Credit Guarantees and Enhancements: Flexible Catalysts for Blended Value Investment An Approach to Breaking the Vicious Cycle Investor and philanthropist George Soros made grants in South Africa in the 1970s, but he did not continue in the 1980s and early 1990s. The election of the Mandela Government in 1994 opened opportunities for Soros to again invest in South Africa. In consultation with trusted adviser Dr Van Zyl Slabbert, Soros’s Open Society Institute (OSI) began seeing philanthropic investment opportunities in South Africa.22 Slabbert suggested to de Beer that Soros might invest in a low-cost housing catalyst, as long as it could be set up as an independent entity that would involve the government as an investment partner (but not as the service provider). Soros and the leadership of OSI saw an opportunity to normalize economic and financial relationships and help the market function in a place where it had not previously worked. In due course, Slabbert arranged a meeting between George Soros and Nelson Mandela. When they emerged from that meeting, the two had agreed to co-sponsor an initiative that would help bring the formal banking sector into low-cost housing finance. They then asked de Beer and his colleagues, in consultation with Slabbert and representatives of the OSI, to determine the structure and strategy of this new entity.
A Victim of Its Own Success To the great benefit of poor South Africans, the Nurcha-facilitated lending model introduced a flood of capital into the low-cost housing sector. By 1999, Nurcha had financed the construction of over 50,000 new housing units. With the loan guarantees in place, the risk-reward profile became manageable, and low-cost housing contractors were able to find bridge financing. By most counts, Nurcha and South Africa’s low-cost housing market appeared to be an unmitigated success—until the wave of economic and currency crises of the late 1990s hit South Africa in 1999.
Officially founded in February 1995, The National Urban Reconstruction and Housing Agency (eventually shortened to Nurcha) was born of their deliberations. OSI and the government of South Africa each contributed US$ 5 million in grants to found and initially capitalize the company. OSI also pledged a loan guarantee of up to US$ 50 million, with a required 3-to-1 match; that is, Nurcha had to raise US$ 150 million in guarantees in order to access the full US$ 50 million offered by OSI. Nurcha successfully raised matching guarantees as required, but by October 2005 it had drawn down no more than US$ 20 million of the available OSI guarantee.
In three months, the over-draft rate of Nurchasupported projects rose by more than 50%. The South African Rand fell in value relative to other currencies, and domestic South African inflation interest rates shot up. When low-cost housing contractors could not manage their interest payments in the inflationary environment, defaults quickly mounted, and the banks withdrew from lending with Nurcha. In the case of one major lender, many loans had not been issued in accordance with pre-established protocols, and these claims against the guarantees were rejected. While Nurcha was fortunate in that its guarantee reserves were not overwhelmingly exposed, the banks’ losses led them to exit the low-cost housing construction market dramatically more quickly than they entered.
Using OSI’s loan guarantee as a catalyst, Nurcha began to guarantee loans from South African commercial banks to low-cost housing developers and contractors. With those banks leery of lending to developers, whom they thought especially risky borrowers, the banks initially required significant fully secured third-party guarantees. Nurcha’s mandate was wide: to “encourage broad banking involvement in the low-cost housing market.”
By 2000, Nurcha was faced with a dilemma. With its guarantee programme, it had proven that lending to low-cost housing projects could be both profitable and vastly beneficial to low-income families. Thanks to its willingness to accept risk when most banks viewed the risks as untenable, Nurcha’s work eventually revealed the lower cost of risks associated with those loans. Nevertheless, the banks continued to misprice the risk, convinced
Founding Nurcha
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Though Nurcha was involved in various programmes, its core activity was guaranteeing bridge financing for low-cost housing projects. Through 1999, Nurcha would help builders and contractors secure commercial financing that it then supported with a 60-70% guarantee. Thus, a bank loaning money to a Nurcha-supported contractor was guaranteed to recover at least 6070% of the loan in case the borrower defaulted. These guarantees were subject to a set of specifically developed prudent lending protocols involving screening applicants, performing due diligence, and monitoring the loans.
Blended Value Investing: Capital Opportunities for Social and Environmental Impact