FEASIBILITY STUDY TO IDENTIFY A MECHANISM FOR MIGRANT...

December 2019

FEASIBILITY STUDY TO IDENTIFY A MECHANISM FOR MIGRANT AND DIASPORA INVESTMENT IN UKRAINE

This feasibility study was prepared by PwC for the International Organisation for Migration (IOM). The au-thors of this study are Fabio D’Aversa, Karim Karaki, Olga Mala, Jean Pouit, Vadym Romaniuk, Mariia Volkovska and Yevheniya Zhorova.

The opinions expressed in the report are those of the authors and do not necessarily reflect the views of the International Organization for Migration (IOM). The designations employed and the presentation of material throughout the report do not imply the expression of any opinion whatsoever on the part of IOM concerning the legal status of any country, territory, city or area, or of its authorities, or concerning its frontiers or boundaries.

IOM is committed to the principle that humane and orderly migration benefits migrants and society. As an intergovernmental organization, IOM acts with its partners in the international community to assist in meet-ing the operational challenges of migration; advance understanding of migration issues; encourage social and economic development through migration; and uphold the human dignity and well-being of migrants.

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Feasibility study to identify a mechanism for migrant and diaspora investment in Ukraine | IOM | PwC

CONTENTS1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

1.1. Overall objective and scope of the feasibility study . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

1.1.1. Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

1.1.2. Objectives and expected results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

1.1.3. Main definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

1.1.4. Scope of work . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

1.2. Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

1.2.1. Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

1.2.2. Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

1.2.3. Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

1.3. Structure of this report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

2. Setting the scene . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

2.1. Remittance process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

2.2. Main actors regulating migrants’ remittances and their investment . . . . . . . . . . . . . . . . . . . . . . . . . 21

3. Transfer of remittances through formal and informal channels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

3.1. Remittance-related services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

3.1.1. Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

3.1.2. International Payment Systems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

3.1.3. Post . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

3.1.4. Cash transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

3.1.5. Non-Financial services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

3.2. Legal aspects of remittance transfers to Ukraine . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

3.2.1. Bank and online transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

3.2.2. Cash transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

3.3. Taxation of remittances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

3.3.1. Double taxation of income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

3.3.2. Taxation of gifts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

3.3.3. Lack of awareness of fiscal rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

3.4. Remittance-related legislation of selected migrants’ destination countries . . . . . . . . . . . . . . . . . . . 33

3.5. Lessons learnt and policy recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

4. Market environment for migrant investment and microfinance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

4.1. Legal aspects of investment of remittances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

4.1.1. Savings channels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

4.1.2. Investment channel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

4.1.3. Taxation of investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

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PwC | IOM | Feasibility study to identify a mechanism for migrant and diaspora investment in Ukraine

4.2. Investment of remittances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

4.3. Microfinance market in Ukraine . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

4.3.1. Supply of commercial finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45

4.3.2. Supply of subsidies and donations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

4.4. Demand for microfinancing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

4.5. Lessons learnt and policy recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

5. Foreign practices of migrant investment mechanisms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52

5.1. Selection criteria for case studies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53

5.2. Longlist of case studies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

5.3. Case Study 1: EEPCO GERD Bonds of the Grand Ethiopian Renaissance Dam . . . . . . . . . . . . . . . . . . 63

5.4. Case Study 2: 1+1 PARE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68

5.5. Comparative analysis of case studies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69

6. Investment mechanism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72

6.1. Proposed investment strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

6.2. Investment mechanism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74

6.2.1. Governance structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79

6.2.2. Provision of technical support . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83

6.2.3. Summary of the proposed investment strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86

6.3. Legal structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88

6.3.1. Legal obstacles for the establishment of an Investment Fund in Ukraine . . . . . . . . . . . . . . . . . 88

6.3.2. Potential destinations for opening an Investment Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89

6.4. Development options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92

6.4.1. Guarantees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92

6.4.2. Integration of the diaspora in the investment mechanism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95

6.5. Key takeaways . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97

7. Roadmap of actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98

7.1. Selection of the Fund Manager . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99

7.2. Selection of financial intermediaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .101

7.2.1. Identification of potential financial intermediaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101

7.2.2. Definition of the procedure to select the financial intermediaries . . . . . . . . . . . . . . . . . . . . . . 101

7.2.3. Negotiation of the operational agreements with the financial intermediaries . . . . . . . . . . . . 102

7.3. Monitoring and reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .103

7.3.1. Key performance indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103

7.3.2. Monitoring and review of the investment strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103

7.3.3. Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103

7.4. Indicative calendar for the implementation plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .104

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TABLE OF FIGURESFigure 1: Distribution of migrants’ remittances to Ukraine by purpose, 2014−2015 . . . . . . . . . . . . . . . . . . . . 9

Figure 2: Ukrainian migrant workers intention to invest in an enterprise in the future, 2016 . . . . . . . . . . . 10

Figure 3: Specific objectives of the feasibility study . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Figure 4: Remittances: a two-sided issue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Figure 5: Our methodological approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Figure 6: Principle of verification and completion of data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Figure 7: Remittance transfer process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Figure 8: Remittance saving and investment process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Figure 9: Stakeholders involved in the transfer and investment of migrant remittances . . . . . . . . . . . . . . . 21

Figure 10: Types of remittance transfer services and their market share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

Figure 11: Factors influencing migrant choice are not only economic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

Figure 12: Double taxation process and issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

Figure 13: Disconnect between migrants and their remittances, and MSMEs investments . . . . . . . . . . . . . . 42

Figure 14: Overview of SMEs source of finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

Figure 15: Proposed investment mechanism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

Figure 16: The proposed Governance structure of the Investment Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81

Figure 17: Technical assistance in the investment mechanism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83

Figure 18: Pros and cons of the proposed legal structure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92

Figure 19: Relevance of financial instruments according to SMEs Development Stages . . . . . . . . . . . . . . . . . 93

Figure 20: Capped first loss portfolio guarantee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94

Figure 21: Diaspora investment motivation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96

Figure 22: Indicative timeline for the Roadmap of Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106

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TABLESTable 1: Overview of the key public actors regulating the transfer and investment of remittances . . . . . . 22

Table 2: Main market players for remittance transfers in Ukraine . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Table 3: Comparative overview of remittance transfer’s channels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

Table 4: Comparative table between the main remittance-related regulatory frameworks of Canada, Poland and Italy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

Table 5: Examples of National and Regional programmes for SMEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

Table 6: SMEs financing gap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

Table 7: Longlist of case studies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

Table 8: Israel bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

Table 9: MRE Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56

Table 10: ADIE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

Table 11: Ethiopian Diaspora Trust Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59

Table 12: EEPCO diaspora bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61

Table 13: PARE 1+1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

Table 14: Overview of diaspora bonds initiatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64

Table 15: Comparison of EEPCO bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66

Table 16: Comparative analysis of the case studies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69

Table 17: Summary of the investment strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86

Table 18: Pros and Cons of guarantees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94

Table 19: Indicative calendar for the implementation plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104

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LIST OF ACRONYMSAbbreviation Full name

AML Anti-Money Laundering

ATM automated teller machine

COSME Competitiveness of Enterprises and Small and Medium-sized Enterprises

EBA European Business Association

EBRD European Bank for Reconstruction and Development

EIB European Investment Bank

EIF European Investment Fund

EoI Expression of Interest

FI Financial Instrument

FLP First Loss Portfolio Guarantee

GDP Gross Domestic Product

IOM International Organization for Migration

IP Intellectual Property

IPS International Payment System

IT Information and Technology

KfW Kreditanstalt für Wiederaufbau

MFIs Microfinance Institutions

MNCs Multi-National Corporations

MoEDT Ministry of Economic Development and Trade of Ukraine

MSMEs Micro, Small and Medium sized Enterprises

NBU National Bank of Ukraine

P2P Person-to-Person

RIA Ria Money Transfer

SFS State Fiscal Service of Ukraine

SMEDO SME Development Office

SMEs Small and Medium-sized Enterprises

SWIFT Society for Worldwide Interbank Financial Telecommunication

UWC Ukrainian World Congress

INTRODUCTION

1

9


INTRODUCTION

1.1. Overall objective and scope of the feasibility study

1.1.1. Background

With over two third of migrants transferring on average USD 4,300 (approx. EUR 3,900) annually to Ukraine, the remittances flow is particularly important, accounting for USD 11 billion (approx. EUR 9.9 bil-lion), and 9 per cent of the Gross Domestic Product (GDP) in 20181.

In the last decade, migration has gained increasing attention and importance in Ukraine . The World Bank ranks Ukraine the fifth largest supplier of migrant populations globally, and the first among Central and East-ern European Countries2. In fact, Ukraine is considered the largest European supplier of migrant workers, with almost 25 per cent of the country’s economically active population having experience of working abroad.

Poland, Russia and Italy are the top three destination countries for Ukrainian migrants, accounting for 40 per cent, 25 per cent and 11 per cent respectively of Ukrainian migrant workers in 20173. A large majority of these migrants – over 60 per cent, intend to go back to live in Ukraine, together with their family.

The volume of remittances has grown by 64 per cent between 2015 and 2018. At the same time, an increas-ing part of these remittances goes through informal channels, which accounted for 48 per cent of the total remittances flow in 2018.

According to the International Organization for Migration (IOM)4, about 40 per cent of the total amount of re-mittances of migrants in 2014 was spent on consumption (including durable goods and category "other"). About 20 per cent of remittances were invested, primarily in the construction, purchase or renovation of housing. Over 40 per cent of the remittances were saved.

Figure 1: Distribution of migrants’ remittances to Ukraine by purpose, 2014−2015

Other 6%

Durable goods 9%

Consumption 25%

Savings 42%

Investments in property 17%

Source: IOM (2016)

1 National Bank of Ukraine, Remittances in Ukraine, 2019. https://www.bank.gov.ua/doccatalog/document?id=806512 Ibidem3 State Statistics Service of Ukraine, Mirgation survey, 2017.4 IOM, Migration as an enabler of development in Ukraine, 2016.

http://iom.org.ua/sites/default/files/iom_migration_as_an_enabler_of_development_in_ukraine

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Most of migrants’ savings remain unused, with only a small portion being invested in property or businesses.

While the investment share of remittances is low, it does not mean that migrants are not interested in investing.

About 20 per cent of migrants expressed an investment intention with higher preference towards investment in their local communities in Ukraine5.

These migrants’ resources could hence become an alternative source of financing for Ukrainian entrepre-neurs and support local development in the country.

Figure 2: Ukrainian migrant workers intention to invest in an enterprise in the future, 2016

Source: IOM (2016)

Migrant remittances are extremely important for the economic stability of Ukraine (as they support the trade balance of the country) and could become a powerful investment tool for Ukrainian migrants and diaspora. However, the lack of trust in the Ukrainian government and banking system, as well as the absence of targeted incentives impedes a more productive use of remittances and savings.

1.1.2. Objectives and expected resultsThis feasibility study aims to contribute to the Government of Ukraine’s efforts to boost local economic development through identifying a viable option for channelling migrants’ remittances and savings towards productive investments, thus supporting local business development in Ukraine. The specific objectives of the project are further described in the figure below.

