The proposed design of the Grand Renaissance Dam. an infrastructure project that the Ethiopian government hopesto finance through diaspora bonds.

Well-planned infrastructure and development projects improve people’s daily lives and spur economic growth, but they often a fortune to complete.  It can be difficult to pay for a new bridge all at once, so a government might choose to issue a bond to raise enough cash to cover the construction cost.  In issuing such a bond, a government can borrow money today from investors, promising to re-pay the full amount of the loan plus a set amount of interest after a specified number of months or years.

However, governments in less developed or unstable countries may have more difficulty raising enough cash to pay for large-scale projects for two important reasons.  First, these governments may be unable to access standard international capital markets .  Second, mainstream investors may only be willing to lend such governments money at prohibitively high interest rates.

Diaspora bonds are marketed to members of the diaspora and offer a strong alternative to governments facing such hurdles.

The World Bank estimated in February 2011 that diaspora groups from developing countries likely hold upwards of $400 billion in savings.  Writing in Foreign Policy magazine, Ngozio Okonjo-Iweala. Nigeria’s Minister of Finance, and Dilip Ratha. manager of the World Bank’s migration unit, challenge us to imagine what could be accomplished if even a small portion of this $400 billion in diaspora savings were harnessed for development:

These savings are mostly held as cash under the mattress or in low-yielding bank accounts in the countries of destination …[But] if one in every 10 diaspora members, whether rich or poor, could be persuaded to invest $1,000 in his or her country of origin, developing countries could potentially raise $20 billion a year for development financing.

Members of a country’s diaspora tend to be wealthier than its resident citizens, making them more likely to have means to invest in their homeland.

Diaspora investors sometimes offer what is called a “patriotic” discount to governments in their country of origin/ancestry.  According to George Washington University’s Liesl Riddle. when diaspora members invest in their homelands, they are motivated by more than just profit: “Social and emotional motivations also play a role.”

[…]increasingly, diasporans are searching for avenues to extend their development impact beyond politics and philanthropy.  They seek ways to leverage the human, social, and financial capital they have acquired to make investments and establish new businesses in their countries-of-origin.

Diaspora investors might be willing to accept a lower rate of return and have a greater tolerance for uncertainty when buying diaspora bonds than a mainstream investment.  Diaspora investors might partially view the purchase of a diaspora bond as an act of charity and might also have a greater understanding of a country’s level of risk than other foreign investors.  The diaspora bond allows individuals to put their money to work for a cause that they support.

Learn more about diaspora bonds from these resources: