A retail development bond could be the perfect vehicle to develop South African small and micro-business and low-income housing while, at the same time, providing retail investors with market-related returns.
Although socially responsible investing (SRI) is well understood in South Africa, with specialised fund managers such as Futuregrowth investing in commercially viable developments, there is an enormous gap in funding available for projects under R3-million.
Small business is the sector that fuels the growth of any developing economy. An example comes from Philipi in the Western Cape, where a community used a range of subsidies and other financing to build homes.
These homes have now been completed, but there is no commercial centre where the residents can shop.
The housing association is looking for a R3-million commercial loan to build a shopping centre.
Fund managers, such as Futuregrowth, focus on retail developments in underdeveloped areas. A project of this size would be too small as it requires a great deal of hands-on expertise, which comes at a price.
Daniel Bradlow, a law professor at the American University in Washington DC, is developing an investment product, in consultation with international and domestic financial institutions and development financing experts, that aims to create access to funding for smaller projects.
The project could be instrumental in giving a kick-start to small and micro enterprises.
Bradlow has mooted a retail bond along the lines of the government retail bond, which the public can invest in for a minimum of R500 for 10 years.
It provides a semi-annual return equal to the government’s retail bond, the underlying funds being used to develop small and micro- enterprise business and low-income housing in South Africa. So investors will be doing their bit to develop the country while making money themselves.
“There is an enormous gap in funding for small and micro-businesses needing financing below R3-million. These businesses are revenue generating entities and therefore do not qualify for grants. However, they are too small for the banks and financial institutions to get involved,” says Bradlow.
The investment will also be marketed to foreign investors and ex-patriots who would like to make a contribution to the development of South Africa.
Andrew Canter of Futuregrowth says that while South Africa receives support from international bodies such as the International Monetary Fund and the World Bank for grant-based development, the country receives little support from the international community for socially responsible investing.
Futuregrowth is one of the largest SRI fund managers in South Africa, but Canter says the bulk of the funds come from local investors. South Africa has not attracted foreign SRI money despite the supposed goodwill towards South Africa and the “Mandela factor”.
Both Israel and India have used bonds to encourage their countrymen abroad to invest in development back home.
Although the project still needs some bedding down, Bradlow is working with the Development and Reconciliation Trust, which was created to promote reconciliation by providing financial support to development projects.
The next step, and the biggest challenge, is to get corporate South Africa involved. The first 10-year bond issue will be to corporates, which will underpin the retail bond offering. Bradlow says that at the end of the 10 years, the corporate investors will receive their initial capital, plus a total return in the region of 30% over 10 years. “Although this is not a commercial return, the institutions will receive charter points as well as a tax benefit.”