How to set up an endowment fund for community development

BY ANTHONY IZUAGIE

After the 2009 financial crisis, some Nigerian investors are nursing the pain of bad investments in financial assets, specifically the stock market. This episode, though systemic, was amplified by rumours and behavioural biases communicated by people who were not professionally qualified to recommend investment products. The level of financial literacy in Nigeria is low; that is the reason why most investors are not grounded in the “risk/return payoff”.

In the United States, inexperienced investors start investing through Exchange-traded Funds (ETFs). It allows beginners to invest through a professional manager who must represent a client in investment management. This is not the case in Nigeria, where retail investors interface with stockbroking firms by managing their portfolios with emotions.

In urban areas, people from a community living in cities form clubs and associations to promote community development. Organised clubs and associations impose a monthly contribution on their members to support the social and educational development of their community. This support, though insignificant, has helped to address issues like purchasing generators for general hospitals in our communities, employing part-time teachers for the community secondary school, and lately, supporting the youths in community vigilante projects.

All Nigerian communities are well-endowed with human and physical resources that make up the communal economy. If a community economy is prioritised beyond the buying and selling on community market days, various economic principles, namely comparative advantage, community investment, community endowment, community wealth, and community financing, would spur development.

When Professor Muhammad Yunus, the chief adviser to the government of Bangladesh, introduced the microfinance model to the world, very few believed the model could transform community financing.

Today, most communities in developed and developing countries have experienced faster growth through a microbanking system that facilitates commerce and aids trade. Another important economic practice for a community economy is community investing, investing in financial assets for communal growth. A process likened to a micro-sovereign wealth.

They exist in some parts of the world, but in Africa, it is not a common practice, though there are some representations of community endowments from the United States and Europe in Africa.

The All Share Index had a spectacular growth in 2024, and recent equity market updates show that the index is poised to repeat its performance in 2025. How many Nigerians or associations expect a share of the market return in 2025?

Actually, as the stock market grows, Nigerians are expected to be richer. At this moment, if investors watch the market from afar, only to return when it is underperforming, they have made their moves at the wrong time. Market timing is very important in investing. One type of investor that needs to exploit the capital market is a community endowment.

Community endowment is the community’s sovereign wealth fund. It is a sustainable method of investing for community development. Returns from the Community endowment, when applied, can address many social issues noted earlier, and it would reduce the pressure on community associations and clubs. A Community endowment is a vehicle for investing on behalf of the community. Similar to this are the recent calls for Nigerian Universities’ endowments. This will save Nigerian universities from total dependence on the government for grants. There are no community endowments in Nigeria or West Africa, rather private and corporate endowments.

The Cleveland Foundation was the first community endowment in the United States of America. It was established in 1914. It has endowment assets of 2.6 billion dollars as of December 2023. The goals of the endowment were to protect and promote regional assets, including culture and natural resources, to position Cleveland as a go-to place to locate and expand businesses. Countries in Europe use community endowments for development, for example, in Spain, the Madrid Community endowment is notable.

Endowments are platforms for accountability and preservation of capital. One important feature of an endowment is that it has checks and balances between the investment manager and the community investment committee, governed by an investment policy statement (IPS). The investment committee members will include credible community members, such as the paramount rulers, who serve as the Board of Directors, while the investment managers will be investment banking institutions. Communities wishing to apply this model can access seed capital through the methods below.

Crowdfunding: Nigerian communities can crowdfund for start-up capital. It is one of the fundraising options available to many start-up investment funds, including private equity funds. Through crowdfunding, generous donors and philanthropists can contribute to the investment funds. Crowdfunding details can be shared with community members for their donations. It does not require a specific amount of donation; every pence or naira contributed makes a difference. There are many crowdfunding sites for this process.

Special community events: Communities can organise special fundraising events that will attract the sons, daughters, and their well-wishers to donate to a fund managed by professional fund managers. Events like the annual community festivals and homecoming can create fundraising opportunities for your community endowment startup capital.

Diaspora remittances: This is a familiar source of support for families; most families are earning a better living through remittances from abroad. This can be extended to the community level. A community endowment can accumulate its seed capital through contributions from community members abroad.

Donation matching: Communities can partner with a corporate organisation to match their donation through corporate social responsibility programs. Some communities have a corporate organisation delivering corporate social responsibility to the community. This CSR program can be negotiated to be a seed capital for starting the community endowment.

Programme launching: This can be packaged as a special launch program where an endowment will be officially kick-started through a fundraising ceremony and project signing. Such a launching program can accommodate the signing of the Investment Policy Statement, the appointment of members of the investment committee, and the appointment of fund managers.

These methods are not exhaustive; a combination of these methods can also be handy for sourcing the seed capital. Importantly, as communities overlook this practice, they lose that additional source of income that would have impacted community development.

Anthony Izuagie is an MBA graduate and CFA Level 3 candidate. He is at Texas A&M International University. He can be contacted at [email protected]