South African communities are about to experience a difficult set of circumstances due to the impact of the Covid-19 lockdown on municipalities' funds. Every community needs to develop institutions to weather the storm. A persistent complaint from entrepreneurs in township communities is the lack of capital; if South Africa were to encourage the formation of Cooperative Financial Institutions (CFI's), it would go a long way towards empowering these communities.
Of course, creating a financial institution is not enough - it has to enjoy community buy-in, as well as be capitalised. This is where government-owned assets in these communities could be put to good use: by selling these and using the proceeds to capitalise the CFI in the community in which the land was held. In doing this, the government solves two problems: makes land available for use by entrepreneurs, and for everyone who wants to own land, even if to build a home.
Secondly, the proceeds from any sales 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.
This approach is clearly different from giving land to people for free, while simultaneously recognising the need to distribute this 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 sales of land could be restricted to residents of the community- the obvious tradeoff here is that the pool of capital is much smaller and if an individual decides to later sell at a higher price, they could realise a greater profit because they’ll have the advantage of being able to sell to anyone.
CFI’s in South Africa require a common bond between the members (according to the regulations, belonging to the same community, municipality, town, district municipality are all sufficient), R100,000 in capital (minimum), and at least 200 members. There would also be nothing stopping any community without any government land to sell, to start their own CFI and to capitalise it via their contributions. The government has to play a role in making the regulatory landscape more permissive, in particular, while R100,000 is not a particularly high threshold compared to the R10 million in required minimum capital for a mutual bank and R250 million for a commercial bank, convincing 200 like-minded people with similar time preferences can be harder than raising R250 million, this particular requirement needs to be reconsidered or scrapped.
CFI’s can work in a particular community where every household is a member and if 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, to provide services. 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 so on, not always 'complying' with each and every government regulation. One of these industries are the Mashonisas, the short term lenders who sometimes build successful businesses by identifying the best short-term investment prospects in the townships, whether it is financing someone’s first month at a job, or financing a small startup- 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, the government only needs to get out of the way of well-meaning people. Once communities can finance their own businesses, it will be an important step towards ending poverty; by no means the only one or the final one - there are still many more - but it can unlock a lot of potential for the people who need it the most.This article was first published on City Press on 3 December 2020