Ideas & Debate

Endowment funds can transform generations

fund

Legacies are built by strong institutions which stand on the shoulders of strong governance. FILE PHOTO | NMG

“Princeton has one of the most generous financial aid policies in the country. About 60% of students receive financial aid. We provide financial aid in the form of grants, which do not have to be repaid. Our aid program does not require any borrowing so students may graduate debt free. As a result, 82% of our recent seniors graduated debt free.”

Princeton University in the state of New Jersey, United States was chartered as a university in 1746 making it the fourth oldest college in the country. Princeton is part of the elite club of Ivy League colleges, a group of long established universities in the eastern United States having high academic and social prestige. Other universities within that club include Harvard, Yale, Columbia, Cornell and Dartmouth. Someone dropped off a Princeton University brochure at my desk recently and the above quoted text deafeningly jumped out at me. Sixty percent of their students receive financial aid? How? Princeton provides financial aid in the form of grants, which do not have to be repaid? Again, how? The answer lies in one word, which I have consistently written about over the last few years: governance.

We natives still struggle with leaving our meagre assets as inheritance to our heirs, who in many cases tear each other apart over the same. Wealth owners in the West, who may not have the luxury (or curse) of multiple potential heirs, have historically donated money to third parties who can use the funds for noble causes.

In the United States for example, endowments represent money or other financial assets that are donated to universities and are meant to be invested so as to grow the principal and provide additional income for future investing and expenditures. According to an article by Albert Phung titled How do university endowments work?, endowment funds follow a fairly strict set of long-term guidelines which dictate the asset allocation that will yield the targeted return without taking on too much risk. Why is this important, you might ask? This ensures that the principal remains safe and almost guaranteed, so that it continues to generate a return that is often used to fund scholarships or to pay celebrated professors who are dedicated to research and growth of academic credentials for the school.

Governance checks in at the point of donating the funds since the endowment donors usually accompany large payouts with an Investment Policy Statement which is very specific as to where the funds are to be allocated and what amounts of the investment income can be spent. The universities must have a sound system of monitoring over endowed funds, ensuring the appropriate application of the same and providing accountability over decades to key stakeholders.

The numbers are staggering. As of 2018, the university with the highest level of endowments was Harvard University with $38.3 billion (Sh3.83 trillion), followed by Yale at $29.4 billion. Princeton comes in fourth on the 2018 endowment league table with $25.9 billion (Sh2.6 trillion). Using the endowment rule of thumb that not more than 5 percent of the endowment assets should be spent in investable income per annum, Princeton has about $1.3 billion per annum to spend (Sh130 billion), assuming that the professionals who run the endowment funds are able to successfully generate a minimum of 5percent of investment income from the nominal value of endowment assets.

Princeton currently has about 5,267 undergraduates evenly split between genders. Going by their claim that 60 percent of their students receive financial aid, that would be about 3,160 students who benefit through grants from the endowment funds cited above. Without having to repay a single cent! And all this because the American college system has been able to create water tight governance systems that keep a hawk eye over decades of financial donations from generous benefactors.

Turning to our own native selves, we have watched and read myriad stories of embarrassing fights between families keen to share the spoils of a very rich and very dead patriarch. Imagine how many thousands of Kenyans could benefit if rich benefactors could transfer their wealth during their lifetime to strong institutions in both the education and health industries that could transform the lives of generations.

Of course there’s a whole framework that would be required to be built around such gifts including tax incentives and benefits for the donors who gift both during their lifetime and after their death, as well as strong corporate trustees that can hold the funds in trust separate from the institutions themselves to provide transparency and avoid temptation of co-mingling of funds (of the Masai Mara University proportions!). Legacies are built by strong institutions which stand on the shoulders of strong governance. Perhaps we can someday do the same for our own people.