We need community wealth funds, not a sovereign wealth fund

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The ability of communities to finance their own businesses will be an important step towards ending poverty and it can unlock much potential for the people who need it the most.
The ability of communities to finance their own businesses will be an important step towards ending poverty and it can unlock much potential for the people who need it the most.

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South African communities are about to experience a difficult set of circumstances due to the impact of the lockdown on municipalities’ funds. Every community needs to develop institutions to weather the storm wrought by the Covid-19 coronavirus and lockdown.

A persistent complaint from entrepreneurs in township communities is the lack of capital. Encouraging the formation of cooperative financial institutions (CFIs) would go a long way towards empowering these communities.

But just creating a financial institution is not enough, it has to enjoy community buy-in and be capitalised. This is where government-owned assets in these communities could be put to good use – by selling them and using the proceeds to capitalise CFIs in the communities in which the land was held.

In doing so, government solves two problems – it makes land available for use by entrepreneurs and anyone else who wants to own it, even if it is to build a home. Secondly, the proceeds from any sale become the common property of the community through the CFI, which would be designed in such a way that each person is represented.

The details of composition would be up to the particular community, but a possibility would be having one head of each household exercising voting rights in the CFI on behalf of their family. The institutional design can be such that the CFI operates on consensus.

Every community needs to develop institutions to weather the storm wrought by the Covid-19 coronavirus and lockdown.

This approach is different from giving land to people for free, while simultaneously recognising the need to distribute government land privately. Utilising the sale of community land to capitalise a CFI can be considered a modern twist on customary law property ownership, where land was often owned communally.

The sale of land could be restricted to residents of the community, the trade-off here being that the pool of capital is much smaller and if an individual decides to later sell at a higher price they can realise a greater profit because they would have the advantage of being able to sell to anyone.

There would also be nothing stopping any community without any government land to sell to start its own CFI and to capitalise it via contributions.

Read: Gauteng townships deserve real development, which includes skilled foreign entrepreneurs

In South Africa, CFIs require a common bond between the members (belonging to the same community, municipality, town, district or municipality), R100 000 in capital (minimum) and at least 200 members.

Government’s particular role here is in making the regulatory landscape more permissive. While R100 000 is not a particularly high threshold compared with the R10 million minimum required capital for a mutual bank and R250 million for a commercial bank, finding and convincing 200 like-minded people with similar time preferences can be harder than raising R250 million, therefore this particular requirement needs to be reconsidered or scrapped.

CFIs can work in a community where every household is a member and where the CFI is built on consensus as opposed to majoritarianism (each member is required to have exactly one vote regardless of contribution to the capital establishing the CFI). They can provide a means for the community to invest for the future, to build infrastructure and to provide services.

The ability of communities to finance their own businesses will be an important step towards ending poverty and it can unlock much potential for the people who need it the most.

Instead of thinking about a national sovereign wealth fund, we can reach the people who really need help if we force our thinking to the micro level.

There are, for example, people in every township who are brilliant investors in the local context of that township, who run successful businesses but may not be fully compliant with each and every government regulation.

One of these industries is that of the mashonisas, short-term lenders who sometimes build successful businesses by identifying the best short-term investment prospects in townships – be it financing someone’s first month at a job or financing a small start-up, often nothing more than a few tools for starting a handyman business.

The competent deployers of capital in each local context are the ones who must lead this effort. As always, government only needs to get out of the way of well-meaning individuals. The ability of communities to finance their own businesses will be an important step towards ending poverty and it can unlock much potential for the people who need it the most.

Dhlamini is a freelance writer and independent data analyst


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