Diaspora Bonds
As a New Funding Vehicle for
Developing Countries
Suhas Ketkar
Vanderbilt University
&
Dilip Ratha
The World Bank
Privatization of Development Finance Conference at
NYU, December 4 and 5, 2009
Main messages
 Israel
and India have used diaspora
bonds to raise nearly $40 billion
 . . . 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 – home bias
 Risk 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 $26 bn via this
stable source of finance
 ..receiving significant patriotic discount – 4%
coupon until 1990 regardless of US interest
rates
 Patriotic discount has declined of late as (1)
Jewish Diaspora with less direct links to the
Holocaust is making investment decisions based
on total returns; and (2) secondary market in
Israeli government bonds has emerged
Israel: Diaspora Bond Sales
US$ million
1,569
1,600
1,400
1,310
800
1,202
1,145
1,200
1,000
1,283
982
1,119
1,049
1,000
924
872
785
600
400
200
0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Israel: Bond Sales by Type
% of total
100
Notes
90
80
70
60
50
Fixed rate
Floating rate
40
30
20
10
19
51
19
54
19
57
19
60
19
63
19
66
19
69
19
72
19
75
19
78
19
81
19
84
19
87
19
90
19
93
19
96
19
99
20
02
20
05
0
fixed rate
floating rate
notes
Discount on Israel Bonds
annual average rate %
14
12
10
8
6
4
2
19
53
19
56
19
59
19
62
19
65
19
68
19
71
19
74
19
77
19
80
19
83
19
86
19
89
19
92
19
95
19
98
20
01
20
04
20
07
0
fixed rate
10-year U.S. Treasury
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 recent market failures
But market pressure may eventually 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
El
m
Sa m
in
ica lva
d
n
Re or
Ko pub
lic
re
a,
Re
Ja p.
m
ai
Co ca
lo
m
G
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
 Ethiopia, Ghana, Grenada, Jamaica, Liberia,
Morocco, Nepal, Philippines, Rwanda, Sierra
Leone and Sri Lanka are exploring the possibility
of issuing diaspora bonds at present.
 SEC registration required in the short run