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Nepali bank launches bond for migrant workers

On March 15, 2014

Nepal Rastra Bank (the Nepali central bank) is to issue a Foreign Employment Bond next week which will provide Nepali migrant workers with an option for investing the money that they have earned while working overseas.

The question of how to best to help migrant workers safeguard their earnings and to make sound investments is a hot topic in the international development and finance communities (the African Development Bank, for example, has done a lot of research on the subject). One of the reasons is that a lot of the money that migrant workers bring home is spent on household consumption -estimated to be around 90% of remittances in the case Nepal- with most of the rest going towards education and paying off previous loans.

An argument from the finance and development sectors is that this money would go further if migrant workers invested at least some of it. They would get a return, and the central bank could then use the money invested through bonds to invest in  infrastructure such as roads and bridges.

This may seem like a virtuous circle, but such bonds have proved tricky to implement.

Nepal's two previous attempts (in 2010 and 2011) to sell bonds  to migrants flopped due to low demand. In 2010, only Rs4m of bonds were sold - compared with a target of Rs1bn. World Bank Economist Dilip Ratha has some theories about where Nepal Rastra Bank went wrong in this blog post: he suggests that a lack of publicity, a short time frame for buying bonds, lack of trust in government-backed institutions and the fact that migrant workers could get a better interest rate by just putting their money into long-term savings accounts could be to blame.

Bonds for migrant workers are still a fairly new concept for much of the world: so far, only Israel and India have an established system of issuing 'diaspora bonds'. For a more detailed look at what happened with the last two bond issues in Nepal, have a look at this paper by Thomas Probst of NADEL, a Swiss organisation.

This time around, Nepal Rastra Bank has set a more modest target - and is phasing the release of the bonds. Rs 250m  (US$3.35m) of the bonds went on sale in December, and a further Rs 250m will go on sale on 19 March. Around 10% of the bonds put on sale in December were bought - a small amount, but an improvement on previous years.

Migrants working in the Gulf countries plus the UK, Israel, the US and Malaysia will be able to buy the bonds for a minimum subscription of NRS5000 (around US$50) and will get a return of 9% per year. The bonds have a lifespan of five years, and the window for buying will remain open until 8 April. Migrants can buy the bonds via a range of banks and remittance agencies who have been appointed by Nepal Rastra Bank.

The argument for bonds for migrant workers is a compelling one, but successes have been limited. Data on who Nepal Rastra Bank sold bonds to is not available, so it is difficult to see who benefits from the scheme. The other issue is that this means of saving may be off-limits to those who lack financial literacy, who are 'irregular' migrants and those who have no money left to put aside for savings after having paid off debts and sent money home to meet the basic needs of their families. Development or diaspora bonds may ultimately be little help to the low-paid, highly-indebted migrant workers that much of Migrant Rights' work focuses on, but they are an interesting development nonetheless - and one that is worth watching out for both in Nepal and internationally.