With US$40 billion in annual remittances into Africa, the African diaspora has become the subject of much public policy discussion as a potential source of sustainable supplemental development finance.
In recognition of the power of the diaspora, President Kagame of Rwanda recently announced the launch of a Rwanda Diaspora Mutual Fund whose objective is to tap into the offshore savings of Rwandans, and other East African diaspora, to finance key public sector projects in Rwanda. Similarly, in 2011, The Central Bank of Kenya redirected a segment of its regularly scheduled domestic currency infrastructure bond to target investors from the Kenyan diaspora. Other countries have plans to follow similar paths. According to the World Bank, aggregate African diaspora savings amount to about $35 billion. These sums are deposited in Western banks earning negative interest rates, when adjusted for inflation.
Dr Dilip Ratha, lead economist at the World Bank Migration and Remittances Unit narrows it down to two key factors: (1) patient capital and (2) counter-cyclicality. Diaspora remittance flows are linked to families in the home country. What’s more, the character of these flows is unique in its counter-cyclicality. Ratha’s findings suggest that in periods of economic stress in the home country remittance flows tend to increase, unlike foreign direct investments and development aid which tend to flee in periods of duress in either home or source country. This factor tends to suggest a more patient, long-term character to diaspora flows. This is especially important when considering Africa’s infrastructure needs. Infrastructure investments typically require long term commitments. The same commitment is also required for financing small- and medium-sized enterprises (SMEs).
Until recently, conventional wisdom suggested that all diaspora flows were consumed by recipients for subsistence. However, according to a recent World Bank study, conducted in the case of Kenya, the breakdown of remittance receipts can be roughly classified in the following manner: 50% for family support, 15% medical, 10% education related and an amazing 25% of remittances are directed at some sort of investment (SMEs, real estate, services…). In 2011, according to the Central Bank of Kenya, the country received $891 million in diaspora remittances. Based on the CBK’s own figures, this would mean that $222 million, or close to a quarter of a billion dollars, is available capital to be directed into the productive sector. This number rivals $180 million in total foreign direct investment received by Kenya in 2011, as reported by the World Bank in 2012.
The above assumptions about size of diaspora savings pool are supported by academic research conducted by George Washington University’s Center for International Business Education and Research, in conjunction with Western Union and USAID. GWU conducted an investment interest survey targeted at US-based African professionals and entrepreneurs who participated in a 2010 venture financing competition. The results show an overwhelming interest in investing “back home”. However, the study also reveals a dramatic gap between the “desire to invest” in a range of opportunities from real estateto manufacturing and services, and the “ability to invest” in those same opportunities, as members of the diaspora. This suggests the existence of structural impediments preventing the diaspora from accessing opportunities with ease. A closer examination reveals that these structural blocs fall into three key categories: transparency, regulatory and administration.
Transparency: Most opportunities sought by the diaspora are not structured for ease of access by them. In part this is due to the fact that amounts required may be too large relative to what the diaspora can afford to invest, or that the opportunities are not transparent enough to enable them to judge inherent risks on their own as remote investors.
Host country regulations: Both the United Kingdom’s Financial Services Authority and the United States’ Security and Exchange Commission have household earnings tests that limit access to private deals that are not listed on an exchange. Only those with financial sophistication as defined by the regulators – with private net worth exceeding $1 million – can invest in opportunities that are not listed on a public exchange. Listing on an exchange can be an expensive proposition even for sovereigns, much less for an entrepreneur in the home country seeking to tap into diaspora capital.
Small transfers: Diaspora transfers on average are small and most investment opportunities are seeking aggregates that are larger than what one individual remitter can afford. Therefore the need to administrate these small amounts into larger pools that can command institution-like influence is critical.
The combination of these factors make it difficult for the diaspora to participate in a meaningful way in the development of critical sectors such as infrastructure, key SME industries and large scale real estate projects.
To capitalise on the transformational nature of diaspora flows one has to simultaneously engage key constituencies:
Domestic banks: Domestic commercial banks play a key role in providing financial services to the diaspora. Recently, Kenyan and Ghanaian banks have designed new financial products directed at the diaspora to facilitate savings, and investment including financing of the purchase of land and building a home. Banks need to do more by offering more targeted private banking services to the diaspora. This entails offering a wider choice of investment opportunities that diaspora seek back home, and partnering with other players to broaden their offerings;
Aggregating platforms: New aggregating platforms have emerged, including one that the author has initiated – Homestrings.com. These platforms take advantage of a new web-based phenomenon called crowd-funding. This method has also found success in the political arena with the Obama campaign innovating fundraising via the web. Crowd- funding platforms, such as Homestrings, have the advantage of being omnipresent, being on the internet, and of being responsive to the needs to the diaspora, in real time;
Government: Investment promotion agencies (IPAs) have a key role to play in attracting diaspora capital. As a facilitating agent they should be engaged in selling the investment programme to their respective diaspora and, more importantly, working with financial players to structure these opportunities in such as way that it facilitates access to them by the diaspora. IPAs are also critical in the education of investors – which in turn requires them to have a good grasp of financial presentation practices;
Domestic private sector: As targets of diaspora investments, the domestic private sector, in conjunction with the IPAs, should create avenues of investment that facilitate access by the diaspora. Whether it’s listing in the host country’s stock exchange (AIM) or providing much needed due diligence transparency and education. These efforts, combined with the sustained and targeted marketing efforts of IPAs, form a powerful galvanising mix that could only be beneficial to the home country.
Once the impediments are removed it comes down to constant marketing to the diaspora. The Israel Bond Agency is the global benchmark in diaspora engagement. Its organisational approach to raising funds from its global diaspora is testament to what can be accomplished. Israel raises between $1 billion to $5 billion annually from the Jewish diaspora and diaspora related institutional investors. Its offices span the globe and they are constantly informing the diaspora of various developments and investment opportunities. They work collaboratively with various public and private players in order to leverage the existing financial infrastructure to their advantage.
The diaspora presents a significant opportunity to introduce a paradigm shift in how development is financed. However, attracting the diaspora to invest in the productive sector is a combination of education, effective structuring, transparency and active promotion and engagement. All vested parties must work together to facilitate diaspora investments. Each party has leverage that the other doesn’t. By working together, diaspora investment capital can be a sustainable, effective and efficient source of development finance for Africa.