Hometown Investment Trust funds

Abstract

There are different challenges a small- to medium-sized enterprise when they are gathering capital, especially if they carry a lot of risk. The banks have become more stringent because of the Basel Capital Adequacy Requirements, the investors prefer to invest in safer enterprises. Japan has tried to solve this problem by implementing Hometown Investment Trust funds. Hometown Investment Trust funds tries to reduce the risk of investing in small- to medium-sized enterprises by reducing information asymmetry, playing on the investors pride toward their local community. In Japan the Hometown Investment Trust funds are managed by the Financial Services Agency, which is government owned, and are sold by banks, credit rating offices and post offices. The government can reduce the scepticism towards Hometown Investment Trust funds, by having a government owned institution manage it. This is because these institutions do not have the same incentives as a private institution to profit from Hometown Investment Trust funds. Hometown Investment Trust funds do also try to incentivise investors to invest because of the social return they can receive. The local region can expect some economic growth if a Hometown Investment Trust fund becomes successful, because the total amount of investments have increased. The small- to medium-sized enterprise that received the funds would then be able to start the production and start selling the products. The income can be used to expand the enterprise, or to increase the wages of their employees, maybe both if the income was sufficient.