25.5.

2014

Diaspora Bonds: New emerging market capital

Follow Us

McKinsey & Company

McKinsey on Society

Voices

Expertise

Tools

Search

Themes

Multimedia

Click to Explore Voices Topics

Voices

Financing Social Change

Diaspora Bonds: New emerging market capital

From the Greeks to the Chinese, diaspora communities are always eager to

The Perspectives
Mark Wien
Should micro-equity
replace micro-loans?

assist the fortunes of the people who have remained in their homelands.
Theres no better demonstration of this desire than the huge flow of funds that

Dele Meiji Fatunla

are remitted each year from prosperous nations to poorer ones, particularly

Diaspora Bonds: New

emerging market capital

in Latin America and Africa. Remittances have become a vital part of the

Dele Meiji Fatunla

Editor
Diaspora Debate
Dele Meiji Fatunla is a writer and
researcher b ased in London. He is
editor of Diaspora Deb ate, part of

social safety net, cushioning millions of families across the globe and keeping

Gerard Lyons

them from falling into a financial abyss.

A growing role for

Sovereign Wealth Funds

Despite the high volume and frequency of remittances, however, these funds
are only a survival mechanism. They are based on bonds of attachment that
are personal, rather than national; in most cases, they are uncoordinated at a

the Royal African Society's African

national level. While remittances offer evidence that members of diasporas

Arguments b log.

care about their home countries even if its primarily to keep their loved

Interactive

ones off the breadlinethese funds do not and will not offer a permanent path
to development. There is little governments can do to harness the flow of
incoming money except make transactions cheaper and easier.
Yet there is an opportunity for
cash-strapped developing
countries to gain access to the

Q.

hard-earned savings of their

Diaspora members often send money back home to

support family or friends, but lending money to
governments can entail greater risk of waste or
corruption. Would you invest in a Diaspora Bond?

The Crowdfunding landscape

Changing how people support
social causes

Featured Videos

emigrant sons and daughtersone

Yes

which has been tried and tested by

No

Vote

two countries with famously large

Challenges and opportunities in
social investing

and industrious diaspora

populations, Israel and India.
Both nations have had significant

Q.

success issuing bonds targeted at

their diasporasIsrael since the

Are you a member of a diaspora?

Yes

No
Vote

1950s and India since the 1980s.

An introduction to Social Impact

Bonds

Diaspora bonds are essentially a form of government debt that targets members of the national community
abroad, based on the presumption that their emotional ties to a country make investing in such products
worthwhile. Sales can be restricted solely to members of a particular nationality or opened to all buyers, with
nationals receiving a preferential rate.

Other Voices topics

Entrepreneurship
Without Boundaries

For governments that have large diaspora populations, the bonds provide an opportunity to tap into a capital
market beyond international investors, foreign direct investment, or loans. If governments have experienced
difficulties raising money on the international market or attracting investment, diaspora bonds can be an

How We Give

attractive new source of financing. Three other principal benefits stand out for the issuing governments:
A successful issue, along with the access to steady new funding, may help improve ratings on a countrys
sovereign debt.

The Art and Science of

Delivery

Buyers may continue to purchase bonds, even when markets are skeptical about a nations economic
outlook. (Israel has borne this out, as sales of Israeli diaspora bonds rose during the Six-Day War.)

http://voices.mckinseyonsociety.com/diaspora-bonds-a-new-source-of-capital-for-emerging-markets/

1/3

25.5.2014

Diaspora Bonds: New emerging market capital

The Socially Conscious
Consumer

Countries in essence receive a patriotic discount when they issue diaspora bonds, as investors are often
willing to accept returns much lower than they might on the open market.
Patriotism, its famously been said, is the last refuge of the scoundrelbut its equally the last refuge of the

Financing Social
Change

dispersed. The yearning for home and the desire to maintain an attachment, even after decades or centuries
away from a homeland, is a powerful emotion that nations can marshal to great benefit. This emotional force has
rarely been applied to finance, but it could yet prove an effective fundraising mechanism for emerging
economies that are struggling to raise money on the capital markets or through foreign investment.