5 Ibidem

CIS countries

EU countries

Canada

Other countries

Average

Yes N/A No

18% 30% 52%

21% 24% 54%

28% 30% 42%

35% 27% 38%

21% 26% 53%

0% 20% 40% 60% 80% 100%

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Figure 3: Specific objectives of the feasibility study

Assessing the Ukrainian legislative and regulatory framework

Analysing the market of remittances and microfinancing

Analysing good practices for similar initiatives

Identification of feasible mechanism for channelling remittances towards local business development

Developing a Road Map of action for the implementation of the mechanism

Key objectives of the feasibility study

By achieving these five objectives, the project is expected to contribute to the following economic results:

1. Minimise the informal flow of remittances. In turn, this is expected to positively influence the macro-economic situation of the country as well as its banking sector.

2. Improve the transparency and management of remittances flow. This will help to facilitate both the government’s policies and migrants’ life and will support the creation of sound relationship be-tween state institutions and citizens.

3. Support the Government of Ukraine to optimise the socioeconomic potential derived from the Ukrainian migrants and diaspora, turning migration into an opportunity for economic develop-ment. While migration is a highly sensitive issue in Ukraine, there is a need to show to Ukrainian residents that migration can be a vector of local economic and social opportunities in the country.

4. Direct the remittances flow into local business development. This is the ultimate objective of the in-vestment mechanism proposed in this report. By channelling financial resources towards entrepre-neurs and Micro, Small and Medium Enterprises (MSMEs), the investment mechanism is expected to contribute to the development of entrepreneurship and the creation of jobs.

5. Contribute to the Government of Ukraine’s efforts to boost (local) sustainable economic development.

1.1.3. Main definitions

The current analysis is based on several assumptions and concepts. These are important to clarify, to allow the reader to correctly interpret the scope of work, the analysis and the focus of the pre-sented recommendations.

We distinguish between long-term, short-term and circular migration, following the definitions of the United Nations Recommendations on Statistics of International Migration and the Global Forum on Migration and Development. A Long-Term Migrant is “a person who moves to a country other than that of his or her usual residence for a period of at least a year”. A Short-Term Migrant is “a person who moves to a country other than that of his or her usual residence for a period of at least three months, but less than a year”. Last, circu-

12


lar migration is defined as “the temporary, recurrent movement of people between two or more countries mainly for purposes of work or study”6.

This report also distinguishes between first generation migrant (temporary or permanent) with tangible con-nections to Ukraine, and other first-generation long-term migrants without tangible connections as well as second, third, etc. generations. The report focuses on, and limits itself to, the first-generation migrant (tem-porary or permanent) with tangible connections to Ukraine.

The term diaspora is widely defined by IOM as migrants or descendants of migrants, whose identity and sense of belonging have been shaped by their migration experience and background7.

According to the IOM’s definition, migrant worker is a person who is to be engaged, engaged or has been engaged in a remunerated activity in a State of which he or she is not a national8. In line with this, we refer to migrant workers (or shortly migrants) in this feasibility study as Ukrainians working temporarily abroad, but having Ukrainian nationality, relatives and relations in Ukraine, and regularly transferring remittances to Ukraine. In that sense, migrants refer also to the first-generation migrant (temporary or permanent) with tangible connections to Ukraine.

The concept of migrant remittances in this study refers to the income that Ukrainian migrant workers working abroad transfer on the regular basis to Ukraine using legal channels.

The study assumes that the remittances that are transferred to Ukraine consist of two components:

a. element of consumption, meaning the part of remittances dedicated to finance consumption needs of the family or the beneficiary of the remittance transfer (e.g. food, clothes, bills, medical expenses, education, etc.);

b. element of saving, meaning the part of remittances transferred to Ukraine that is not consumed, and saved for future capital expenses or investments (here it is important to distinguish the savings that the migrant keeps abroad from those that are kept in Ukraine).

Country of origin Remittance channels Productive investments

In this report, the term country of origin refers to the country where Ukrainian migrants send remittances from. Importantly, country of origin in this report is not Ukraine, but foreign countries where the income of migrant worker originates. For instance, the re-port looks particularly at Canada, Italy and Poland as countries where remit-tances originate from. The countries of origin of migrants’ remittances are also the countries of destination of migrants.

This report also distinguishes between formal and informal channels of remit-tance transfer. Formal channels for mi-grant remittances are services offered by officially registered or exempted en-tities that can be monitored by the su-pervising bodies. They include banks, international payment systems, cash transfers (under the legal limit) and post transfers. Informal channels mainly re-fer to unofficial cash transfers, goods transfers etc., which can hardly be mon-itored by state institutions.

Last, the concept of productive invest-ments deserves some clarifications. We understand by productive invest-ments an “investment in fixed capital or immaterial assets for enterprises, which are to be used for the produc-tion of goods and services, thereby contributing to gross capital formation and employment”9.

6 UNECE, Defining and Measuring Circular Migration, 2016, p.3. https://www.unece.org/fileadmin/DAM/stats/documents/ece/ces/bur/2016/February/14-Add1_Circular_migration.pdf

7 IOM, World Migration Report, 2018, page 305. https://www.iom.int/sites/default/files/country/docs/china/r5_world_migration_report_2018_en.pdf

8 Definition of the International Organisation for migration, adopted from the International Convention on the Protection of the Rights of all Migrant Workers and Members of Their Families, adopted 18 December 1990, enterred into force 01 July 2003.

9 European Court of Auditors. EU support for productive investments in businesses – greater focus on durability needed, 2018, p.11. https://www.eca.europa.eu/Lists/ECADocuments/SR18_08/SR_DURABILITY_EN.pdf

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1.1.4. Scope of workThe topic of migrant remittances in Ukraine is complex and involves many actors. While the first-generation long-term migrants without tangible connections as well as the second, thirds, etc. generations and the dias-pora are relevant elements, they have significantly different interests, issues and financial capacities in com-parison to the first generation of Ukrainian migrants with tangible connection to Ukraine.

This report specifically focuses on first generation Ukrainian migrants (temporary or permanent) with tangi-ble connections to Ukraine.

The report focuses on short-term, circular and long-term regular migrants (including migrants coming back to settle in Ukraine), thus excluding irregular migration. The latter can hardly access formal employment op-portunities, and/or open a bank account.

The present study focuses on remittances transferred via formal channels (banks, International Payment Systems, post and cash under the legal limits). Informal remittances include undeclared cash above the le-gal limits, as well as other tangible assets transferred from one household to another. Information on the quantification and monitoring of informal remittance channels is limited. Therefore, the current study focuses on the ways to improve the transfer of remittances via formal channels and their investment. How-ever, the study provides recommendations that may contribute to incentivising the transfer of informal remittances towards formal channels.

While remittances can be used for several purposes, the investment mechanism focuses on the share of the remittances dedicated to savings.

The investment mechanism presented in this feasibility study will hence not consider the share of remittanc-es spent on consumption. This is partly explained by the fact that, contrary to consumption, savings represent the potential volume for investments.

The analysis of regulatory environment of countries of origin in this feasibility study is based on the sample of three countries: Canada, Poland, and Italy.

The selection of these countries was based on a number of criteria:

• number of Ukrainian migrants

• volume of migrant remittances

• difference in legal and regulatory regime

• geographical proximity to Ukraine

• level of formalisation of migrant and diaspora community.

The investment mechanism presented further in this feasibility study, addresses the needs of Ukrainian mi-grants and citizens. In doing so, the objective of the investment mechanism is to channel savings of migrants into productive investments at the regional level in Ukraine.

Such an investment mechanism will be designed within the existing legal and regulatory framework.

1.2. Methodology

1.2.1. ApproachThe feasibility study explores and develops the issue of channelling migrant remittances into local invest-ments in Ukraine. To address this issue, we split it in to two consecutive stages:

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1) transfer of migrant remittances from country of origin to Ukraine through formal channels (e.g. banks);

2) raising and investing the share of remittances dedicated to savings into the local business in Ukraine through a tailored financial mechanism.

Such two-folded process is illustrated in the figure below:

Figure 4: Remittances: a two-sided issue

Poland

Italy

Canada Cash

Banks

International Payment systems Invetsments in

local communitiesMicroinvestment

Post

Transfer from country of origin Channelling of remittances Innovative Investment Mechanism

1.2.2. ProcessThe feasibility study is divided into three phases and nine tasks, as described below.

Figure 5: Our methodological approach

Phase 1

Task 1: Analysis of the currentregulatory framework

Task 4: Identification of existing remittance-related services offered by Ukrainian banks to migrants

Task 7: Development of an investment mechanism to channel migrant remittances and savings into local business investment

Task 8: Identification of potential partners and their roles for implementation of the investment mechanism

Task 9: Design a roadmap of action – Action Plan for the process of investment mechanism implementation

Task 2: Analysis of the legal and financial regulations of the top countries of origin

Task 5: Assessment of the market providing loans for business activities

Task 3: Identification of existing gaps and policies that act as barriers

Task 6: Analysis of best practices in channelling migrant remittances to business investment

Phase 3

Phase 2

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Phase 1 Phase 2 Phase 3

Phase 1 focuses on the analysis of the legal and regulatory framework around the remittances transfer (no-tably from the selected countries of origin), and investments. This phase is an important step to analyse and understand how and why migrant re-mittances are channelled in Ukraine; and how they can be used to foster local economic development. Phase 1 is composed of three tasks. The first task aims to review the current regu-latory framework in Ukraine relevant for channelling migrant remittances; the second to provide a high-level review of the legal and financial reg-ulations of the selected countries (Po-land, Italy and Canada); and the third to identify existing gaps and policies that act as barriers and disincentives to transfer remittances through for-mal channels.

Phase 2 focuses on analysis of the main market players providing services related to the transfer of re-mittances and their investment. At the same time, it provides an assess-ment of the microfinance market, ana-lysing the main financial products and services to individuals, entrepreneurs and MSMEs, and how these respond to the needs of these economic play-ers. In doing so, the underlying goal is to identify specific financial products and mechanisms that would efficiently channel migrants’ remittances to pro-ductive investments.

Importantly, Phase 2 analyses for-eign practices relating to the set up and implementation of mechanisms for channelling migrant remittanc-es into local investments and SMEs, and defines the key success factors of realised practices in other coun-tries. The selection of the case studies is based on the analysis of the legal framework and market environment to suggest the most relevant practices in the Ukrainian context.

Based on the analysis conducted during the Phase 1 and Phase 2, Phase 3 aims to develop the innovative investment mechanism for channelling migrants’ savings into productive investments in Ukraine. The tasks included in this phase detail the financial mechanism, its governance and investment strat-egy. In this phase we also suggest the most appropriate stakeholders for the implementation of investment mechanism, their roles and respon-sibilities in the governance structure. The feasibility study concludes with an Action Plan that could be used by the stakeholders as a roadmap for the implementation of the proposed investment mechanism.

1.2.3. MethodologyThe present study sums up some of the key insights raised in the analysis conducted in Phase 1 and 2 of this project and proposes a feasible mechanism by which migrant savings could be viably channelled into local business development in Ukraine.

The data collected throughout each phase of the project relies on three main channels:

1) literature review;2) interviews with Ukrainian and international stakeholders; 3) strategic workshops with stakeholders.

The data collection in the first two phases of the study was based on the literature review compiling quan-titative and qualitative data of international and national institutions from the public and private sector. In addition, a series of 16 interviews were conducted with governmental bodies, market actors and Civil So-ciety Organisations to complete and test the validity of the findings from the literature review. In addition, a Working Group with key stakeholders was formed to review and discuss the findings of each phase of the project. Last, three strategic workshops with the Working Group were conducted with a view to discuss and confirm the analysis and recommendations put forward in this report. A workshop (completed by several interviews with key stakeholders) was conducted on 14th November 2019. This represented an opportunity to test the relevance, interests and appetite of public and private sector actors in the investment mechanism.

