworthy that Malaysia already possesses innovative forms of alternative fundraising that allow organisations like SEs to raise capital from the public. One of these means is crowdfunding. Crowdfunding is an internet-enabled way for businesses or other organisations to raise money in the form of donations or investments from multiple persons. This method capitalises on the collaborative potential of a broad constituency, facilitated through online platforms, thus extending its reach and visibility. Crowdfunding can generally be classified into four different types, namely donation crowdfunding, reward crowdfunding, equity crowdfunding (ECF) and peer-to-peer (P2P) financing. In donation crowdfunding, donors donate to non-profit projects and social-development initiatives. Reward crowdfunding is where donors contribute money in return for a reward, such as a final product from the project owner. In ECF, investors contribute and will become shareholders of an entity, sharing both profits and losses. Lastly, in P2P financing, investors are akin to creditors and will expect a return of principal repayment with profits.
In Malaysia, donation and reward crowdfunding are informal and are generally not regulated. However, ECF and P2P financing are considered investment vehicles and are regulated by the SC. The SC regulates ECF and P2P financing platforms as “recognised markets” under the Guidelines on Recognized Markets, which were revised on Aug 19, 2024. A recognised market is an alternative trading venue, marketplace or facility that brings together purchasers and sellers of capital market products.
Given the availability of alternative funding avenues such as crowdfunding, a pertinent question arises: Is there a need for a social exchange in Malaysia?
The answer lies in the distinction between their purposes and scopes. A social exchange would have a narrower focus compared to crowdfunding, since a social exchange exclusively features entities and projects seeking funds for social upliftment, environmental protection or specific community wellness initiatives. On the other hand, crowdfunding caters for a broader range of entities with the objective of raising funds for business, rewards and donations. In Malaysia, the proposed social exchange will be regulated by the SC, whereas donation crowdfunding currently operates without regulation. Social exchanges will require social impact reports, promoting greater transparency and accountability, and will include capacity-building programmes for listed entities. Crowdfunding does not have these requirements.
Additionally, there are key advantages to a social exchange. First, social exchanges ensure clarity, greater transparency and accountability around the social and environmental impact of investments which would benefit investors. Second, social exchanges facilitate more efficient capital flows towards underserved sectors and marginalised communities. By aggregating supply and demand for impact-oriented capital, a social exchange unlocks new sources of financing for SEs struggling to access traditional capital markets. This could catalyse socio-economic growth and drive progress towards the United Nations’ Sustainable Development Goals. Third, social exchanges provide a platform for price discovery and liquidity, which are essential for the long-term viability of the social investment market. By creating a dedicated marketplace, social exchanges have the potential to transform how capital is deployed to address social and environmental challenges and strengthen the ecosystem of impact investing and social entrepreneurship. Lastly, social exchanges can incentivise the adoption of best practices in sustainable and socially responsible business models. By offering these benefits, a social exchange complements traditional financial markets and crowdfunding platforms, giving both investors and organisations a boost and a dedicated space to promote and scale social impact initiatives.
In conclusion, while both social exchanges and crowdfunding serve as essential tools for raising funds, they cater to different needs and investor bases. By leveraging the strengths of each, Malaysia can create a dynamic environment for social finance.
Dr Sherin Kunhibava is a senior lecturer at the Faculty of Law, Universiti Malaya. Dr Aishath Muneeza is a professor and associate dean (students and internationalisation) at INCEIF University, Kuala Lumpur. Dr Maryam Khalid is a senior lecturer at the Faculty of Law, Universiti Malaya. Zuraida Rastam Shahrom is an associate professor at the Faculty of Law, Universiti Malaya. Dr Sujata Balan is an associate professor at the Faculty of Law, Universiti Malaya.
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