Transformation at the Crossroads: Impact Investing in South Africa
by Donna Katzin, Executive Director, Shared Interest, a social investment fund that mobilizes the financial and human resources of South Africa’s lowest income communities of color. Since 1994, Shared Interest has helped to create more than 180,000 new small and micro-enterprises, 1.9 million jobs, and 120,000 affordable homes – benefiting 2.3 million economically marginalized South Africans – the majority of them women.
Also watch a Video of Donna discussing these issues and solutions here- www.greenmoneyjournal.com/videos-podcasts
Twenty-two years ago, when apartheid fell, South Africa pointed the way from disinvesting to reinvesting in one of the landmark nonviolent social transformations of our time. A number of international investors decided then to put their money to work in building a more equitable South Africa. Today South Africa is the largest impact investment market on the African continent, with US $24 billion disbursed for impact investments by development financial institutions (DFIs), and US $4.9 billion by organizations other than DFIs.
Shared Interest, a non-profit investment fund established for this purpose in 1994, rode the wave of capital seeking to make a transformational impact in the new nation. We use our investors’ funds to partially guarantee loans to low-income black entrepreneurs and farmers by South and Southern African lenders who would otherwise consider them “unbankable.” Our impact has been significant, benefiting 2.3 million South Africans without losing a penny of our impact investors’ capital. In the process, we have found that as South Africa struggles with its unique history and challenges, it provides a wealth of lessons for impact investors world-wide about what works, what doesn’t, and what is possible. Here are a few:
No Quick Fix
First, South Africa itself teaches the importance of long-term strategies, and the impossibility of a quick fix for severely distorted economies. The African National Congress was 82 years old by the time Nelson Mandela was elected President, and that was only the beginning of the country’s “long walk” to economic democracy – a process still in its infancy. Many of us have worked hard to help South Africa overcome its pariah status and become more like the rest of the world. Now it is. Ironically, this means that it is dogged not only by its own history, but also by the challenges of global markets and the rising inequality that all too often accompany the concentration of capital. The removal of deeply entrenched distortions that have historically barred black-owned businesses from the marketplace will require many years more. For impact investors, this means patient capital.
It also means that economic transformation requires numerous complementary strategies, as did South Africa’s victory over apartheid. During the “struggle years” these included the initiatives of the country’s own liberation movements, civil society and domestic defiance campaign, as well as international boycotts, divestment, sanctions, shareholder resolutions and protests carried out around the world. Today, as then, profound change requires what we often describe as a new “ecosystem.” Reshaping what is still one of the world’s most unequal countries in terms of both income and wealth requires a variety of strategies and tools. The goal is not simply launching X businesses or creating Y jobs, but reshaping an economy that will address the needs of all its people.
Shared Interest, for example, has found it essential to use a variety of strategies to ensure the success of its client enterprises and small farms, and move commercial lenders to serve them. While we use our impact investors’ funds to partially guarantee loans from local banks to black borrowers (typically) without collateral or credit histories, we ensure that the new entrepreneurs and farmers also receive technical assistance in launching, managing and scaling their businesses. Through our partners on the ground – notably the Thembani International Guarantee Fund – we provide support for commercial lenders in working with new clients – and creating products for markets they have historically sidelined.
But the new “ecosystem” requires numerous other actors in the private and public sectors to create significant changes and opportunities – and fertile soil for impact investing. They are particularly necessary to jumpstart black-owned small and growing businesses and farms in South Africa, whose colonial structure was built on extractive industries and agribusiness – much of it on land forcibly taken from black South Africans. Moreover, blacks were legally barred from doing business in “white” areas – the most populous – under apartheid. Twenty years after Nelson Mandela was elected President, the Global Entrepreneurship Monitor (GEM) pegged South Africa’s entrepreneurial activity at 25 percent that of other Sub-Saharan African nations.
And so, to support the development of small and growing (and potentially investable) black-owned businesses, numerous enterprise incubators and accelerators have sprung up around the country. They include the University of Pretoria’s Gordon Institute of Business Science (GIBS), which prepares promising emerging enterprises to succeed and scale; and LifeCo, which assists and invests in social and environmental businesses. There is also a bumper crop of business development service (BDS) providers that support small enterprises, farms and cooperatives across the country.
Public Carrots and Sticks
The government is another key player. During the early days of majority rule, in the mid 1990’s, many expected the spirit of the new South Africa to move the private sector to play its part in transformation. But much more has been needed. It is still early days for government to establish a regulatory framework for impact investing, and organizations like the Aspen Network of Development Entrepreneurs (ANDE) are working to encourage such policies. Nonetheless, in agriculture, the state has implemented a number of strategies for change, such as its purchase of land from willing whites and giving it to black farmers – often in cooperatives. The authorities quickly discovered, however, that without technical support, many new farmers failed, and some ended up selling their land back to whites, defeating the purpose of the program. Moreover, without working capital, even the best-trained farmers cannot succeed. Shared Interest’s guarantees for working capital loans, together with technical support, have helped a number of cooperatives achieve excellent results. Another government initiative has been the creation of codes of conduct for companies in different sectors to broaden the distribution of ownership and jobs, and to assist emerging black-owned enterprises.
Read more of Donna's ideas including - Addressing Problems at their Grassroots; and Impactful International Partnerships for a New Time at- www.greenmoneyjournal.com/october-2016/transformation-at-the-crossroads-south-africas-lessons-for-impact-investing
Also watch a Video of Donna discussing these issues & solutions here- www.greenmoneyjournal.com/videos-podcasts