Diaspora Bonds
Track Record and Potential
Suhas Ketkar
Vanderbilt University
&
Dilip Ratha
The World Bank
Migration and Development Conference
World Bank, Washington DC
May 23, 2007
Main messages
 Israel
and India have raised $35-40
billion financing
 . . . Often in times of crisis
 . . . Often at a discount
 There is scope for other countries
with large diaspora abroad to issue
diaspora bonds for financing
development
Diaspora Bonds: Introduction
 Definition:
Bonds issued by a country to
its own Diaspora to tap into their assets in
the adopted developed countries
 Examples: State of Israel bonds, RIBs
and IMDs from India, also bonds issued by
Lebanon and Sri Lanka
 Distinct from FCDs but similar to Islamic
bonds placed in int’l capital markets
Diaspora Bonds: Agenda
 Rationale:
why would countries issue and
investors buy Diaspora bonds?
 Israeli and Indian track-record: significant
differences and regulatory issues
 Minimum conditions for the issuance of
Diaspora bonds and potential issuers
Attraction for issuing countries
 Patriotic
discount: why not seek charity?
 Stable source of finance, esp. in bad times
 Support to sovereign credit rating
Israel: S&P believes such support to be
important but not decisive. Moody’s
believes that it is more relevant now that
the economic house has been put in
order
India: Did not prevent downgrading in
1998
Attraction for investors
 Patriotism
management – Diaspora investors
are likely to view the risk of receiving debt
service in local currency with much less
trepidation
 Desire to do “good” in the country of origin
 Risk
Diaspora Bonds: Israeli experience

DCI established in 1951 to raise funds from
Jewish Diaspora
 Since then, Israel has raised over $25 bn via this
stable source of finance
 ..receiving significant patriotic discount – 4%
coupon until 1990 regardless of US interest
rates
 Patriotic discount has declined of late as Jewish
Diaspora with less direct links to the Holocaust is
making investment decisions based on total
returns
Israel: Diaspora Bond Sales
$ million
1,569
1600
1,310
1200
1,200
1,145
962 1,000 924
1,000
872
800
785
400
0
96
9
1
97
9
1
98
9
1
99
9
1
00
0
2
01
0
2
02
0
2
03
0
2
04
0
2
05
0
2
40%
1951
1953
1955
1957
1959
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
Israel: Bond Sales by Type
100%
80%
Notes
60%
Fixed rate
Floating rate
20%
0%
Discount on Israel Bonds
15 Percent
US 10-yr treasury rate
13
11
9
7
5
3
Israel DCI fixed
rate bonds
20
03
19
98
19
93
19
88
19
83
19
78
19
73
19
68
19
63
19
58
19
53
1
Diaspora Bonds: Indian experience
Issued by SBI with 5-y bullet maturity &
minimum $2000
-- India Development Bonds (1991) $1.6 bn
-- Resurgent India Bonds (1998) $4.2 bn
-- India Millennium Deposits (2000) $5.5 bn
-- Investors received 7.75% on RIBs vs.
7.2% on BB U.S. corporate bonds
-- Investors received 8.5% on IMDs vs. 8.9%
on BB U.S. Corporate bonds
Diaspora Bonds: Indian experience
SBI limited sales to investors of Indian
origin. Why?
-- Marketing gimmick
-- Indian Diaspora to show greater
forbearance
-- SBI reason KYC
Diaspora Bonds: Indian experience
 SBI
decided to forego SEC registration on
the ground that RIBs/IMDs were bank CDs
and hence were subject to U.S. banking
rather than securities laws
 RIBs were sold to U.S. retail investors
 IMDs were not sold in the U.S. despite the
word deposit in the name
Diaspora Bonds: Indian experience
Deterrents to SEC registration include:
-- High costs (but $500K not material)
-- Stringent disclosure requirements (but
no problem for SBI)
-- Long lead time of up to 3 months
-- Plaintiff-friendly U.S. court system
-- India rejected U.S. courts as well as
U.S. laws
Diaspora Bonds: Indian experience
 “In
addition to class action mechanisms to
aggregate individual claims not prevalent
in other countries, U.S. procedures –
including rules of discovery, pleading
requirements, contingent fees, and the
absence of ‘loser pays’ cost rule – are far
more favorable to plaintiffs than those of
foreign courts.” Roberta Romano (1998)
Diaspora Bonds: Indian experience
 While
SEC registration is not optional, the
Indian case raises an interesting issue of
giving investors the choice of law and
forum
 Make such choice another attribute of the
security to be priced in the market
 Can be supported on efficiency grounds
 Unlikely in short run given Enron, MCI etc.