The methodology used is hence based on the principle of verification and completion of data ensuring that all the findings presented in the report are supported, to the largest extent possible, by evidence from three

16


data sources. Information and data obtained through these data sources were compared with each other to identify potential contradictions in the findings.

Figure 6: Principle of verification and completion of data

Literature review

Interviews with publicand private

sector actors, and CSOs

Strategic workshops with stakeholders

Findings

This multi-tool approach (literature review – interviews – workshops), allowed:

1) balancing quantitative information with qualitative information, as much as possible, e.g. better un-derstand some possible indicators and factors that are not visible through quantitative information only, which could be appropriate for consideration;

2) identifying the key success factors and/or blocking factors related to the successful implementation of an instrument to channel migrant remittances to local investment in Ukraine.

The report builds on the inputs from each of the phases and tasks of the project. The legal analysis provided key insights in regard to: i) the barriers migrants face when transferring their remittances to Ukraine and in-vesting them in productive investments; and ii) the investment mechanism options available in the current legislative framework in Ukraine. The market analysis conducted in Phase 2 was key to better understand i) how and why migrants invest (or not) in Ukraine, ii) the unmet financing needs of MSMEs in Ukraine, and iii) how and through which financial product and services the investment mechanism can best channel mi-grants’ remittances into productive investments.

1.3. Structure of this reportThe report is structured around seven main chapters. Chapter 1 introduced the rationale, objective, scope and methodology of the project. Chapter 2 sets the scene, introducing the remittance process and the key actors involved in it.

Following the approach afore mentioned, Chapters 3 and 4 then summarise the key legal and market insights relating to the transfer of remittances, and the market environment for migrant investment and microfinance, respectively. The objective of these two chapters is to highlight the key insights that need to be taken into ac-count, when designing the investment mechanism. Based on this analysis, Chapter 5 introduces several exam-ples of foreign practices when it comes to collecting and channelling remittances into productive investments.

Chapter 6 supplies details on the investment mechanism, presenting its objectives, key characteristics, and investment strategy and governance modalities. Chapter 7 concludes by highlighting an Action Plan to imple-ment the proposed mechanism in the near future.

SETTING THE SCENE

2

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2. SETTING THE SCENEThis chapter aims to describe the process that migrant workers go through to remit their income from the country of origin and invest it in Ukraine, as well as highlights the key stakeholders involved in this process.

The structure of this chapter follows the approaches and methodology afore mentioned. In a first part, we hence look at the transfer of remittances, starting from the point when migrants receive their incomes to when remittances are invested by the recipients. The second part of this chapter focuses on the actors regu-lating and hence shaping the remittance process.

2.1. Remittance processThe remittance transfer process is composed of several steps, as described in the figure below.

Figure 7: Remittance transfer process

Remittances’ recipients and/or migrants

Investments

Investment Fund

MSMEs

Real estate

Deposits

Government and municipal bonds

Savings

Remittance Investments Overview of SMEs source of (investment) finance

Microfinance Institutions

Banks

Start-upsNon-Bank financial institutions (credit organisations)

Government programmes

Alternative finance

MSMEs

Financing investments and/or working capital

Step 1

The first step in the remittance transfer process is receiving and taxing the income by migrants in the country of origin. In the selected countries (Poland, Canada and Italy), the net income received equals the gross income minus the taxes paid on the gross income.

The key institutional players shaping this first step are the bodies in the countries of income’s origin:

1. Ministry (or state body in charge) of Migration. It oversees migration (immigration) and border poli-cies, reception, asylum and integration of refugees. The Ministry partly shapes the rights of migrants – in terms of their residency, and sometimes employment.

2. Ministry of Labour: it handles designing and implementing employment policies; labour law and in-dustrial relations, and employment statistics. It plays a role in shaping the legislation around migrants’ employment in their destination country.

3. Ministry of Finance: it is the principal authority that forms and implements the financial, budget, fiscal and customs policy of the State. It is hence relevant in terms of determining and administrating personal tax income.

4. Ministry of Social Affairs (in some countries merged with Ministries of Health or Labour): it is gen-erally in charge of policies relating to employment, social security and social policy.

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Step 2

Once migrants receive their net income, they can:

1. consume their net income by purchasing goods and services in the country of income’s origin;2. store the share of income as savings on a deposit account in a bank in the country of income’s origin;3. invest their net income in e.g. a business enterprise or real estate in the country of income’s origin

depending on their legal rights;4. remit part of their net income to Ukraine. In such a case, the remittance’s recipient can:

a. consume the remittanceb. save the remittance on e.g. a deposit accountc. invest the remittance in Ukrainian real estate, businesses, etc.

At this stage, the main actors shaping the migrant environment are state institutions and market players:

1. Ministry of Finance and the State Fiscal Service (SFS). The Ministry of Finance (both in Ukraine and in the migrants’ country of destination) play a key role in determining the taxes and customs regulations on remittance transfers and investments. In Ukraine, the SFS plays a key role as it is responsible for implementing tax regulations.

In reality, migrants and the remittance’s recipients often opt for a consumption, storage and investments of the remittances to a different degree.

IOM, 2016

2. Ministry of Economic Development, Trade and Agriculture. The Ministry oversees the design and implementation of state economic development policies. It can influence regulations around Foreign Direct Investment to Ukraine, including who can invest, and in what.

3. National Bank of Ukraine (NBU). Overseeing price and financial stability, the NBU plays a key role in designing and implementing currency regulations. This particularly influences e.g. transfer of (foreign) currencies; the modality for migrants to open a bank account; and the type of institutions able to open deposit accounts (only banks).

4. Ministry of Economy in the country of destination of migrants. The Ministry will oversee shaping for-eign direct investment related policy, which may incentivise or constrain migrants to remit.

5. Banks, International Payment System (IPS), Investment Funds etc . The type of products and services they offer will ultimately influence migrants’ choice.

Step 3

This assignment specifically focuses on remittances of first generation migrants (temporary or perma-nent) with tangible connections to Ukraine. We hence focus on the share of migrants’ income transferred to Ukraine and on the main channels that can be used for this purpose.

To remit the funds from the country of origin to Ukraine, migrants can choose one of the following channels:

1. Banks (through SWIFT or P2P)2. International Payment System (through a physical office, or online platform)3. Post4. Cash

Step 4

The last step of remittance transfer process is receiving of the remittance by the beneficiary. Once the transfer is received in Ukraine, the recipients would have several options for saving or investing their funds. The next steps will regard the investment part of the remittances process.

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The remittance investment process is linear with several investment and saving options existing for inves-tors in Ukraine (see figure below).

Figure 8: Remittance saving and investment process


Investments

Investment Fund

MSMEs

Real estate

Deposits


Savings

The recipient of the remittances and/or the migrants themselves can save or invest the funds received. This study distinguishes between these two modalities as investing entails a risk element, while savings are, by definition, a safe “storage”.

The recipient of the remittances and/or the migrants can store/save the remittance in two ways:

1. Deposits. These are a type of bank account that provides an interest rate, which is often higher than for savings account. However, deposit accounts require that money be kept in the account for a set period, normally shorter than for the saving accounts.

2. Government and municipal bonds. These are debt securities issued by a government to support gov-ernment spending. Government bonds can pay periodic interest payments called coupon payments. Government bonds are considered low-risk investments since the issuing government backs them10.

The recipient of the remittances and/or the migrants themselves can invest the remitted funds in the following:

1. MSMEs. Migrants can directly invest in business in Ukraine. This is normally done on the ad-hoc basis and related to personal connections between the investor and the MSME.

2. Investment Funds. Migrants can invest in Corporate Investment Fund (CIF). Migrants can do so by investing in “investment certificates” issued by asset management companies or purchase shares in Corporate Investment Funds.

3. Real estate. Migrant can invest in real estate by buying property as far as they consider to be a safe investment. This study makes a distinction between productive investments and the non-pro-ductive investments. Productive investments relate to “investments in fixed capital or immaterial assets for enterprises which are to be used for the production of goods and services, thereby con-tributing to gross capital formation and employment”. Therefore, while investing in MSMEs qualify as productive investments, it is not the case of Investment Funds and real estate.

10 World Bank, International Monetary Fund, Developing Government Bond Markets. A Handbook, 2001, http://pubdocs.worldbank.org/en/926021510086386497/PDM-Publication-DomesticDebtMarketDevelopment-DevelopingGovernmentBondMarketsAHandbook.pdf

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Saving and investment of remitted funds is shaped by state institutions and market actors. These include inter-alia:

1. The Ministry of Finance. This state institution issues government and municipal bonds, with an obli-gation to pay periodic interest payments (coupon payments).

2. Banks. Banks play a key role in this step – especially regarding the savings dimension. They are the only financial institutions in Ukraine having the mandate to open and manage deposit accounts. In addi-tion, banks are the only commercial intermediaries between the state and the individuals on the sales of Government and Municipal bonds.

3. Investment funds. These are one of the channels remittances can be invested in. As mentioned above, migrants and remittance recipients can invest in CIF. However, the investments in the Investment Funds are not widespread among Ukrainians (and migrants).

2.2. Main actors regulating migrants’ remittances and their investmentThis sub-section summarises the main actors involved in regulating the transfer and investment of remittanc-es, their responsibilities and roles (as illustrated in the figure below).

Figure 9: Stakeholders involved in the transfer and investment of migrant remittances

Ministry of Social Affairs

Ministry of Finance

Ministry of Labour

From income to remittance Remittance transfer

Remittance Process

State institutions in migrants’ country of destination

State institutions in Ukraine

Received remittancesInvestment

of remittance

National Bank of Ukraine

Ministry of Finance & State FiscalServices

Ministry of Economic Development, Trade

and Agriculture

Ministry of Economic Development, Trade

and Agriculture

Ministry of Labour

Ministry of Migration

Earned income

22


The roles and responsibilities of the public stakeholders throughout the remittance process are detailed below.

Table 1: Overview of the key public actors regulating the transfer and investment of remittances

No Name of the authorities Brief overview of role and responsibilities

1 National Bank of Ukraine (NBU)

A special central executive body responsible for stability of the monetary unit of Ukraine. The National Bank shall within its terms of reference pro-mote the banking system stability and sustainability of the economic growth and second the economic policy of the Cabinet of Ministers of Ukraine.

The NBU also adopts bylaws regulations governing currency flaw, transfer of funds and the procedure of opening/use of bank accounts in Ukraine.

2 Ministry of Finance of Ukraine

A principal authority among central executive bodies that forms and im-plements the financial, budget, tax and customs policy of the State (except for the administration of taxes, customs duties and sales tax and customs policies), policy in the area of state financial control, treasury mainte-nance and AML policy. It also responsible for the issuance of government and municipal bonds.

3 State Fiscal Service of Ukraine

The SFS handles implementation of the state tax and customs policy, as well as policy on combating against crimes/offences in the fields of application of tax and customs legislation.

4 Ministry of Economic Development, Trade and Agriculture of Ukraine

Responsible for forming and implementation of the State Policy in devel-opment and support of small to medium entrepreneurship; investments; industrial policy; intellectual property policy; exports policy etc.