view all

Still, policy makers and governments would be mistaken to see this as a quick and easy route to the stockpile of
savings many diaspora populations have built up. To succeed in raising capital through this mechanism, many
governments would have to make painful changes to the way they operatestarting with how they relate to their
diaspora populations.
In recent years, a number of countries have issued diaspora bonds with limited success, most notably Kenya and
Ethiopia. Part of the problem has been a lack of awareness that the product existed within the targeted diaspora.
But crucially and heres the rub for most nations with diasporasit may be difficult to convince people who
have fled or emigrated from home due to war, poor economic circumstances, or mismanagement to buy into a
product sold by that very same country, even if the leadership of the government has meanwhile changed and
the issues might no longer prevail.
Any government that wants to issue diaspora bonds must lay the groundwork with a strong information
campaign; perhaps more important, it must also be prepared to give its diaspora communities a greater say in
how any funds raised will be used. In Kenya, the fact that diaspora bonds have been used to finance specific
projects has alleviated some concern about graft and mismanagement, though the same tactic wasnt successful
in Ethiopia. The hesitance to support individual governments through diaspora bonds can perhaps be overcome
at the regional level; African countries such as Ethiopia, Kenya, and Nigeria that have explored diaspora bonds
individually might consider pooling their efforts and launching bonds through an institution like the African
Development Bank.
For governments unwilling to develop a responsive relationship with their emigrant populations, diaspora bonds
may be an idea thats more attractive in principle than in practice. For those nations that have succeeded,
however, appealing to their diaspora has provided a huge payback. India and Israel have raised $32 billion and
$11.3 billion respectively through forms of diaspora bonds. A nation like Greece would do well to find a way to
tap into the wealth of its kinsmen abroad, as would many nations in the southern hemisphere. For those that
argue some diasporas are too poor to fund their home country, or that the ties immigrants feel for their loved
ones cant be generalized into a more patriotic act of bond investing, its worth noting that the recent liberation
movements in Eritrea and Sri Lanka reportedly relied greatly on support and funding from their respective
diasporas.
Clearly, diaspora bonds cannot solve all the problems of countries in need of alternative sources of investment.
But they can be part of the solution. To tap that wealth, however, countries will have to focus on engaging with
their diaspora populations and treat them as returning customers rather than fair-weather friends. Although
there is a high degree of risk involved, the bonds could prove a desirable investment for individuals in the
diaspora who want to make a contribution to their home countries. For those two or three generations removed
from the homeland, such symbolic activity may take on greater meaning even if family and social ties have
weakened.

http://voices.mckinseyonsociety.com/diaspora-bonds-a-new-source-of-capital-for-emerging-markets/

2/3

25.5.2014

Diaspora Bonds: New emerging market capital

6 Comments

Voices on Society

Login

Sort by Newest

Share

Favorite

Join the discussion

NamSor Applied Onomastics

7 months ago

Very interesting concept, we look forward to see it grow in practice. We design an applied
onomastics solution (name recognition) and we believe it would be useful to target diasporas and
market such bonds. Recently, we co-submited an innovative economic development project
'AgroDiaspora' for consideration by the African Forum, because we believe that money is most
useful when combined with a supply of talent, the bonding between people : bonding makes better
bonds.
3

Reply Share

Sam ochieng

a year ago

Very educative article about the diaspora bonds

Reply Share

ABEKE ODJEGBA

a year ago

The issue that the diapora community of sub-saharan Africa origin will have is not raising the
needed funds but the efficiency of spending of their governments and the strategic thinking of these
governments.
Reply Share

DiaporaJonny

a year ago

Yes, great article, keep the news flowing on this important topic.
Reply Share

Anon

a year ago

" treat them as returning customers". How true a statement! Needs to start with much much
greater political accountability.
1

Reply Share

darbyfilms

Mod

2 years ago

Love this article!

Reply Share

Subscribe

Home

Add Disqus to your site

Voices

Contact Us

Multimedia

Privacy Policy

OCAT

Economic Development

Terms of use

Education

Global Public Health

Social Innovation

Sustainability

1996-2014 McKinsey & Company

Voices on Society publishes a broad range of opinion and analysis from experts in many sectors. The view s
expressed on the site do not necessarily reflect those of McKinsey & Company.

http://voices.mckinseyonsociety.com/diaspora-bonds-a-new-source-of-capital-for-emerging-markets/

3/3