 But market pressure will come into play
Diaspora Bonds: Israel vs. India
Israel
India
Annual issuance since 1951
Opportunistic issuance in 1991,
1998 and 2000
Development oriented borrowings
Balance of payments support
Large though declining patriotic
discount
Small patriotic discount, if any
Fixed, floating rate bonds and notes
Fixed rate bonds
Maturities from 1 to 20 years with
bullet repayment
Five year with bullet maturity
Direct distribution by DCI
SBI distribution in conjunction with
int'l banks
Targeted towards but not limited to
diaspora
Limited to diaspora
SEC registered
No SEC registration
Non-negotiable
Non-negotiable
Non-volatile
Non-volatile
Diaspora Bonds: Potential
Minimum conditions for issuing diaspora
bonds:
-- Absence of civil strife
-- Minimum governability
-- Ability to meet SEC registration
requirements
-- Sizable first generation diaspora
Diaspora Bonds: Potential
Major migrant pools in the U.S., thousand, 2005 estimates
1,600
1,200
800
1,608
1,143 1,111 1,108
914
776 737
629 577 541
529 473
400
Ph
ilip
pi
ne
s
In
di
a
Ch
in
a
Vi
et
na
Do
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m
Sa m
in
ica lva
d
n
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Ko pub
lic
re
a,
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Ja p.
m
ai
Co ca
lo
m
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bi
ua
a
te
m
al
a
Po
la
nd
Ha
iti
0
Source: Ratha and Shaw, 2007, South-South Migration and Remittances
Diaspora Bonds: Potential
Table 1: Countries with large diasporas in the OECD
Emigrant
Emigrant
stock
stock
High- Emigrant
HighSkilled
stock
Skilled
2000 as 2000 as
2000
% of pop. % of pop. Governance
1 Philippines
2 India
3 Mexico
4 China
5 Vietnam
6 Poland
7 Iran, Islamic Rep.
8 Jamaica
9 Russian Federation
10 Ukraine
11 Colombia
12 Pakistan
13 Romania
14 Turkey
15 Brazil
1,126,260
1,037,626
922,964
816,824
506,449
449,059
308,754
291,166
289,090
246,218
233,536
222,372
176,393
174,043
168,308
1.49
0.1
0.94
0.06
0.64
1.16
0.48
11.24
0.2
0.5
0.55
0.16
0.79
0.26
0.1
2.22
0.17
6.56
0.13
1.61
2.94
0.83
26.3
0.39
1.51
1.33
0.42
2.51
2.92
0.22
-0.52
0.09
-0.48
-0.47
-0.45
0.32
-0.76
-0.55
-0.84
-0.6
-0.71
-0.81
-0.29
0.07
-0.41
Diaspora Bonds: Potential
Table 1: Countries with large diasporas in the OECD (continued)
Emigrant
Emigrant
stock
stock
High- Emigrant
HighSkilled
stock
Skilled
2000 as 2000 as
2000
% of pop. % of pop. Governance
16 South Africa
168,083
0.38
0.61
0.19
17 Peru
163,750
0.63
1.35
-0.77
18 Dominican Republic
155,176
1.88
7.08
-0.66
19 Egypt, Arab Rep.
149,432
0.22
0.38
0.02
20 Serbia and Montenegro
148,229
1.82
8.78
-0.81
21 Morocco
141,168
0.51
3.93
-0.1
22 Lebanon
138,214
4.07
9.15
-0.36
23 El Salvador
127,707
2.03
10.67
-0.37
24 Hungary
124,426
1.22
3.12
0.7
25 Trinidad and Tobago
120,327
9.37
18.35
-0.07
26 Haiti
152,710
1.92
4.93
-1.62
27 Nigeria
149,494
0.13
0.2
-1.38
28 Cuba
332,673
2.99
7.76
-1.14
Source: Governance data from Kaufman, Kraay and Mastruzzi
High-skilled migrants abroad in high-income OECD from Docquier
and Marfouk.
Conclusions
 Diaspora
bonds have been used by Israel
& India with success
 A number of other countries are potential
candidates for issuing diaspora bonds
 SEC registration required in the short run