Harnessing the Potential of Diaspora Finance
October 8, 2015
With global remittance flows estimated at $586 billion for 2015 and expected to rise to $610 billion in 2016 , up from $132 billion in 2000 , there has been growing interest in the international development community in how to leverage these resources beyond person-to-person cash transfers. Numerous companies, nongovernmental organizations (NGOs), and government entities such as the U.S. Agency for International Development (USAID) have experimented with innovative financial products and initiatives to channel remittance flows. These enable members of a diaspora to achieve social impact and financial return through investments in their home communities, countries, or regions.
While still an emerging sector, diaspora finance has evolved significantly from individuals sending cash transfers via Western Union 30 years ago. Although that company still plays the major role in individual remittance transfers globally, Western Union announced a new platform in July that enables members of the Haitian diaspora to finance renewable energy products in Haiti, where only 28 percent of the population has access to electricity.
New diaspora finance platforms are responding to the reality that global money flows have changed permanently due to migration flows. In 2013, 232 million people were living outside their country of origin, an increase from 150 million people in 2000. In several countries, income from remittances makes up at least a quarter of gross domestic product (GDP). In 2013, the portion of GDP from remittances was 42 percent in Tajikistan, 32 percent in the Kyrgyz Republic, 29 percent in Nepal, and 25 percent in Moldova .
The United States is home to more international migrants than any other country, making diaspora finance opportunities especially relevant here. Over 62 million Americans—or approximately one-fifth of the total U.S. population—are first- or second-generation diaspora. Services like Wave have enabled these individuals to transfer funds easily and cheaply to relatives in certain developing countries. However, the impact of these services is not as strong as many think; less than 2 percent of global remittances were transferred through mobile technology in 2013. This is likely due to the regulatory burden imposed by countries on these transfers; there are often disconnects between recipient country banking and telecom regulations. Overall, the cost of sending remittances to individuals remained at 8 percent of the transaction in 2014.
With the amount of remittances projected to be sent in 2015 equal to over four times the amount of Official Development Assistance (ODA) extended to the developing world, as well as the regulatory and financial challenges of individual transfers, government agencies, NGOs, and the private sector are showing increased interest in leveraging diaspora capital through formal financial products and other investment opportunities. These parties note that there is potential to leverage not only current remittance flows, but also the untapped savings of diaspora communities. In 2013, the savings of diaspora members in developing nations totaled $497 billion .
Early initiatives to channel remittances include Construmex, a social enterprise developed by the Mexican multinational building materials company CEMEX in 2001. This galvanized thousands of low-income, U.S.-based, Mexican diaspora members to invest resources in the construction of homes for themselves or relatives in Mexico. Construmex served as an interlocutor between the diaspora and recipients to boost the efficiency and impact of the remittances.
In January 2015, USAID announced the Indian Diaspora Investment Initiative , a public-private partnership among the agency, the Calvert Foundation, and private Indian financial institutions. U.S.-based retail investors can purchase the Calvert Foundation’s Community Investment Note, which is an established security that provides loans for Indian financial institutions. These institutions then invest in social enterprises that focus on extending health care and providing water and sanitation improvements to rural communities, among other development challenges. U.S.-based investors see a financial return via interest paid on the financial institutions’ loans. As part of the initiative, USAID also provides a development credit guarantee to the financial institutions.
Other stakeholders in the diaspora finance space have put forth investment opportunities that recognize investment regulations in developing countries, as well as the limitations on non-listed investments in the United States by the Securities and Exchange Commission (SEC). Additionally, the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001, part of the USA PATRIOT ACT, sets stringent requirements for international money transfers initiated in the United States in the interest of national security.
Homestrings.com is an example of an online platform that connects potential diaspora investors with projects and funds in their region or country of interest. The organization sorts out administrative and regulatory issues for qualified investors and offers businesses and public entities in developing countries the potential to raise funding by registering as an investment on the site. Current opportunities range from Ugandan treasury bonds to a company that offers mortgage writing services to underserved residents of Kenya.
Not all diasporas are alike; different diasporas have shown varied proclivities for risk, as well as for minimum financial return. Other distinctions exist also. Members of African diaspora communities tend to be Pan-Africanist—they show a desire to invest in African countries other than their own country of origin. In contrast, members of the Indian diaspora often want to invest in opportunities at the hyper-local level. Gauging the specific desires of a diaspora community via surveys and other means is important to inform appropriate opportunities and facilitate strategic connections among members.
It is also important that diaspora finance stakeholders have a “portfolio approach”—that the market offers potential investors more than a one-size-fits-all product. As with traditional investments, various types and structures of diaspora finance products will appeal to different individuals. Stakeholders also must adopt a gender lens; women do not have equitable access to capital in many countries to and from which remittances flow.
What is clear is that, as traditional donors reduce development spending, diaspora communities have the resources and in many cases the desire to fill finance gaps locally, nationally, and regionally. Innovative diaspora finance products provide members of these communities with the opportunity to achieve philanthropic goals while seeing personal financial return.
Daniel F. Runde is director of the Project on Prosperity and Development and holds the William A. Schreyer Chair in Global Analysis at the Center for Strategic and International Studies (CSIS) in Washington D.C. Helen Moser is a research fellow with the CSIS Project on Prosperity and Development.
Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).
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