5 National Committee on Financial Services

Central executive body responsible for realization of the state policy in the field of non-banking financial services (e.g. by credit unions, private pension funds).

6 Ministry of Social Policy

The Ukrainian government department responsible for instituting labour relations, family and children, immigration and trafficking, women’s rights, children’s rights, and humanitarian aid.

7 State Labour Service of Ukraine

A specialised state service, the purpose of which is ensuring complex resolv-ing of issues related to labour inspection and industrial safety.

TRANSFER OF REMITTANCES THROUGH FORMAL AND INFORMAL CHANNELS

3

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3. TRANSFER OF REMITTANCES THROUGH FORMAL AND INFORMAL CHANNELS

The legal and regulatory framework refers to the legislative environment of Ukraine, including custom regulation and tax and banking regulations. The market environment refers to the actual actors providing remittance transfer services to migrants.

The following chapter provides an overview on how the legal and regulatory framework and the market envi-ronment influence and shape the way migrant workers transfer their remittances to Ukraine.

In doing so, the chapter highlights a set of lessons learnt and policy recommendations, with a view to facili-tate and increase the transfer of remittances via formal channels.

In the first section, the analysis focuses on describing the formal channels used by migrants to transfer their remittances. These include banks, International Payment Systems, post and cash under the legal limits. We will first look at their market share and the characteristics of their transfer of remittance-related services.

The second section then looks at the legal framework and how it shapes and influences the market environ-ment and the way migrants transfer their remittances to Ukraine.

The third section takes one step back to analyse the main legislative elements of the selected countries of origin (Poland, Italy and Canada) related to migrant remittances. The objective is to provide a better under-standing of the type of barriers Ukrainian migrants face when transferring their remittances.

Last, this chapter concludes by highlighting a set of lessons learnt and policy recommendations, which could help facilitate the remittance transfer process via formal channels. These recommendations should be con-sidered separately from the investment mechanism proposed in the section 6 Investment mechanism, which solely focuses on the investment part of the remittances, as its name suggests.

3.1. Remittance-related servicesAs mentioned in Chapter 2, we distinguish four main channels for the transfer of migrants’ remittances to Ukraine:

1. banks (through SWIFT or Person to Person (P2P) transfer systems)2. International Payment System (IPS)3. post4. cash (under legal limit, i.e. in line with the existing customs regulation).

The Ukrainian market for remittance-related services is to some extent fragmented with several large and small actors. We named the main market players for each channel below.

Table 2: Main market players for remittance transfers in Ukraine

Banks P2P IPS Post

PrivatbankOschadbankRaiffeisenUkrgasbankKredobankUkrsibbankAlfaBankPivdennyi bankPireus

iPay.uaLiqPayPaysend.comSend2UA.comTransferGoTransferWise

Western UnionMoneyGramIntelExpressRIA

Ukrposhta

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After cash including in-king and informal transfers, the second and third preferred options for migrants to transfer their remittances are SWIFT transfers (30.8%) and IPS (20.3%). In regards with the latter channel, more than half of the total of remittances (59%) was channelled through Western Union in 2018. Money-Gram, Intel Express and RIA account for 23 per cent, 8 per cent, and 7 per cent respectively of the market of international IPS transfers to Ukraine.

Figure 10: Types of remittance transfer services and their market share

IPS 20%

SWIFT 31%

Cash including in-kind and informal transfers 49%

Source: NBU, 2019

In terms of market shares, cash (including in-kind and informal transfers) account for almost half of the remit-tances transferred to Ukraine (48.9%).

Each type of remittance channel has its own mechanism and specific features. According to the Law of Ukraine “On Currency and Currency Transactions”, transfer exceeding UAH 150,000 (approx. EUR 5,500) is subject to currency control and might require provision of additional documents to confirm the origin of funds. This regulation sets up a limit of UAH 150,000 (approx. EUR 5,500) of a one-off transfer for almost all remittance channels.

3.1.1. BanksCommercial and state-owned banks in Ukraine are generally using two main mechanisms for transfer of re-mittances: SWIFT transfers and P2P transfers. Both systems are described in further details below.

SWIFT transfers

SWIFT transfers are not widespread as an option for migrants’ transfer of remittances.

In Ukraine, all commercial and state-owned banks are using SWIFT transfers. To use the service, both sender and recipient of the transfer should have an open bank account in their respective banks.

The limited use of SWIFT system for remittance transfer is explained by several factors:

1. SWIFT transfers need detailed information about the sender and recipient of the transfer, which often translates in increased risk of making mistakes (e.g. in the bank account number).

2. SWIFT transfers are more time consuming, compared to (competitive) payment systems (see more details below). SWIFT transfer can take from several hours to 5 working days. However, the average duration of transfer is 2-4 working days.

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3. SWIFT transfers are too costly for small amounts of remittances. The high fixed cost of SWIFT payment makes them not cost-efficient for the migrant remittances, which are usually comparatively low (ap-prox. EUR 500 per month11).

4. More generally, the high cost of SWIFT transfers makes them less appealing for small amount of mi-grant remittances.

In addition, SWIFT is not marketed by Ukrainian banks as a service for migrant’s transfer. Banks mostly focus on P2P transfers, as presented below.

Person-to-person (P2P) transfers

P2P transfers are cheaper and faster, compared to SWIFT transfers. They are usually done in a matter of minutes.

P2P transfers are based on the use of card payment systems and hence require a bank account for the sender and recipient of the transfer. Most of international P2P operators in Ukraine work with Visa and MasterCard (TransferGo, TransferWise, Paysend, LiqPay) to send money from more than 50 countries. At the same time, some are more restricted in terms of card payment systems (e.g. iPay.ua works only with MasterCard) or geography (e.g. Send2UA works only with Russian Federation). In some cases, P2P operators work with cards issued only by specific Ukrainian banks (e.g. TransferWise works exclusively with PrivatBank).

As a result, Ukrainian banking sector quickly picked up P2P transfers’ potential, integrating it into its payment platforms. Although the NBU does not capture the P2P transfers as a separate element, the fast growth of international bank transfers in 2018 confirms the growing interest of migrants in this product.

The growth of international P2P transfers to Ukraine is fuelled by the increasing volume of migrants’ re-mittances and freelance payments (mostly from IT industry).

The disadvantage of P2P transfers is the requirement to have a bank account abroad. In many cases, this becomes a barrier for migrants due to various reasons (lack of language skills, illegal work, etc.) to use P2P services.

3.1.2. International Payment SystemsOne of the key benefits for migrants to use IPS is the simplicity of the money transfer process.

International Payment Systems (IPS) remain popular as a channel for migrant remittances. According to the NBU, in the first half of 2019, remittances through payment systems to Ukraine amounted to USD 1.1 billion (EUR 1.0 billion), showing a slight drop compared to the first half of 2018 (- 9.0%).

Migrants see several benefits of using IPS over other systems. First, migrants are not required to have a bank account to use such a channel. Second, IPS operators often demand an ID as the only administrative paper before proceeding the transfers. Third, the transfer process itself is well understood and is considered as safe, fast (available within minutes to the recipients) and reliable from the public.

IPSs are attractive to migrants due to their known brand and wide network of offices. For example, Western Union has over 130 offices in Ukraine spread all over the country, making it convenient and easy to reach for the recipients of the remittances. In addition, for those who prefer to transfer money via their phones, Mon-eyGram and Western Union provide their clients with a mobile application.

IPS are present all over the country in Ukraine as well as abroad, and their brands are generally recognized and trusted.

11 Migration as development factor in Ukraine, International Organisation for Migration, 2016, available at http://iom.org.ua/sites/default/files/mom_migraciya_yak_chynnyk_rozvytku_v_ukrayini.pdf

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Channelling remittances through payment systems remains expensive (see Table 3) in comparison to P2P systems. For most International Payment Systems, fees are fixed as a percentage of the transferred amount.

3.1.3. PostPost remains an important channel of remittances for selected destinations. Post transfers are popular in remote areas of Ukraine due to its wide network of branches.

Taking into account that most migrant workers and their families live in Ukraine in rural areas, UkrPoshta is a preferred operator of money transfer and delivery for specific groups of population (e.g. elderly), as well as for those living in remote areas, where there is no other financial infrastructure (e.g. banks, ATMs, stable internet connection).

Although UkrPoshta has a minor share of international transfers from Europe, it represents a key formal channel of remittances’ from Russia. In fact, it covers up to 90 per cent of all formal remittances from Russia.

UkrPoshta offers two types of money transfers: address transfer and urgent transfer – however, these gener-ally take longer compared with IPS and P2P transfers. Address transfer is available to/from 29 eligible coun-tries and takes 1-5 working days. Urgent transfer can be completed in 15-30 min but available only from Azerbaijan, Belarus, Kazakhstan, Moldova, Serbia and Portugal. For both types of transfers, the recipient can receive a transfer of a maximum of UAH 150,000 per day.

Post transfers are delivered in cash, therefore Post has a limited potential to accumulate migrant remit-tances and savings. UkrPoshta does not have a status of a banking institution and cannot issue cards or open and manage accounts. Such a barrier limits the potential of UkrPoshta to offer additional financial services to users.

3.1.4. Cash transfersCash transfers remain popular among migrants (especially those living in neighbouring countries), despite the development of bank, IPS and post services relating to the transfer of remittances.

This is explained by several factors:

1. Migrants do not necessarily understand how the formal channels work and thus, what advantages they bring. In many cases, migrants do not have sufficient knowledge of finance, economics, banking or taxation to objectively compare the strengths and weaknesses of different remittance channels.

2. Migrants tend to distrust formal channels such as banks. This can be explained by the recent chal-lenges the banking system has gone through, with the number of banks dropping by more than 50 per cent in a decade and resulting in many people losing their savings. The lack of trust to banking system incentivises them to opt for cash transfers.

3. Migrants – even those working legally, are afraid of being imposed tax on their remittance transfer by state institutions. By channelling their remittance through formal channel such as banks, they are often afraid that the tax authorities will raise questions and try to tax their transfer. The study found that most migrants are not aware of the principles of Ukrainian fiscal system and the mechanism of remittance tax administration. The lack of understanding of taxation of remittances and savings leads to the avoidance of using formal channels to reduce the perceived risks of excessive taxation.

The limit for cash transfer amounts to EUR 10,000. Above this amount, any cash transfer must be declared to the customs authorities. Importantly, while the customs declaration is not linked with their taxation, it is associated with a risk of taxation by migrants.

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Cash transfers remain either free (if one does it by her/himself) or relatively cheap (through an intermediary, often part of the close social network of the migrants) in comparison to formal channels, but they are very risky. There is often no guarantee if the cash is lost or stolen.

3.1.5. Non-Financial servicesIn addition to the transfers per se, some foreign banks (mainly Polish), P2P platforms and IPS offer non-finan-cial services to Ukrainian migrant workers.

With the dense competition characterising the market for the Ukrainian migrant transfers, the service provid-ers are operating on the lowest possible transfer fees. In order to increase the market share, the main service providers develop non-financial services to keep and expand their client base:

• Translation of the website in Ukrainian. Some branches of foreign banks provide service in Ukrainian language, allowing migrants to easily understand the financial service they provide. This was observed especially in Poland, where banks perceive Ukrainian migrants as an important mar-ket. Instances of such non-financial service include PKO Bank Polski, Bank Credit Agricole, BGZ BIL-LIONP Paribas in Poland.

