Essays on savings and the financing of reconstruction and development in South Africa: A study of the loan market for low-income housing

This dissertation seeks to analyze the flow of savings from lenders to borrowers, or more generally the flow of funds to finance productive and welfare enhancing investment. South Africa will provide the case study. The argument will be made that given economic conditions similar to South Africa, a policy that places the burden on unfettered markets to channel funds to where they are most needed will most likely result in significant shortfall of funds. This dissertation focuses in particular on social investment. From a philosophical point of view social investment is based on the view that often times certain investments are necessary to maximize social welfare, yet due to the nature of certain investments private voluntary lending could be discouraged. Social investment is required to ensure corporate responsibility; fill financing gaps arising from asymmetric information; provide finance to investments that are deemed socially necessary but do not generate an adequate expected rate of return; compensate for under lending to finance public good production; and increase lending in the case that lenders in the market have a preference for discrimination. A model is developed and used to demonstrate how asymmetric information in low income housing market could result in underlending. These results lead to policy suggestions. Collateral valuation on the part of the lender is shown to be particularly significant. Policies suggested include upgrading of residential communities and increasing credit-recording agencies. Efforts to liberalize financial sectors work against the feasibility of implementing a social investment program.