By BABAJIDE KOMOLAFE

Diaspora Bond issuance is an effective alternative source of funding that can be used by African countries to fund development projects, said Africa Development Bank (ADB).

”The Bank recognizes that by default and by design, traditional methods of raising finance domestically are losing influence. We have to conceive of new ways of financing development, and can no longer depend on a limited envelope. Given the shifting patterns in development finance and traditional donor funding, domestic resource mobilization efforts are getting renewed focus.

“There is a need to develop new instruments to ensure financing for growth enhancing projects on the continent. Diaspora bonds are one way in which this can be achieved. In particular, these bonds can be used to underwrite infrastructure projects which will have the greatest transformational impact to the continent”, the Bank said a paper titled  “Diaspora Bonds: Some Lessons for African Countries.

“The experience of the major Diaspora bond issuers, namely Israel, India and Ethiopia provide many lessons to be learnt, some of which are applicable to African countries and some which instruct potential issuers on challenges to avoid. It is clear that African countries will need robust analytics on their Diaspora members, credit enhancements to entice overseas nationals to invest and trustworthy government institutions which protect the interest of the bondholders,” the Bank said.

The paper written by Seliatou Kayode-Anglade and Nana Spio-Garbrah, staff of the Financial Technical Services Division, highlighted five lessons from Diaspora Bonds issued by of  Isreal, India and Ethiopia. The lessons according to the authors are:

“ Diaspora bonds are a trustworthy source of finance for countries undergoing difficulty. Israel, India and Ethiopia’s experiences show that the Diaspora is often called upon when countries are having difficulty borrowing from other sources. Although Israel has been issuing Diaspora bonds regularly since 1951, it is noted that sales peak in difficult times.

“ Open the sale to all, but market strategically to the few. One of the key takeaways from Diaspora issuances is the benefit from not restricting its access to specific categories of investors. Although this has been done, most successful Diaspora bonds are open to various investor classes.

“Emotional affiliation does not eliminate the need to make a financial return. The Ethiopian experience in issuing Diaspora bonds is very instructive with regard to the concept of a patriotic discount – a benefit to the issuer. This term refers to a Diaspora bond coupon level that is lower than the benchmark, typically the 10-year US Treasury bond or other bonds floated by the same or comparable issuer”.