• Exchange rates comparison. These are mostly provided by the P2P platforms (e.g. Transferwise) to give the client more information on the competitive fee.

• Fee calculator . Most international payment systems (e.g. IntelExpress) and P2P platforms provide a fee calculator, which gives an indication of the fees of the transfer depending on its timing and amount.

• Mobile application. Several international banks, P2P platforms and international payment systems offer mobile application available in English. These provide easy access to bank accounts, and the pos-sibility to transfer money.

• Short-term promotions. Most of the banks are offering temporary promotions for the selected des-tinations. Those promotions consist in most of the cases, in the reduced fee or transfer or a cashback for the transfer in the specific period of time. For example, PrivatBank offers every third payment over one month free of charge.

• Training programmes of the banks to improve financial literacy. More and more banks provide bro-chures and information on account management and money transfer, to facilitate migrants’ remit-tances flow to Ukraine.

• Cashback for the transactions. Several Ukrainian banks (e.g. PrivatBank, Monobank) are offering cashback (percentage of the amount of transaction is returned to the user) to the card of user in case of international remittance operated by these banks and at least three operations done with the pay-ment card in a period of time.

The choice of remittance channel by migrant depends of his/her legal status in the country, accessibility of service for sender and recipient of the transfer, duration and price of the transaction. The comparative anal-ysis of pros and cons of the main remittance channels based on the above-mentioned criteria is provided in the table below.

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Table 3: Comparative overview of remittance transfer’s channels

Criteria SWIFT P2P International Payment Systems Post Cash

Costs Fixed fees EUR 18−27

(depending on a number of bank-correspondents)

0.5−1% transaction fees

1−2% transaction fees

About EUR 4.5 per transaction

Vary from the country of payment origin

Double currency exchange imposed on the transfer

N/A

Duration 3−5 days 10 min – 72 hours 1 min – 30 min 1−5 days N/A

Maximum amount per transfer

None UAH 150,000 (ap. EUR 5,000)

UAH 150,000 (ap. EUR 5,000)

UAH 150,000 (ap. EUR 5,000)

EUR 10,000 (more would require a customs declaration)

Examples of non-financial services

• Website translated in Ukrainian

• Short-term promotions

• Fee calculator

• Exchange fee comparator

• Mobile application

• Fee calculator

• Mobile application

• N/A • N/A

Documentation • Bank account

• Passport or national ID card

• Proof of residence (residence cards for those, who received work permit)

• Proof of employment (optional)

• Details for sending a foreign currency SWIFT-payment: Beneficiary bank name; SWIFT-code; account number (or the international bank account number – IBAN); name (for individuals – first name and last name) and address (residency) of the beneficiary

• Payment purpose (purpose and invoice number)

• Bank account


• Proof of residence (residence cards for those who received work permit)



• Sender’s and recipient’s names, country of origin

• Bank account




• Full name, birthday, phone number, and address of the sender. Full name, phone number, and address of the recipient

• Bank card number

• Name of the recipient

• Recipient address

Safety and reliability

• Safe but potential to commit mistakes when entering bank account number

• Safe as it is based on MasterCard/Visa technology

• Safe • Transfers from restricted countries (e.g. the Russian Federation)

• Paid in cash

• High risks: no guarantees and tracking

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Criteria SWIFT P2P International Payment Systems Post Cash

Trust level • Limited trust towards banking institutions

• Lack of trust in new technology

• Recognised and often trusted brand

• Recognised and trusted service

• But lack of awareness abroad

• Trust level varies depending on who transports the cash

Other characteristics

• Same processes in any office (easy)

• Network of branches all over the country

• Should be with-drawn in cash

• Not all IPS are allowed to operate due to the sanctions

• Largest network of branch offices

• Accessibility in remote areas

• Limited amount of eligible countries

• Should be with-drawn in cash

• Lack of payment infrastructure

3.2. Legal aspects of remittance transfers to UkraineThe Ukrainian legislation does not create any barriers for Ukrainian migrants to open and use bank accounts in the destination countries.

The legal and regulatory framework influences how migrants transfer their remittances to Ukraine. This sec-tion refers to the legislative environment of Ukraine, including customs, tax and banking regulations.

This section summarises the main elements of the legal and regulatory environment in Ukraine affecting i) bank and online transfers as well as; ii) cash transfers.

3.2.1. Bank and online transfersIn recent years, the NBU has significantly liberalised the requirements for the obtainment of licenses by indi-viduals to open a bank account abroad12. Neither the deposit of funds, which originate outside of Ukraine in such an account, nor investments using such funds require a license from the NBU. There is also no need to declare valuables on foreign bank accounts (the requirement to declare foreign accounts as assets and bal-ances on them exists only for state officials). The updated regulation has a positive impact on the process of remittance transfer, since the migrants are not bound by any additional requirements from the Ukrainian reg-ulation, which existed before (i.e. obtaining individual licenses of the NBU and declaring of accounts abroad).

However, NBU sets up a threshold for the maximum amount of one-off transfer in UAH 150,000 (approx. EUR 5,500). In cases where transfers are above this threshold, they are a subject to currency control and re-quire submitting documents confirming the origin of funds13. Interviews with migrant associations and banks showed that this regulation does not represent a heavy obstacle for migrants’ remittance transfer.

12 The Law of Ukraine “On Currency and Currency Transactions” dated 21 June 2018, Paragraph 3 Article 4; Paragraph 4 Article 12. https://zakon.rada.gov.ua/laws/show/2473-19?lang=en

13 The Law of Ukraine “On Currency and Currency Transactions” dated 21 June 2018, Paragraph 1 Article 8. https://zakon.rada.gov.ua/laws/show/2473-19?lang=en The Resolution of the Cabinet of Ministers of Ukraine “On issues related to cross-border movement of currency valuables by individuals” No.203 dated 27 February 2019. https://zakon.rada.gov.ua/laws/show/203-2019-%D0%BF?lang=en The Customs Code of Ukraine dated 13 March 2012, Article 472. https://zakon.rada.gov.ua/laws/show/4495-17

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There is no mandatory conversion of the foreign currency into local currency for the money transfers. Ukrainian residents are not obliged to convert foreign currency received from abroad into local currency (i.e. UAH). This regulation has a positive impact on formalising migrant remittances, since migrant remittances can be kept in foreign currency, which protects the migrants from risks related to currency fluctuations. In addition, it provides migrants with more choices towards the currency of transfer.

3.2.2. Cash transfersCross-border movement of cash in amount, equal to, or exceeding, EUR 10,000 or equivalent in other cur-rencies is subject to mandatory filling in of a customs declaration14. Otherwise, it may lead to a fine imposed by the controlling authorities along with seizure of such undeclared amounts of cash.

Usually migrants transfer cash in amounts below EUR 10,000 and therefore do not fall under the require-ments of the customs declaration. However, the large share of migrants is not aware of the threshold and ne-cessity to fill in customs declaration. As a result, customs authorities may impose fines and forfeit the surplus. In addition, customs authorities may share the information from these declarations to the tax authorities and an individual may receive a request from the tax office to declare these funds.

More generally, the higher threshold of cash transfers (EUR 10,000) compared to the one-off cashless transfer (EUR 5,500) reduces the incentives to use formal cashless channels, especially for circular mi-grants living in neighbouring countries.

3.3. Taxation of remittancesAccording to the Ukrainian legislation, if a tax non-resident migrant transfers funds (including remittances) to someone in Ukraine, formally such recipient receives a gift from a tax non-resident. In this case, the re-cipient should pay a personal income tax, accounting for 18 per cent plus a military tax of 1.5 per cent of the amount of the gift.

The current fiscal policy towards remittances creates negative incentives for the migrants in three ways:

1. It is difficult to avoid double taxation of income, even if there is a double tax treaty between Ukraine and the country of destination;

2. Taxation of gifts from tax non-residents is at higher rates than from tax residents; and is indirectly contributing to the double taxation issue;

3. Migrants are not sure when their funds earned abroad are taxable in Ukraine and when not.

3.3.1. Double taxation of income

Ukraine has double tax treaty agreements with 74 countries15, which allows avoiding double taxation of passive and active income. However, in practice, it is difficult to avoid double taxation of income even if there is a tax treaty agreement between Ukraine and the country of origin of income.

14 The Law of Ukraine “On Currency and Currency Transactions” dated 21 June 2018, Paragraph 1 Article 8. https://zakon.rada.gov.ua/laws/show/2473-19?lang=en The Resolution of the Cabinet of Ministers of Ukraine “On issues related to cross-border movement of currency valuables by individuals” No.203 dated 27 February 2019. https://zakon.rada.gov.ua/laws/show/203-2019-%D0%BF?lang=en The Customs Code of Ukraine dated 13 March 2012, Article 472. https://zakon.rada.gov.ua/laws/show/4495-17

15 ContactUkraine, Double Tax Treaties of Ukraine, https://www.contactukraine.com/taxation/ukraine-double-tax-treaties

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The reason is the specific and strict format of the tax certificate (the document has to be on paper, with the for-eign tax authorities’ letterhead, stamp and original signature, confirming the amounts of foreign income taxable and taxes paid, with Apostille or legalisation), which Ukrainian tax authorities require to acknowledge the in-come tax paid in a destination country. Tax authorities of many countries do not issue the tax certificates in such a format. As a result, if the certificate in the set format is not available, double taxation cannot be avoided.

In addition, Ukraine has clear rules of taxation of tax residents who work abroad. If such individual has already paid personal income tax in a country with which Ukraine has a valid double tax treaty, she/he can credit the tax paid abroad against her/his Ukrainian personal income tax from the same income as follows:

• If the personal income tax rate in the destination country is lower than in Ukraine, the individual will need to pay the difference of the rates to Ukrainian tax authorities.

• If the personal income tax rate in the destination country is higher than in Ukraine, Ukrainian laws provide no possibility to return the surplus (only the Ukrainian personal income tax liability from the same income base will be zero) 16.

• Foreign personal income tax may be credited only against Ukrainian personal income tax but not against Ukrainian military tax.

Currently, Ukrainian tax authorities are unable to monitor the source and volume of migrants’ incomes. From one side, information about migrant’s income obtained by the tax authorities of other counties can’t be pro-vided to Ukrainian tax authorities; and from the other side Ukrainian tax authorities are not able to monitor the information, which is covered by bank secrecy.

3.3.2. Taxation of giftsTaxation of gifts applicable to tax non-residents is administrated at higher tax rates than those applicable to tax residents.

The Tax Code of Ukraine sets that gifts received from tax residents are taxed at zero or 5% personal income tax rates (depending on degree of relationship between the parties) and at 18 per cent personal income tax rate if received from a tax non-resident (irrespective of relationship with this non-resident).

Therefore, if a tax non-resident migrant transfers funds to someone in Ukraine, formally such recipient re-ceives a gift from a tax non-resident and should pay personal income tax at 18 per cent plus military tax at 1.5 per cent. There is no threshold for gifts in monetary form, which is non-taxable. A migrant may also qualify a tax resident of Ukraine even working abroad, so taxation of gifts depends on each particular situation.

3.3.3. Lack of awareness of fiscal rulesMigrants are not sure when their funds earned abroad are taxable in Ukraine and when not.

