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Development finance via diaspora bonds track record and potential

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Author Info

  • Ketkar, Suhas L.
  • Ratha, Dilip

Abstract

A diaspora bond is a debt instrument issued by a country - or potentially, a sub-sovereign entity or a private corporation - to raise financing from its overseas diaspora. Israel and India have raised $35-40 billion using these bonds. Drawing on their experiences, this paper discusses the rationale, methodology, and factors affecting the issuance of diaspora bonds for raising external development finance. The Government of Israel has offered a flexible menu of diaspora bonds since 1951 to keep the Jewish diaspora engaged. The Indian authorities, in contrast, have used this instrument for balance of payments support, to raise financing during times when they had difficulty in accessing international capital markets. Diaspora bonds are often sold at a premium to the diaspora members, thus fetching a"patriotic"discount in borrowing costs. Besides patriotism or the desire to do good in the investor's country of origin, such a discount can also be explained by the fact that diaspora investors may be more willing and able to take on sovereign risks of default in hard currency as well as devaluation as they may have local currency liabilities and they may be able to influence the borrower's decision to service such debt. The paper discusses several conditions for successful diaspora bond issuance having a sizeable diaspora, especially first-generation migrants, is understandably an important factor affecting the issuance of diaspora bonds. Countries with strong and transparent legal systems for contract enforcement are likely to find it easier to issue such bonds. Absence of civil strife is a plus. While not a pre-requisite, presence of national banks and other institutions in destination countries facilitates the marketing of bonds to the diaspora.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 4311.

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Date of creation: 01 Aug 2004
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Handle: RePEc:wbk:wbrwps:4311

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Related research

Keywords: Debt Markets; Emerging Markets; Banks&Banking Reform; Economic Theory&Research;

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Cited by:
  1. Schu╠łttler, Kirsten, 2008. "The contribution of migrant organisations to income-generating activities in their countries of origin," ILO Working Papers 412931, International Labour Organization.
  2. World Bank, 2009. "Kenya - Poverty and Inequality Assessment : Executive Summary and Synthesis Report," World Bank Other Operational Studies 3081, The World Bank.
  3. Oliver Bakewell, 2009. "Migration, Diasporas and Development: Some Critical Perspectives," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), Justus-Liebig University Giessen, Department of Statistics and Economics, vol. 229(6), pages 787-802, December.
  4. Ilene Grabel, 2008. "The Political Economy of Remittances: What Do We Know? What Do We Need to Know?," Working Papers wp184, Political Economy Research Institute, University of Massachusetts at Amherst.

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