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Diaspora: The Next Growth Frontier

By Cytonn Research Team, September 11, 2016

In October last year, we had our first diaspora roadshow in the US, where our team visited several states and interacted with East Africans, who are eager to (i) know the opportunities available to them to invest back home, and (ii) find trusted partners with whom they can invest through back home. In two consecutive focus notes, we discussed the diaspora community and examined several learning and delivery points. In our Cytonn Weekly Report #40, 2015 we talked about diaspora contribution to economic growth, highlighting the importance of the diaspora, their location, needs from an investment perspective, challenges when it comes to investment in Kenya, how private sector players can position themselves to be their trusted partner, and the ultimate benefits to the Kenyan economy. In our Cytonn Weekly Report #41, 2015 we focused on how we can make it easier for the Diaspora to contribute to Kenya’s economic growth.

This week, we examine the state of Diaspora contribution to the economy, highlight the steps that the market has taken to implement the recommendations and finally review the steps that the government has taken and should take to further grow and support the Diaspora communities.

There has been continued growth of Diaspora remittances month-on-month with the largest sources being the US and Europe, accounting for 48.8% and 29.4%, respectively in the last 3 months to June 2016.

Most of the people in the diaspora would like to invest back home but there are a couple of challenges that they face among them:

  1. Products: lack of structured investment products that are tailor-made to address their needs, and these exist mainly in alternative investment markets like Real Estate and structured products;
  2. Dedicated Partners: lack of a trusted partner who truly represents their interests, and is an institutional firm providing institutional grade investment solutions and client service;
  3. Investment platforms: the inability to safely, affordably and conveniently remit funds back to their country for investment.

The private sector players seek to address these challenges by creating solutions that attend to each of them;

  1. Investment Opportunities: Several players have availed numerous investment opportunities to the Diaspora investors. It is important to note that Diaspora community is already exposed to many products, yet sophisticated ones, but the need to have personalized structured products continues to grow. For instance, Cytonn Diaspora links Kenyans in the Diaspora to trusted investment opportunities in Kenya, in real estate and structured products;
  2. Partnership: Through constant engagement, private sector players have in turn build strong partnerships with the Diaspora community, through constant interactions to help understand the needs of the Diaspora. Cytonn has positioned itself to be a partner of choice for the Diaspora community by providing institutional grade investment solutions and client service;
  3. Platforms: Several platforms have been developed by the different private sector players. These platforms offer numerous linkages and updates among them; (i) Information dissemination of what is happening back in the respective countries, and (ii) The investment options available to the Diaspora community. Cytonn Diaspora platform brings together Kenyans in the Diaspora wishing to invest back home and companies in Kenya wishing to present opportunities to the diaspora community;
  4. Reducing the cost of remittance transmission: While the average cost of sending money to Sub-Saharan Africa is the highest in the world, Kenya stands apart from other remittance destinations due to the high level of financial inclusion and the presence of multiple payment channels that facilitate low cost remittances. Alternative remittance platforms complement traditional banks, leading to an overall decline in the cost of remittances. According to the World Bank, the cost of sending USD 200 to Kenya averaged 7.5% in Q2 2016, comprising a 5% fee and 2.5% exchange rate margin, below the Sub-Saharan Africa average of 9.8%.

Despite what the Kenyan Government is doing to encourage the diaspora to invest back home, like the Ministry of Foreign Affairs is working closely with the Kenya’s diaspora communities, as highlighted in our previous notes, the Kenyan Government can support the diaspora investment initiative by:

  1. Formulation of investment friendly policies – The Government should work in close conjunction with banks and other investment firms to allow for favorable accounts for diaspora, which will encourage them to remit more money back to the country. Such accounts should offer preferential rates for those in the diaspora and should ideally be foreign exchange accounts;
  2. Issuing Diaspora Bonds – The government should start issuing diaspora bonds to raise funds. As seen in India, Diaspora bonds are proving to be attractive avenues through which Governments can raise capital. The Kenyan government is behind on its global borrowing for budget financing, and also has a worsening foreign exchange reserve, and hence should consider diaspora bonds as an alternative fund raising channel;
  3. Setting up overseas diaspora facilities – in order to improve on the relationships and engagement with the diaspora, the Kenyan government should set up overseas facilities abroad for the diaspora. These facilities should serve to promote the Kenyan Culture and educate on the different investment avenues the diaspora can invest back in Kenya;
  4. Establishment of Organizations – In order to encourage skill transfer back home, as well as maximize on the intellectual capital of those Kenyans in the diaspora, the government should work to establish centers which allow for consultation on global best practices and institutionalization efforts which have been successful in the developed markets.
  5. Support of financial institutions and businesses trying to get the diaspora to invest back home.

For anything to work well, parties from both sides need to see what the effort means to them. The ability for the diaspora to invest back home is key since they are able to get an above average return that they cannot access in the developed markets due to the low GDP growth rates. For the Kenyan economy, great Diaspora engagement helps with the diversification of inflows and increases loyalty towards the country and some of the benefits could be both short-term and long-term in nature; from remittances to skills transfer. Therefore, continuous engagement to properly understand Diaspora needs and tailoring these needs, will enhance the participation of the Diaspora community in the growth of the Kenyan economy.

To participate in the on-going Cytonn Diaspora Roadshow, please visit the link below: Cytonn Diaspora Roadshow.

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Disclaimer: The views expressed in this publication, are those of the writers where particulars are not warranted- as the facts may change from time to time. This publication is meant for general information only, and is not a warranty, representation or solicitation for any product that may be on offer. Readers are thereby advised in all circumstances, to seek the advice of an independent financial advisor to advise them of the suitability of any financial product for their investment purposes.

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