Why Diaspora Bonds don't Always Work

paper money on coins

by: Nana Boakye-Adjei

Interest in diaspora finance has grown significantly over the last decade. International organisations, donors and governments are all keen to identify how best to mobilise funds from the diaspora to support economic development. International remittances, as is widely known, is one of the easiest ways that diasporas contribute to their countries of origin. Whilst ideas, pilots and policies have been developed to go beyond remittances and create an environment that expands the role of the diaspora in economic development, there have been limited success cases.

One area where the interest has continued to be high is diaspora bonds. The concept of issuing a government security that targets its overseas population has been popular amongst emerging country governments for some time. A number of countries have issued them; Ethiopia, Ghana, Nigeria, Kenya, Bangladesh and Nepal. Whilst we have seen quite a few issuances over the last 15 years it is interesting that India and Israel are normally quoted as the best examples although the last issue for both countries is nearly 20 years ago.

Why Today's Environment Makes it Difficult to Raise Diaspora Bonds

Why has no other country managed to successfully emulate what the Indians and Israeli’s did so long ago? 

A number of factors are at play here; Firstly, the regulatory environment for issuing a diaspora bond is far more complicated in this post 9/11 world and therefore more expensive than when India and Israel were looking at mobilizing diaspora finance. Today, if a government wants to market a financial instrument to their diaspora in Europe or the US they must ensure they comply with local securities regulations and the issuance will cost them upwards of USD 500-750 thousand. Ethiopia thought they had found a way around these regulatory hurdles and costs by promoting their bond through their embassy and on their website. In 2016, they were rewarded with a hefty fine (USD 6.5 million) from the SEC for their efforts.

Secondly; how we define success for such initiatives is based on knowing who has actually invested. Let’s look at the recent example of Nigeria, who some say successfully raised USD 300 million from their diaspora in 2017. The proposition was an attractive one; coupon rate of 5.6% over 5 years, excellent returns when compared to a savings rates of less than 1% in the USA and Europe at the time. Combined with a concerted effort to target the retail banking market where Nigerians overseas reside, the recipe for oversubscription seemed sound. Unsurprisingly the bond did well and was filled within the allotted timeframe.

However, if you ask the million-dollar question ‘how many diaspora investors subscribed?’ there is no tangible data that will give you a definitive answer. Even the Nigerians themselves don’t really know who invested in the bond. Whether the bond was mopped up by those playing in the secondary bond market, or Nigerians overseas came out in their droves to support their government’s recent bid to tap their savings, no one can really say. On the one hand, who cares? Nigeria raised USD 300 million for infrastructure projects across the country, whether that money came from diaspora members or not, doesn’t really matter.

Interestingly though, the Nigerian government cares because they wanted to specifically raise funds from their diaspora, who remain connected both emotionally and financially to their country of origin. Maybe better tools for diaspora engagement and communication might have provided the insights needed to really unpack who invested in the bond and from where, so we could truly celebrate Nigeria’s success in this difficult area of development finance.

The Importance of Data in Successfully Raising Diaspora Bonds 

So what’s the takeaway?

The regulatory regime at the time India and Israel were issuing their bonds was far more relaxed than today, this is an important point that cannot be overlooked, and some may argue is the main reason why diaspora bonds can’t really be done effectively anymore. However, another really important factor is that both the Israeli and Indian government knew their diaspora well and had well established and strong links into the communities[1]. Moreover, the diaspora had a sense of national pride and wanted to support their government during their time of need. All this without social media!

For us at DMA Global, who as remittance specialists are continually asked ‘how can governments mobilise more money from their diaspora’, we say; develop better diaspora engagement policies and do a deep dive assessment of whether a diaspora bond (or other vehicles for mobilizing diaspora finance) is the most effective way to get your diaspora re-investing into their country of origin.

One of the biggest barriers to mobilising diaspora finance well is a lack of useful data. Diasporas by their very nature are disperse and this can make it difficult to get useful information on their financial habits and investment preferences. In partnership with the African Union, the African Development Bank and IOM, we have developed some excellent tools that governments can use to make data driven decisions about how to improve their approach to diaspora engagement. Additionally, these tools assist in identifying which financial instruments that can be used to tap diaspora finance in a manner that best suits their country context. We’re also doing a lot of work on how to improve the stock of data itself, which is essential to answering so many questions related to diaspora and development initiatives.

To find out more about these projects give us a shout, we’re always happy to talk about what we’re doing.



[1] In the case of Israel the definition used is broader than for other countries as there are political and religious factors at play that do not apply to other countries.

[2] Cover image from: The Commonwealth.org