capital markets benefit the poor
By Ingrid Goodspeed, South
African Institute of Financial Markets
World Bank and donor agencies like the United Kingdom’s
Department for International Development (DFID) have adopted
the theme “making markets work” when delineating
their private sector development strategies to reduce poverty.
In South Africa FinMark Trust has adopted the mission “making
financial markets for the poor”. This article picks
up this theme and considers how the capital market can be
made to work for the poor. The supposition is that capital
markets have an impressive record of financial innovation
and if this could be directed towards issues such as dead
capital it would contribute towards achieving the Millennium
Development Goal of halving the number of poor by 2015.
and dead capital
Capital has two dimensions. Firstly it has the physical dimension
of an asset such as land, equipment and livestock. In addition
it has the potential to generate further production i.e.,
it is a source of additional production.
According to de Soto in his seminal work
“The Mystery of Capital“, the major impediment
that prevents the developing world from benefiting from capitalism
is its inability to produce capital. He states that “capital
is the force that raises the productivity of labour and creates
the wealth of nations. It is the lifeblood of the capitalist
system, the foundation of progress and the one thing that
the poor countries of the world cannot seem to produce for
themselves no matter how eagerly their people engage in all
other activities that characterise a capitalist economy”.
The basic tenet of de Soto's (2000) work
is that the poor in developing countries, in spite of holding
considerable property, do not have a system for property rights
that can turn these assets into capital. The poor possess
property not in the formal property system, but in the extralegal,
underground system that has its own laws and customs. Thus
because they do not have formal title to the assets, the assets
represent dead capital as the poor cannot use them as collateral
to obtain credit i.e., for capital formation.
De Soto estimates that about 85% of urban
land tracts in developing countries and between 40% and 53%
of their tracts of rural land represent dead capital. He further
estimates that the total latent value of the real estate held
but not legally owned by the poor in the developing world
and in transition countries is in the order of about $9.3
Clearly the answer to capital formation in
developing countries would be to formalise informal ownership.
This implies adequate and appropriate laws that establish
property, tenurial and foreclosure rights, a sound mortgage
insurance system, and information systems to record credit
scoring data and loan default rates. However without enforcement,
property rights for the poor are meaningless.
2. The capital
Capital markets are markets in which institutions, corporations,
companies and governments raise long-term funds to finance
capital investments and expansion projects. The bonds and
other long-term debt market as well as the equity market constitute
the capital markets.
There are isolated incidents of the capital
market being used to mobilise dead capital. For example:
- Shelter-Afrique, the company for habitat and housing in
Africa has demonstrated that the capital market can be a
sustainable source of financing for housing and urban development.
It successfully issued bonds in the capital markets of selected
countries including in Kenya, Benin, Burkina Faso, Côte
d’Ivoire, Guinea Bissau, Mali, Niger, Senegal, and
Togo. The proceeds from these bonds have been on lent to
developers and financial institutions for housing development.
- UN-Habitat is developing a new facility –the Slum
Upgrading Facility (SUF). This facility envisages providing
technical assistance and bridge-financing to mobilize domestic
capital and investment for slum upgrading initiatives in
developing countries. The facility, in its first three years
will design, field test and scale-up financial instruments
that attract investments from banks, other housing finance
institutions and micro-finance institutions.
In poorer developing countries and in outreach
to underprivileged sections of the population in particular,
the private sector is often not prepared to make longer-term
commitments without for example guarantees by government or
official development agencies.
According to Shelter-Afrique S.A. the problem of generating
resources for housing in Africa is not necessarily an absence
of savings at the household level but a lack of effective
institutions and instruments to mobilize these savings and
channel them into housing investments.
Could asset-backed securitization be used
to mobilise dead capital by securitising the loans of a community
or rural village? Group lending of this ilk will enable a
community or rural village to provide additional collateral
for a number of loans through a pledge by the group to repay
the loans. The incentive to repay the loan is based on peer
pressure i.e., if one group member defaults the other group
members make up the payment amount. However mortgage securitization
rests on a complex matrix of legal and institutional structures
that may not and must be addressed in this context.
It is possible to form a company with the
property of a community or village as the asset of the company
and members of the community or village as shareholders? The
company could raise a loan using both the property and group
lending repayment pledge as collateral. However should the
company default on the loan, would the lender be able to take
possession of the collateral?
It is not clear whether the poor would want
to borrow money with their property or houses as collateral.
There may be reluctance to endanger a household's / community’s
/ village’s financial viability. Many may fear the consequences
of failing to repay the loan and would prefer to use informal
savings facilities like stokvels to obtain credit. This raises
the question: is it possible to securitise the cash flow of
The road out of poverty is built by economic growth. In the
world’s developed economies capitalism promotes economic
growth by incorporating incentives that encourage production,
exchange and innovation supported by clearly defined property
rights secured by the rule of law.
In developing countries, the poor possess
capital, but it cannot be put to use to generate additional
capital – something that is essential for economic growth.
And herein lies the challenge for participants in the capital
market. Can they use their creativity and expertise to create
the tools necessary to mobile dead capital?
De Soto, Hernando, 2000, The Mystery
of Capital, New York: Basic Books.
Shelter-Afrique S.A., 2003, Domestic
Resource Mobilization for Housing Development in Africa, Annual