03/27/2012 01:47 pm ET Updated May 27, 2012

Your Wad Is My Bond: Are Diaspora Bonds Worth the Risk for Diaspora Africans?

The perennial worry of migrant-producing states has always been that their emigrating populations have left for good -- taking their skills, labor and, crucially, income (taxable or otherwise) with them. In recent times, the buoyant volume of remittances from emigrants to many African states has blunted that perception somewhat, and now an even, more lucrative means of tapping into the wealth of diasporas is on the radar of African governments -- one that involves playing on the same feelings that encourage members of a diaspora to continue supporting their "home" teams during sporting events and celebrate national holidays in another land.

They're called diaspora bonds and the idea behind them is quite simple. Essentially, these are sales of government debt on which investors can earn interest, and which are sold at a premium to diaspora investors, to take advantage of a presumed patriotic bond, very often for interest that would not be considered competitive on the international market, but which patriotic investors are able to accept.

Where remittances are often sent in response to family and community needs, diaspora bonds are a direct investment in the economy at the national level. Even though they are being explored for the first time by African governments, the idea of issuing diaspora bonds is not new. India and Israel pioneered the concept, and have used it to varying degrees of success to tap into overseas populations whose origins lie in their countries. Israel began issuing diaspora bonds in the 1950s to finance the general development of the state. India, meanwhile, has used diaspora bonds specifically to address issues of access to cash for the country. Where other lenders have been reluctant to lend to the country, investors of Indian origin have been enticed to buy into its development.

In both cases, diaspora bonds have proved a valuable additional source of financing for their economies; for those guiding the economies of some of Africa's biggest countries, diaspora bonds are an exciting new source of financial leverage. In the last year, three of Africa's largest countries -- Ethiopia, Kenya and Nigeria -- have outlined plans to issue them. Nigeria's minister of finance has even co-authored an article with Dilip Ratha, the World Bank expert on the subject.

The estimated $400 billion in savings of Diaspora Africans is clearly an attractive pool of serviceable investment for African governments, and diaspora bonds offer a way to get hold of it. The attraction for governments is plain enough, but is the temptation worth the risk for their citizens in the diaspora? Like all investors, Diaspora Africans are essentially asked to take a bet on the future prosperity and stability of their countries of origin that those in the international market might not make for a variety of reasons -- the low returns compared to risk as well as the general risk of political instability. So far, citizens of African countries that have launched diaspora bonds have overwhelmingly voted "no" with their pockets.

Ethiopia launched a diaspora bond, the Millennium Diaspora Bond in 2009, to finance the building of a power dam; however, take-up of the bonds was low. Ethiopia has launched a second bond, The Grand Renaissance Dam Bond, also aimed at raising capital for the financing of a power dam, which it hopes will be more successful. The new bond is aimed at dispelling the fears that hampered its original bond issue through new features, such as the payment of interest every six months.

In Kenya, the government is hoping that the fact that the money realised from its bonds will be tied to particular development projects will ensure a good uptake of the scheme. Nigeria has also indicated that its bonds will be tied to specific infrastructure and development projects; for many a diasporan, restless to make an impact beyond sending the occasion remittance home, investing through the purchase of bonds maybe a viable option. The long-term of maturity of the bonds, in most instances over five to 10 years, offer the satisfaction of participating in an infrastructure project for a significant part of its development. The Ethiopian Grand Renaissance Bond is available in as low a denomination as $50, to encourage take-up. The minimum purchase for the original bond was $500.

Yet despite these measures the underlying concerns with diaspora bonds remain, at root, a distrust of the governments issuing them. In Ethiopia, for example, the reticence of many in the diaspora to finance the authoritarianism of the incumbent government may explain some of the hesitancy in taking up the bonds. It's clear that diaspora bonds are here to stay, yet the questions remain: Are Diaspora Africans willing to dip their hands into their pockets and purchase bonds on trusts from the governments of our home countries? It would require a shift in attitude from remitting cash, which is relatively easily monitored and for which communities of trust and accountability exist, to actively partnering with "home" governments in investing in their countries. Can Diaspora Africans truly believe their home governments when they say your word is my bond?