Individuals who are tax residents in Ukraine are taxed in Ukraine on their worldwide income (for migrants this would include their foreign incomes). At the same time, individuals who are tax non-residents of Ukraine are taxable in Ukraine on their income sourced in Ukraine (this would exclude foreign income)17. Ukrainian tax residence rules are complicated so many individuals believe that “the funds become taxable when they are remitted to Ukraine”. This observation is based on empirical data, i.e. work with expatriates of multi-national corporations (MNCs) and is believed to apply equally to migrants. Interviews with public and private stake-holders also highlight the lack of awareness and knowledge of migrants around tax regulations.

16 The Tax Code of Ukraine, dated 01 July 2019, Article 13, https://zakon.rada.gov.ua/laws/show/2755-1717 The Tax Code of Ukraine dated 01 July 2019, Article 14.1.213. https://zakon.rada.gov.ua/laws/show/2755-17

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3.4. Remittance-related legislation of selected migrants’ destination countriesThe legislative environment of the destination countries for Ukrainian migrant workers may incentivise or discourage the formal transfer of remittances to Ukraine.

For the current study, we analyse the legislative and regulatory environment of three top destination countries for Ukrainian migrants: Poland, Italy and Canada.

Those countries were selected for the analysis based on:

• number of Ukrainian migrants• volume of migrant remittances• difference in legal and regulatory regime• geographical proximity to Ukraine• level of formalisation of migrant and diaspora community.

The selected samples of countries represents the variety of countries of origin that represent the issue of migrant remittances from different, yet important angles.

Based on the analysis of each of selected destination countries, the Table below draws the comparison of the main legislative and regulatory elements of these countries relevant for migrant remittances.

Table 4: Comparative table between the main remittance-related regulatory frameworks of Canada, Poland and Italy

Canada Poland Italy

Documents for opening bank accounts

• Passport

• Immigration papers (or residence card) or any other form of docu-mentation that definitively prove your legal residence status. Dif-ferent banks may have different requirements, and these will de-pend on what is your immigration status, where you come from and in what province you are.




• A valid identity document

• Account’s holder tax code

• Proof of address

• A certificate of residence

Thresholds for AML-monitoring

Paragraphs 12(1)(b) and 12(1)(c) of the Proceeds of Crime (Money Laundering) and Terrorist Financing (PCMLTF) Regulations, provide that financial entities are required to report the sending out of Canada and the receipt from outside Cana-da, at the request of a client, of an electronic funds transfer in amount exceeding equivalent of CAD 10,000.

Article 35 of the Polish Act dated 1 March 2018 “On Counteracting Money Laundering and Financing Terrorism” establishes that all remittances of funds in amount exceeding equivalent of EUR 1,000 are the subject for financial moni-toring.

Italian AML Law establishes that all remittances of funds in amount exceeding EUR 1,000 are the sub-ject for financial monitoring.

Limits for remittances

• Royal Bank of Canada: USD 2,500 (approx. EUR 2,250) per day, however RBC cheque or savings account is required

• Western Union: up to CAD 7,500 (approx. EUR 5,110) per transfer

• MoneyGram: up to CAD 999

• Western Union: up to PLN 4,000 (approx. EUR 1,000)

• MoneyGram: up to PLN 29,300 (approx. EUR 6,900)

• Transfer fees may vary be-tween 1%–6% depending on the amount of funds to be re-mitted

• Western Union: up to EUR 5,000

• MoneyGram: up to EUR 999.

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Canada Poland Italy

Income Tax rates

Income tax rate varies depending on the amount of income, for instance:

• From CAD 0 to CAD 47,630 – 15%

• From CAD 47,630 to CAD 95,259 – 20.5%

• From CAD 95,259 to CAD 147,667 – 26%

• From CAD 147,667 to CAD 210,371 – 29%

• From CAD 210,371 and above – 33%


• From PLN 0 to PLN 85,528 – 18%

• From PLN 85,528 and above – PLN 15,395.04 + 32% of the surplus over PLN 85,528 minus tax-reducing amount


• From EUR 0 to EUR 15,000 – 23%

• From EUR 15,001 to EUR 28,000 – 27%

• From EUR 28,001 to EUR 55,000 – 38%

• From EUR 55,001 to EUR 75,000 – 41%

• From EUR 75,001 – 43%

With all three selected countries, Ukraine has effective double tax treaties. However, as mentioned in section 3.3 Taxation of remittances, these treaties are hardly implementable in practice because of the strict format required for the tax certificate.

Tax authorities of many countries do not issue the documents in such format (e.g. they can issue an e-docu-ment but not on paper with the stamp; they can confirm “the tax due to payment” but not the “tax paid”). If the certificate in the set format is not available, double taxation cannot be avoided.

There are certain provisions provided in double tax treaties and other related bilateral international trea-ties between governments on the exchange of tax information between tax authorities of Ukraine and tax authorities of top destination countries. However, in practice, such information exchange has not been implemented so far.

3.5. Lessons learnt and policy recommendationsAs showed in the legal and market analysis around the transfer of remittances, migrants lack awareness of, and understanding about, the options they have to send their remittances from the country of origin to Ukraine. They often do not know what the transfer channels are, how they work and what their pros and cons are. This information asymmetry has two impacts: i) it negatively affects the use of formal channels; and ii) it allows market actors to take advantage of migrants’ lack of knowledge by implementing relatively high remittance transfer fees. As a result, their choice of remittance transfer channels is guided by other factors (see figure below).

In addition, the one-off cashless transfer threshold of approx. EUR 5,500 is lower than the one for cash trans-fer (EUR 10,000), preventing migrants to send more substantial amounts of money (including when they wish to repatriate some of their savings stored in their countries of destination).

Based on the conducted analysis, we suggest below a set of recommendations that could shape the way forward, facilitating migrants’ remittances transfer to Ukraine through formal channels. These recom-mendations should be considered as steps of a single process and are presented in a logical sequence of implementation.

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Figure 11: Factors influencing migrant choice are not only economic

Use of long-proven and popular solutions

Low financial literacy

Lack of knowledge of fiscal compliance

Lack of trust in the financial system

Accessible and user friendly services

Migrants avoid using formal channels to transfer remittances

Source: PwC

How to stimulate the channelling of remittances through formal channels?

1 . Creation of an integrated platform for remittance services

We recommend the creation of an independent integrated platform for remittance services. Such integrated platform would gather the offers of various service providers including remittance services and related non-financial services.

This platform could be developed as a first step as a website, which would be seconded by a mobile application at a later stage. The migrants would be able to compare the offers of different service pro-viders (in term of costs, time, required documents, promotions, etc.) and select the one fitting the best his/her needs. The remittance platform can be a strong tool for awareness raising and increasing fi-nancial literacy. Additional services could be included to this platform to increase its added value to the migrants, especially regarding non-financial services.

The remittance platform should be available for all service providers of all formal remittance channels (bank transfers, P2P, IPS, etc.) and managed by an independent organisation, e.g. National Bank of Ukraine, Association of Ukrainian banks or by another umbrella organisation.

Such solution would benefit both the migrants and market operators. Creating a platform for remit-tances will provide a strong additional selling channel for the market operators. The fact that the mi-grant would be able to compare the offers of different service providers will increase the competition of the service providers and lead to faster, cheaper and more elaborated offer of services.

2 . Increase the one-off transfer threshold to EUR 10,000

Increasing the threshold of maximum amount of one-off transfer of EUR 10,000 could be the incentive to stimulate the flow of remittances through formal channels. Currently, there is a Draft Law registered with the Ukrainian Parliament (Draft Law No. 9417 dated 19.12.2018), which suggest increasing the threshold to UAH 400,000 (approx. EUR 14,000). The law is aimed at the implementation of the 4th EU Anti-Money Laundering Directive and there is a strong support in the Parliament for its adoption. In case this Law passes, it is expected to further incentivize the formal transfer of remittances.

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3 . A wide-reaching education campaign to improve financial and fiscal literacy

In order for migrants to feel comfortable using formal remittance transfer channels, they should un-derstand the mechanisms behind different channels and associated risks and benefits. We believe that a wide-scale information and education campaign is needed to provide migrants with the minimum knowledge to make an informed decision on the channel of remittances.

Such information and education campaign can cover the following aspects:

1. banking system of Ukraine and how the State guarantees its stability;2. bank transfers: concept of IBAN transfers, pros and cons for the migrant, fees, duration, limits and

eligibility criteria;3. P2P transfer: concept of P2P transfers, pros and cons for the migrant, fees, duration, limits and

eligibility criteria;4. additional non-financial services that banks provided to migrants;5. risks and benefits of different formal channels;6. where to find more information and/or whom to ask questions.The information and education campaign should have a wide media reach. Moreover, it should be sup-ported by information sessions and material. The information sessions could be provided by the asso-ciations of migrants, Ukrainian embassies abroad, but also market players, like banks.

Secondly, the taxation of remittances is affected by at least five key issues:

1. Double taxation of tax-residents. At the present, by declaring their income earned abroad (even in case they already paid tax income and provide a tax certificate), migrants only risk paying addition-al taxes. This is a major disincentive for migrants to go through such a process, which is shown by the limited amount of tax declaration received by the tax authorities from Ukrainian migrants.

2. Tax certificate. Currently it has very strict format and tax authorities of many countries cannot issue such documents in this set format (e.g. on paper, with the official original stamp, etc.). With no tax certificate, migrants cannot prove to Ukrainian tax authorities they have paid their tax on income abroad, and so their income will be taxed one more time by the Ukrainian authorities.

Figure 12: Double taxation process and issues

Key issues affecting migrants

Ukrainian migrants

Disincentive: when declaring their tax income in Ukraine, migrants expose themselves to paying additional taxes to

Ukrainian authorities

Issue: Certificate to avoid double taxation is too rigid,

limiting its actual use

Migrants may pay additional taxes to the Ukrainian tax

authorities

Migrants pay their tax income abroad

Migrants pay their income tax in

the country of origin

Migrants pay their tax income to the Ukrainian

authorities

Migrants pay tax to the Ukrainian

authorities, only if they have a source of

income in Ukraine

Circular migrantstax resident in Ukraine

Long-term migrantstax resident abroad

Migrants may pay additional taxes to the Ukrainian tax

authorities

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3. Taxation of gifts. Currently gifts to/from tax non-residents are taxed at 18 per cent personal income tax rate (while similar transfers between tax residents are taxed at either zero or 5 per cent depending on family relationship between the individuals). This means that in addition to tax on income paid to the destination country, migrants will have to pay an additional taxation on gift.

4. Lack of awareness and understanding of Ukrainian fiscal compliance by migrants. Migrants lack knowledge when it comes to their rights and duties related to taxation. Together with their lack of trust towards state institutions, this factor may disincentive migrants to declare their income.

5. Ukrainian tax authorities currently do not have efficient tools to monitor the source and volume of migrants’ incomes. This is partly linked to the lack of exchange of information between foreign and Ukrainian tax authorities, between customs and tax authorities; and by bank secrecy.

How to improve the legal framework to facilitate remittances transfers in Ukraine?

