An increasing number of countries are looking to take advantage of the money related assets of their abroad populations, by luring their remittances and savings into diaspora bonds.
The over $500bn of cross-border payments that flow into emerging market nations each year are a crucial source of finances for many of the world’s poorest populations, reinforcing household consumption for native families.
Yet according to development economists, the financial impact of remittance flows could still be more if at least some of that money is directed into productive investment such as diaspora bonds.
Dilip Ratha, lead economist in the migration and remittances team at the World Bank, suggested that the organization has received multiple requests to help develop financial products targeting expatriate workers from 20 countries.
“They are a simple recognition of the fact that migrants send money home but they also save a significant amount, quite possibly more than they send home, in bank deposits on which the interest rate is close to zero,” Mr. Ratha said.
“Offering a diaspora bond at 4 to 5 per cent in dollar terms can attract their savings.”
The benefits of this approach are theoretically multitudinous. With foreign direct investment having fallen drastically, bond financing is less variable compared to other forms of cross-border flows, bank lending and bank deposits, which can be withdrawn any time.
He also added that diasporas “have a more favourable perception of country risk and are willing to be more patient with it than professional investors.”
This approach has been successful in Israel, with the Middle Eastern country having raised $32.4bn in diaspora bonds since 1951.
India ranks second in diaspora bonds, having raised $11.3bn, however, the country has not issued a diaspora bond since 2000.
Nigeria, Ethiopia and Nepal are the least beneficiaries of diaspora bonds.
But diaspora bonds are not the sole approach to channeling remittances into productive investment. The UN’s International Fund for Agriculture Development has piloted 60 projects via its Financing Facility for Remittances.
The projects have two prongs. First, they seek to tap into the potential investment capital of expats, who IFAD estimate save 10% of their income, almost the same as the 15% set aside as remittances.
Second, they aim to bring the recipients of remittances into the normal financial system through banks and microfinance institutions, allowing them to accumulate savings and access loans and insurance.
Pedro De Vasconcelos, senior technical specialist for the FFR said:
“Twelve years ago, after having identified the flows of remittances to developing countries, we realised that more than half were bound for rural areas.
“The rationale was simple: how can we make these remittances count more?”
An important part of the work is encouraging recipients of remittances to put some of the money into savings.
“We are trying to empower them,” added Mr De Vasconcelos.
Money can then be funneled into investment. For instance, a scheme in the Philippines tapped funds from 1,500 expat workers and 1,260 recipient families. Supplemented by grants from donors, the project channeled $8m into agricultural co-operatives and created 1,300 jobs in the process.
In Somalia, $1m raised from overseas helped fund the establishment of 14 companies and created 230 jobs in agriculture, fishing and food processing. The issue now is to maximize these pilot projects.
“The number of people who could benefit from this is astonishing,” Mr De Vasconcelos said.
“It’s really a life-changing opportunity for millions of families, 200m people sending remittances, 800m receiving, that’s 1bn people that can address their own SDGs [UN Sustainable Development Goals] through their own means.”
Mr De Vasconcelos added that tapping into expatriates’ financial resources such as this could help keep more workers at home, meaning people will have different motives of moving abroad.
So “we work on this in order to make migration more of a choice than a necessity — because right now what are the options for the youth in [say] Mali?”