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US signs historic deal with El Salvador and Honduras for remittance securitization

Sanket Mohapatra's picture

The United States has recently signed separate Memorandums of Understanding (MoUs) with El Salvador and Honduras to assist them in securitizing their future remittance receipts to raise financing for infrastructure and development projects. Under the Building Remittance Investment for Development, Growth, and Entrepreneurship (BRIDGE) initiative, banks in these countries will leverage their future remittance receipts to raise lower-cost and longer-term financing in international capital markets to fund infrastructure, public works, and commercial development initiatives (see press release).

In a speech in New York City on September 22, Secretary of State Hillary Clinton explained how BRIDGE would work to raise critically needed development funding:

“…Now, if they [migrants] send these remittances through the formal financial system, they create huge funding flows that are orders of magnitude larger than any development assistance we can dream of. By harnessing the potential of remittances, BRIDGE will make it easier for communities in El Salvador and Honduras to get the financing they need to build roads and bridges, for example, to support entrepreneurs, to make loans, to bring more people into the financial system…..Through BRIDGE and its in-country partners, local banks will be able to leverage their remittance flows….With the leverage from remittances, the local banks will be able to get lower-cost, longer-term financing for investments in infrastructure projects and small businesses.”

The financing structure proposed under BRIDGE is similar to that used by banks in several remittance-receiving countries such as Brazil, Jamaica, Kazakhstan, Mexico, Peru and Turkey, to raise over $15 billion in international financing during the last decade (see previous work on this topic by my colleagues Dilip Ratha and Suhas Ketkar on securitization of future-flow receivables and new paths to funding).

The BRIDGE initiative provides an excellent application of innovative financing instruments leveraging on migration and remittances. The World Bank group has recently become involved in this area. The International Finance Corporation has recently provided up to $30 million debt financing for securitizing the significant remittances of El Salvadorans working abroad to raise  financing for a credit cooperative Fedecredito. These additional resources will be used to increase lending to micro-entrepreneurs and low-income people in the country. Increasingly the Bank is receiving requests to assist countries to raise funds through diaspora bonds. 
 

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