1 . Simplify the procedure for abroad tax declaration (presentation of hosting country’s tax declaration could be considered) and avoid to tax any income produced abroad under a defined threshold

The format of the certificate required to support claiming foreign tax credit for tax residents in Ukraine in respect of income taxed abroad would need to be either: simplified (either the format is simpli-fied, either the Ukrainian tax authorities recognise hosting country’s tax declaration); or eliminated. The legislation may be changed to:

Remove the requirement for the migrant to follow the strict requirements for the tax certificate.

a) Recognise existing legal formats of the tax certificates of each destination country, on a case by case basis. For example, today Canadian tax authorities cannot follow the Ukrainian requirements for the foreign tax certificate (cannot provide stamped/signed documents), but Italian or Polish authorities can do it. Therefore, the flexibility is needed for the selected countries.

b) Simplify the confirmation of the foreign tax paid by tax residents of Ukraine (e.g. a foreign tax return, a certificate from the foreign employer), to accept e-certificates or to accept the original tax certificates of the foreign countries in their own format, if their translation was certified by the embassy of Ukraine.

2 . Incentivise migrants who are tax residents in Ukraine to declare their income, by ensuring them that providing that they can prove they have paid their taxes abroad, they will not be subject to further tax by Ukrainian authorities on their income earned abroad

By declaring their income earned abroad (even in case they already paid tax income and provide a tax certificate), migrants only risk to pay additional taxes. This is a major disincentive for migrants to go through such a process, (shown by the limited amount of tax declaration received by the tax authori-ties from Ukrainian migrants).

The legislation could be changed to guarantee migrants that no additional income tax will be applied on the foreign income when declaring it in Ukraine and supporting with the foreign tax declaration.

Fostering formal transfer of remittances through the banking system, as there will be no additional taxes that might apply to the migrant;

• Increasing remittances will encourage private consumption and hence increase of indirect taxes;

• Increasing remittances will remain in the formal economy, leaving to increasing investment capac-ity of banks;

• Fostering trust relationship between migrants and state institutions, based on the clear, simple and predictable tax rules.

Although the current bilateral treaties on avoidance of double taxation partially cover this issue, there are still inconsistencies in its implementation. Specifically, taxation of income (remittances) entering Ukraine and destined for investment should be regulated separately, outside the bilateral double tax-ation legislation. Guarantees, clear and transparent tax rules should be introduced for the invested income to foster productive investment of savings.

3 . Eliminate gift taxation under a defined threshold (calculated as total for one tax payer for one fiscal year)

Elimination of gift taxation under a defined threshold per a defined period (calculated as total for one tax payer for one fiscal year) will stimulate migrants to use formal channels for remittances as well.

Cancelling the 18 per cent rate would stimulate individuals to perform such transfers more openly, through formal channels. Differences between what is gift, and what is tax evasion, a threshold – cal-culated based on NBU statistics, should be defined as well.

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4 . Create a register of migrant workers as an instrument to facilitate transparency and transfer of remittances in Ukraine avoiding double/discriminatory taxation of beneficiaries of transfers under a defined threshold (other services can be also envisaged thanks to such register)

The experience of European countries shows that a register of long-term migrants may facilitate the formal flow of remittances to the country. For example, the Italian government set up the Ana-grafe degli Italiani Residenti all’Estero (Registry of Italian (Citizens) Residing Abroad) in 1988, to facili-tate the administrative process of Italians tax non-residents living abroad.

Importantly, this process also eases the naturalisation of the descendants of Italian migrants.

Such a record-keeping system could be put in place in the context of Ukraine, providing similar bene-fits as the ones shown in the Italian case. The record-keeping system would keep a track of Ukrainian workers that are long-term migrants.

The people included in this register (and the members of their families) should benefit from the sim-plified procedure of recognition of their foreign income by Ukrainian tax authorities. Therefore, the migrants who register themselves will receive confidence that no additional taxes to those paid on the destination countries will be charged by the Ukrainian tax authorities on their foreign income. To provide migrants with additional incentives to be registered, the embassies, that will keep the register, may provide some free services to migrants (e.g. translation and certification of tax certificates, free remittance transfers, consular services).

From a government perspective, such a tool generates important benefits:

• The record keeping system makes it easier to follow the migration trends (volume of migration, associated skills needs, flow of remittances) and generate adequate policies to transform migra-tion into an opportunity.

• The record keeping system helps create trust between migrants and state institutions.

• Currently, the Action Plan for 2019−2021 on the implementation of the Strategy for State Migra-tion Policy of Ukraine for the Period until 2025 highlights the need to have a better monitoring tool on the amount of migrants, both internal and external, for the purposes of more accurate statis-tical data and informed policy making (explicitly stated in the goal 1.1. of the Action Plan: filling in the Unified State Demographic Register of the Unified Information-Analytical System of Migration Management (EIAS). The proposed register could be considered when addressing such a need. However, it is crucial that the register remains a tool for a migrant, and not for controlling and monitoring entities. Therefore, the state monitoring of migrants through such a register should be balanced with the strong advantages for migrants.

5 . Conduct the awareness raising campaign to help migrants better understand their rights and duties related to taxation

Conducted research revealed a need to provide informational support and raise awareness among circular and long-term migrants on the Ukrainian taxation framework, using several communication channels such as social media, information brochures, migrant associations etc. Such a campaign could be led by the Ministry of Finance, with the support of Ukrainian migrants’ associations abroad.

MARKET ENVIRONMENT FOR MIGRANT INVESTMENT AND MICROFINANCE

4

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4. MARKET ENVIRONMENT FOR MIGRANT INVESTMENT AND MICROFINANCEThe current chapter analyses the environment for investment and microfinance in Ukraine. The analysis in this chapter follows two main objectives. The first one is to shed light on the current practices regarding migrants’ investments in Ukraine and the reasons for such investments (from both legal and market perspectives).

The second objective is to analyse the microfinance environment, by looking at the characteristics of the supply and the demand for such a financing. This will help us understand how the investment mecha-nism could best address some of the needs and interests of the supply and demand around financing for entrepreneurs and MSMEs.

The underlying goal is to tailor the proposed investment mechanism to the characteristics, interests and con-straints of Ukrainian migrants.

This chapter is hence structured around five sections. The first looks at the legal framework around the in-vestment of remittances, to analyse how it influences migrants’ investment choices. The second section ap-proaches the same issue, i.e. the investment of remittances, but from a market perspective, to show where migrants invest and why. The third section then dives into the microfinance environment by analysing the sup-ply of financing targeting the needs of entrepreneurs and MSMEs. The fourth section looks at the demand of MSMEs for microfinance. Last, a set of policy recommendations and conclusion on how to support the micro investment environment and foster productive migrant investment in Ukraine is highlighted.

4.1. Legal aspects of investment of remittances

The Ukrainian legislation, including the Law on “External Labour Migration”18 does not provide specific privileges or incentives for investment of migrant savings.

Even though this law contains certain regulations related to the social welfare of migrant workers, such provi-sions have only a declarative character and do not provide for appropriate mechanisms of reintegration and further employment of migrants in Ukraine or other incentives (including for investment activities).

4.1.1. Savings channels

Migrants can store their remittances as savings in a deposit account in a bank (in the country of origin or in Ukraine), or in governmental and municipal bonds.

This section hence looks specifically at these channels, and analyses how and why migrants use them, thus highlighting some of their pros and cons.

Deposits

Migrants can channel their remittances in a deposit bank account. This type of products can only be opened by Ukrainian banks, as per the Law of Ukraine “On Payment Systems and Transfer of Funds in Ukraine”. There-fore, this requires migrants to open a bank account, for which they need a copy of their passport, as well as a copy of their taxpayer registration card (for residents only).

18 The Law of Ukraine “On External Labour Migration” No.761-VIII dated 05 November 2015. https://zakon.rada.gov.ua/laws/show/761-19?lang=en

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For the Ukrainian State Savings Bank (Oschadbank), the deposits are guaranteed in full, while for the oth-er banks – only the amount up to UAH 200,000 (approx. EUR 7,200) is guaranteed.

This regulation has a positive impact on the channelling of migrants’ savings, since the possibility to put funds on a deposit account guaranteed (partly or fully) by the state gives incentives for migrants to store their savings in bank accounts. Still, some of the migrants may be reluctant to do so fearing that they might be required to disclose additional documents / information; or that they could lose their deposits in case of bank crash.

As a rule, banks are obliged to pay interest on deposits in a manner stipulated in the bank deposit agreement. The Ukrainian Law does not provide for major differences for the regulation of UAH and foreign currency de-posits. Financial monitoring rules are similar in both cases. As for interest rates, if a deposit is placed in UAH, interest will be paid in UAH. At the same time, if a deposit is placed in foreign currency, interest will be paid either in UAH or in foreign currency, subject to the client’s discretion.


Migrants (both residents and non-residents) can channel their remittances in different types of bonds issued either by the Ukrainian State itself or by local municipal bodies19.

Government bonds (also referred to as State bonds) and Municipal bonds are (i) long-term bonds (more than 5 years); (ii) medium-term bonds (from 1 to 5 years); (iii) short-term bonds (up to 1 year). Depending on the term of bond, buyer may receive interest based on the interest rate established in the bond. Government and Municipal bonds can be issued both in UAH and in foreign currencies. The minimum nominal amount for Government bonds in UAH is UAH 1,000 and for Government bonds in USD is USD 1,000.

Due to the complexity of the purchase procedure of Government bonds, migrants can only buy bonds through intermediary institutions (such as banks, investments companies or stock exchange traders). However, these commonly set up their own minimum threshold for investments in Government bonds. These thresholds are generally high (e.g. UAH 100,000 and above). This means that migrants cannot buy bonds for less than UAH 100,000 in this example. These high thresholds represent a barrier for migrants to invest in bonds.

4.1.2. Investment channelMigrants can also channel their remittances in MSMEs and Investment Funds, and more especially the Corpo-rate Investment Funds (CIF). This section looks in more depth at these investment instruments, highlighting whether, how and why they are used (or not) by migrants.

Investment Fund

When investing part of their remittances, migrants may opt for investment certificates issued by asset man-agement companies or purchase shares in Corporate Investment Funds (CIF). Possibility to make investments via Investment Funds gives migrants additional choice for investments.

In practice, Corporate Investment Funds is not a widespread form of investment in Ukraine, especially for individuals.

The main reasons for individuals not to invest in Corporate Investment Funds include:

• low awareness about existence of Investment Funds• low awareness and understanding of the mechanism of work of Investment Funds• low awareness about guarantees to ensure the return of investments

19 The Law of Ukraine «On Securities and Stock Market» No.3480-IV dated 23 February 2006. https://zakon.rada.gov.ua/laws/show/3480-15

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• general lack of trust in financial institutions

• complexity of investment procedures

• general lack of financial literacy among population.

MSMEs

Migrants can also choose to invest their remittances in MSMEs. To do that, they would need to i) identify an opportunity; ii) invest in the form of equity or loans depending on the legal structure of the company.

If it is a share joint-stock company, migrants can buy the shares of the company and/or provide a loan. If the company is a limited liability company, migrants can provide a loan, or participatory loan (where the in-terest charged is linked to the progress of the business).

One of the pitfalls of such an approach is that migrants cannot identify and access easily MSMEs’ investment opportunities through e.g. a structured and organised platform connecting their savings with MSMEs invest-ment opportunities. In fact, migrants can only invest in MSMEs that may be directly or indirectly related to them (through e.g. their social networks). Such information asymmetry translates in high transaction costs (in terms of identifying the right MSMEs investment opportunities), which helps explain why migrants are to some extent reluctant to engage in MSMEs investments.

While migrants would like to invest in businesses in their local communities, they do not have adequate tools to do so, as illustrated in the figure below. Hence, there is a gap between migrant investment capac-ity and unmet financing needs of MSMEs.

