Investment vehicles for the diaspora

DIASPORA remittances are the key sources of finance in developing countries. The diaspora for the West African countries, Latin America and Asia are playing a critical role not only in sending money home for consumption but also for investments.

In Zimbabwe under the dollarised environment, diaspora remittances are second after exports as major sources of liquidity. However, what is clear is that of late, diaspora remittances have been falling. Again, it is apparent that, as a country, we haven’t exhausted major avenues for mobilising diaspora remittances. Our remittances have been coming as financial support for family members.

In order to attract diaspora remittances for investments in the home country, international experience has shown that countries employed a number of investment vehicles like deposit accounts, securitisation of remittances, transnational loans, diaspora bonds and revenue bonds.

Deposit accounts

Literature has shown that foreign nationals open accounts with commercial banks in their home countries to get better returns. For example, German Socio-Economic Panel economists Christian Dustmann and Joseph Mestres estimate that 48 percent of households in German hold savings accounts in their country of origin. Domestic interest rates are by far much higher the London Interbank Rate (LIBOR) of around 1 percent, hence the motivation to send money home as deposit accounts.

From a policy perspective, to enable this in Zimbabwe, we need to eliminate all costs associated with savings accounts and withdrawal charges. Most importantly, the savings accounts should bear interest rates which will be above the minimum bank charges which may be incurred, as well as inflation.

At the end of the day, the return on such accounts should be positive and encouraging. In my view, a handsome return, based on interest rates, is a better incentive in rewarding diaspora.

In addition, measures aimed at building confidence in the banking sector such as putting measures to ensure bank soundness and liberalisation of the financial market must be put in place.

Our banks’ balance sheets must be sound, the Government’s accounts shouldn’t be in overdraft, and there should not be any constraint in withdrawing money or making international transfers. If we achieve these minimum requirements, we will certainly restore confidence even if we don’t say a word in assuring our depositors.

Securitisation of remittance flows

Diasporas can contribute — albeit inadvertently — to broadening the assets held by domestic bank in their countries of origin through the securitisation of remittance flows. Securitisation is the process of taking an illiquid asset, or group of assets, and converting it into stocks, bonds or rights to ownership. Issuers of debt securitised can be public entities, private corporations and banks that have proven record of stability.

Evidence has shown that countries like Mexico, Brazil, El Salvador and Peru, for example, successfully securitised their debts using the diasporas.

From a policy perspective, the securitisation of assets or debt requires cleaning of balance sheets of public entities and private entities in particular. At a national level, it requires expeditious implementation of doing business reforms and debt clearance. This must then be followed by good corporate governance practices. At the centre of governance, corruption must be dealt with decisively.

Transnational loans

Transnational loans are generally small loans provided by banks or microfinance organisations that allow immigrants to apply for and service a loan in their countries of origin while residing abroad. Transnational loans enable migrants to provide credit to their family members back home while leveraging on credit history established in the country of residence and retaining ultimate control over the loan.

Evidence has shown that transnational loans for business expansion, home improvement, home purchase and education expenses have been most successful.

Diaspora and revenue bonds

Diaspora bonds are long — dated sovereign debt arrangements that are marketed to diasporas. A number of countries have successfully used diaspora bonds. Good examples are: ◆ Israel issued bonds to the Jewish diaspora annually since 1951 through the Development Corporation to raise long term infrastructure investment capital; Egypt issued bonds to Egyptian workers throughout the Middle East in the late 1970s; The Government of Ghana, in 2007, issued a $50 million “Golden Jubilee” savings bond targeted at the Ghanaian at home and abroad; and Ethiopia issued the Millennium Corporate Bond in 2008 to raise capital for the state – owned Ethiopian Electric Power Corporation; In our quest to mobilise diaspora investments, we must look at our strategies from a business perspective (what is in it for the diaspora), not sympathy. ◆ Dr Mugano is the Registrar of Zimbabwe Ezekiel Guti University. Feedback: gmugano@zegu.ac.zw, Cell: 0772 541 209.