How Africa can raise money through diaspora bonds

Africa’s development plans are ambitious, but the continent and individual countries lack the money to finance them. Research by the World Bank for example shows that the funding gap to meet for Africa’s infrastructure needs only is around US$93 billion per year alone. Where is Africa going to get such finance?

In spite of the usual promises of forthcoming large trunks of development aid to Africa by industrial powers, as repeated again by G8 leaders last week, the continent must accept that this will never be forthcoming and plan accordingly. The truth is that it is unlikely that Western powers would finance Africa’s development in the same way the US financed Western Europe’s post-Second World War reconstruction through the Marshall Plan, or the US’ post-Second World War financing of East Asian reconstruction as part of its strategic objective to secure these countries against Communist influence.

Neither can Africa realistically expect that former colonial powers will compensate individual African countries for the negative impact of slavery and colonialism, in the same way that Germany after the Second World War compensated Israel for Jewish suffering during the Holocaust.

The global financial and Eurozone crises mean that industrial nations are likely to continue to dramatically cut development finance to Africa and re-channel the funds for their own internal economic reconstruction.

The collective savings of individual African citizens within African countries are also wholly inadequate to finance the continent’s development. The urgent challenge for Africa is how to innovatively diversify the way in which it raises finances for development. World Bank and International Monetary Fund figures put remittances from Africans abroad to the continent at between US$25 billion and US$34 billion a year. Unrecorded informal flows of remittances were most probably at least a third of this amount.

However, there is a need for the continent to leverage African diaspora money, including savings in the hands of African Americans in the US or Brazilians of African descent, more aggressively and innovatively for development.

The idea of issuing diaspora bonds should be considered as a viable alternative to raise finance for Africa’s development. Some of these remittances from Africans abroad could be channeled into buying such diaspora bonds, which can then be specifically used to, say, finance Africa’s infrastructure development. The great advantage of diaspora bonds is that they are sources of finance that are long-term in nature and therefore less volatile: it is usually long-dated securities redeemed only upon maturity.

Africa is perpetually perceived as the continent with the begging bowl in hand – which both locals and diaspora communities resent. A diaspora bond will be able to counter these ‘begging bowl’ notions, which reduce Africa to rely on Western or Eastern ‘charity’. Diaspora bonds may also allow Africa to circumvent the conditionalities that accompany development and investment finance from both old industrial and new emerging powers.

Israel has shown successful diaspora bonds can be leveraged as an instrument for development finance. When it issued its diaspora bonds in 1951, the Israeli government established the Development Corporation for Israel (DCI) as the authority that would issue and administer the bonds. Although the diaspora bond was targeted at the Israeli diaspora, it was not limited to them alone.

The DCI was registered with the United States Securities and Exchange Commission (SEC), meaning that the bonds could be traded like any other listed securities. Israel’s diaspora bonds were relatively flexible, providing different investment offerings, depending on what the market required or dictated at the time.

Through the DCI issuance of the Israeli diaspora bonds, over US$32 billion has been raised for development in Israel, particularly for infrastructure development in the transport, energy, water and telecommunications sectors. The Israel diaspora bonds issued by the DCI were fixed, floating rate bonds and notes with maturity periods ranging from 1 to 20 years with bullet repayment.

The Israeli diaspora bonds presented a large patriotic discount, and other financial incentives included Israel making its interest rate slightly higher than US Treasury-bills. To make the bonds more accessible, the DCI established a selling agency of the bonds in the US (considering that of the 7.5 million Jewish diaspora, 6 million reside in the US) and in selected other countries.

India is another example of the successful use of diaspora bonds. The Indian diaspora bonds differed from the Israeli model in that the bonds were issued to support India’s balance of payments in 1991, 1998 and 2000. Through the State Bank of India (SBI), bonds known as the India Development Bonds (IDBs - $1.6 billion), Resurgent India Bonds (RIBs - $4.2 billion), and India Millennium Deposits (IMDs - $5.5 billion), an estimated total of $11.3 billion was raised. India chose to make these fixed rate bonds with a five year maturity also with bullet maturity.

The India diaspora bonds were strictly only issued to Indian diaspora and sales were limited only to investors of Indian origin and heritage. India chose not to register its bonds with any securities’ exchange, contrary to what Israel did with theirs. It is estimated that there are 20 million Indian diaspora communities with strong religious, cultural, professional and political networks. The Indian government created a body that would focus specifically on liaising with the Diaspora. To incentivize the purchasing of bonds, India made their bond interest rates two percent higher than US Treasury-bills. In addition, there were tax exemption provisions made from Indian income and wealth tax.

Lastly, a number of Middle Eastern countries have recently issued Islamic bonds, which target people of that religion, rather than specific country diaspora. Such bonds are typically structured as asset-backed securities, with medium-term maturity. Investors share the profits of the proceeds. Islamic laws (Sharia) prohibit receiving or paying interests. An example of an Islamic bond is the Bahrain Monetary Agency bond issued in 2001, which had three- and five-year maturities.

What would be the key obstacles to successfully issuing an Africa diaspora bond for development finance purposes? Firstly, generally poor governance, lack of democracy and appalling incidents of mismanagement by individual African governments mean potential African diaspora investors may be wary. This will clearly have to change.

Early efforts by the African Development Bank to explore African bonds that would be guaranteed by African central banks have also met with little success, precisely because many individual African central banks are poorly governed and lack credibility.

Furthermore, in spite of the rhetoric African countries have generally not banded together at a continental level for common development purposes – this will have to change. Yet, credible individual, regional and continental development finance institutions, such as the Mauritius Development Bank, Development Bank of Southern Africa, and the African Development Bank, are institutions that have successfully issued bonds – and can club together to issue and guarantee an African diaspora bond.

* This is an extract of a policy briefing paper for the 1st Global Africa Diaspora Summit in Johannesburg, 25 May 2012, in Johannesburg.

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* William Gumede is Honorary Associate Professor, Public and Development Management, University of the Witwatersrand. David Monyae and Kamo Motshidi are independent development analysts.

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