Figure 13: Disconnect between migrants and their remittances, and MSMEs investments


Investments

Investment Fund

MSMEs

Real estate

Deposits


Savings

Remittance Investments Overview of SMEs source of (investment) finance


Banks



Alternative finance

MSMEs


Source: PwC

4.1.3. Taxation of investmentThe current legislative framework does not provide incentives towards productive investment. The latter and non-productive investment (e.g. in bonds) are taxed at the same level, i.e. 18.0 per cent plus 1.5 per cent mili-tary tax; while the level of risks differs (investing in MSMEs is often riskier than in bonds). Therefore, migrants are not incentivised to invest in riskier assets, and rather opt for safer type of investments.

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4.2. Investment of remittancesAs mentioned in the introduction, while more than 20 per cent of migrants wish to invest in their local com-munities, the share of remittances dedicated to investments is low (1%).

When channelled, migrants’ remittances mainly go towards safe and conservative type of investments (i.e. savings): deposits and bonds.

Deposits are particularly attractive to migrants as:

• deposits are guaranteed by the Deposit Guarantee Fund up to UAH 200,000 (approx. EUR 7,200);

• deposit is a simple and easy to access instrument;

• deposits provide a stable fixed income and are risk free (up to the amount guaranteed by the Deposit Guarantee Fund);

• deposits are a flexible mechanism that could be adjusted for specific clients’ needs (e.g. duration, currency, withdrawal and additional financing options).

The analysis of the offer of deposits shows that Ukrainian banks encourage individuals to invest in depos-its in national currency. The average interest rate for the deposits of individuals in UAH across banks in 2019 is 14 per cent, once in USD it is limited to 2.0 per cent and in EUR to 0.5 per cent.

In terms of duration, banks focus their offer to individuals on short to medium-term deposits, with most of the banks offering the best interest rates for the deposits of a duration from 6 to 12 months long. This also reflects the market demand: associations of migrants as well as banks confirm that individuals prefer the de-posits of up to one year over longer-term deposits. This is linked to the low trust in the banking sector and fear of economic instability and inflation.

Government bonds are the second preferred choice for remittance channelling, but they are less popular among migrants. For example, in 2018, the volume of individual investments in government bonds stood at UAH 6.6 billion, which is about 1.2 per cent of the volume of deposits of individuals (UAH 530.3 billion)20,21.

The low demand for government and municipal bonds shows the lack of awareness and understanding of this product by individuals. The government bonds in Ukraine provide several advantages compared with commercial deposits, including higher interest rates not subject to personal tax income; they can be sold at any time; and a state 100 per cent guarantee of government bonds22. However, the pro-cess of buying government bonds is more complicated: financial intermediaries normally put a high entry threshold for purchasing government bonds, which vary from UAH 100,000 (approx. EUR 3,500) to UAH 1 million (approx. EUR 35,000). In addition, holders of government bonds need to file income declaration with the State Fiscal Service of Ukraine.

Absence of targeted incentives for migrants’ investments limits their willingness to invest savings into the economy.

As shown in the analysis above and the literature, there are several factors preventing migrants to invest:

1. migrants’ behaviour is risk-adverse;

2. migrant’s awareness and understanding of their investment options is limited;

20 Українська правда. Як купити державні облігації та заробити на них, 4 лютого 2019 року. https://www.epravda.com.ua/publications/2019/02/4/644883/

21 National Bank of Ukraine, Financial sector statistics, https://bank.gov.ua/statistic/sector-financial/data-sector-financial22 When in the bank, in case of its liquidation, only up to UAH 200,000 is guaranteed by the Deposit Guarantee Fund.

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3. migrant’s trust towards financial institutions (and state institutions) is rather low;

4. migrants’ confidence towards the economic prospects of Ukraine is rather low, characterised by un-certainties related to e.g. the banking sector and the business environment.

4.3. Microfinance market in UkraineThe development of SMEs, including individual entrepreneurs is essential to the economic growth of Ukraine. Small and medium-sized enterprises (SMEs) played a key role in Ukraine’s transition process from a command economy to a market economy since the 1990s. SMEs can indeed facilitate this shift to a more diverse, de-mand-driven and market-oriented supply of products23. In 2017, there were 337,857 micro and small and me-dium-sized enterprises (MSMEs) in Ukraine, accounting for 99.9 per cent of the total number of companies and about 80.8 per cent of all jobs in entrepreneurial entities in 201724.

As many as 21.3 per cent of SMEs report the lack of access to finance as the main constraint for the development.

However, MSMEs face issues, preventing them to further develop and contribute to a sustainable and inclu-sive economic growth. SMEs reported that the main constraints they face relate to: lack of access to finance (21.3%), corruption (19.2%), tax rates (15.5%), political instability (11.9%) and grey economy (7.7%)25.

This section on the microfinance environment will dive in the issue of access to finance, approaching this the-matic from a supply (lending providers) and demand (MSMEs and start-ups) perspectives (see figure below).

This section hence looks at the financing supply, covering commercial finance (microfinance, credit unions, banks, venture capital and business angels); subsidies and donations type of finance (including government support programmes and crowdfunding platforms) aiming to unlock finance for SMEs.

Figure 14: Overview of SMEs source of finance


Banks



Alternative finance

MSMEs


23 Koriakin and Kirchner, Improving SME Access to Finance in Ukraine, 2016. https://www.beratergruppe-ukraine.de/wordpress/wp-content/uploads/2016/03/PP_02_2016_en.pdf

24 Centre for Economic Strategy. How can Ukrainian SME grow into national and global champions? 2019. https://ces.org.ua/en/how-can-ukrainian-sme-grow-into-national-and-global-champions/

25 Government of Ukraine, Strategy for Small and Medium-sized Enterprise Development in Ukraine until 2020, 2017. http://me.gov.ua/Documents/Download?id=7a48c253-8e8e-4c1d-ad66-bbcb261b54ba

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4.3.1. Supply of commercial financeThis section provides an overview of the commercial sources of (investment) finance for MSMEs.

“Commercial” sources of finance refer to market-based finance provided by the private sector. These include:

1. microfinance institutions

2. banks

3. non-bank financial institutions such as credit unions

4. venture capital and business angels.

Microfinance institutions

The microfinance market is not well-developed in Ukraine. This is partly explained by the fact that there is no legislative framework for setting up and operating Microfinance Institutions (MFIs)26.

While this means that there is no MFIs, it does not mean that microfinance does not exist in Ukraine. Instead, the microfinance market is largely covered by financial (banks) and non-bank financial institutions (such as credit unions, venture capital etc.). Requirements to obtain micro-loans are often too demanding and ex-pensive. Collaterals may include equal deposit amount, real and movable property, property rights, surety, vehicles and equipment being purchased. In addition, interest rates are rather high, ranging from 18 per cent to 56 per cent in UAH, and from 5 per cent to 9 per cent in USD and EUR.

Banks

The Ukrainian banking sector has been consolidating over the last few years, supported by the regulations and measures from the NBU. It is still in the process of recovery from the latest crisis and increasingly looks at servicing the needs of SMEs. However, banks suffer from several issues (e.g. the portion of non-performing loans in their portfolio), which influence their risks behaviour.

Banks tend to be rather conservative and risk-adverse when it comes to lending money, especially for entre-preneurs and MSMEs with a lack of collateral or short financial history. These represent riskier investment than large companies.

In turn, the financial products offered by banks to SMEs are rather traditional. Most of them consist of loans with few guarantees being offered. For instance, when looking at the top five Ukrainian banks, 92 per cent of their financial products were loans, while the remaining 8 per cent were guarantees.

Banks’ financial products are assessed following a risk-adverse approach (short-term duration; high interest rates; heavy requirements in terms of documentation and collateral).

More than half of banks’ financial products provide mid to long-term investment financing with an average loan duration of seven years. On the contrary, loans targeting working capital needs have a shorter duration, ranging from zero to three years. They account for 40 per cent of the number of financial products – while 60 per cent of financial products target companies’ investment needs. Even though the duration of these financial products differs, the annual interest rates are rather similar, averaging 20 per cent for loans in UAH, 8 per cent for loans in USD and 7 per cent for loans in EUR.

Requirements for loans targeting investments and working capital needs are similar when it comes to docu-mentation and collaterals. Enterprises need to provide i.a. business registration documentations including tax registration, business permit etc. and financial documentation such as balance sheet and financial statement.

26 A microfinance institution (MFI) is often defined as an organisation that provides financial services to the low income people/ microentrepreneurs. In the context of Ukraine, microfinance providers cannot provide any type of bank accounts (deposits, current etc.).

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However, loans targeting investment financing needs required in addition the enterprises’ own contribution, which can be up to 20 per cent to 30 per cent of the value of the loan. Therefore, it may be more difficult for companies to obtain investment financing type of loans. Last, banks’ financial products are characterised by particularly high annual interest rates, which range from 18 per cent to 21 per cent in national currency27.

While few banks have started opening credit lines for start-ups and SMEs, these are rather limited in scope and reach. For instance, MSMEs can hardly access risk-sharing type of financial products. As a result, MS-MEs and especially the micro enterprises and start-ups struggle accessing finance through the banks.

Non-bank financial institutions (credit unions)

In 2018, there were about 378 credit unions in Ukraine spread all over the territory, with 564,100 participants. While the number of credit unions and participants have decreased (-18.2% and -12.3% respectively in compar-ison to 2017), the volume of loans increased by 5.7 per cent, reaching UAH 1.9 billion (EUR 68.5 million)28.

MSMEs and start-ups that are not able to access finance through banks (and those in the agricultural sector), often turn to non-bank financial institutions such as credit unions.

The appetite for loans of credit unions is partly explained by the lower requirements in terms of documenta-tion than in the banking segment.

The appetite for loans of credit unions is partly explained by the lower requirements in terms of documenta-tion than in the banking segment (especially when it comes to financial statements and loan application doc-uments); collaterals; and their presence in rural areas. Credit unions are also popular in some specific sectors such as the agriculture (some only work with this sector). In fact, the greater part of these unions provides their services exclusively for agribusiness, and much less for other economic sectors.

However, borrowing from credit unions is associated with several barriers. First, the interest rates proposed by the credit unions are higher (at least 25–40% per year) and maturity periods are rather short (1–2 years) in comparison to the banking sector. Second, membership in credit unions is a condition to apply for the loan. Overall, financial products of credit unions are often focused on the coverage of company’s current expenses, rather than a longer-term investment activity and are significantly more expensive than bank loans.

Alternative finance (venture capital and business angels)

Banks and credit unions are not the only actors providing finance to MSMEs in Ukraine. There are also alter-native financing sources, which include venture capital, and business angels among others. These sources of finance are growing in volume and represent potential alternatives to the more traditional financial channels. The latter only supply limited funding to seed and start-ups. In fact, the total value of venture capital flow mostly in the Information Technology (IT) sector. The investment volume had more than doubled between 2015 and 2018, going from USD 132 million (EUR 120 million) to USD 337 million (EUR 305 million).

However, venture capital funds have a very specific target: they are geared towards financing large (over hundred thousand dollar) investments in IT companies.

In fact, software, hardware and online service companies are leading in terms of the value of venture capital deals (EUR 106 million and EUR 74 million respectively). The prevalent number of funds operating in Ukraine are focused on the seed stage29, and the average ticket amounted to USD 920,000 (EUR 830,000). In other words, venture capitalists do not often serve SMEs with small investment needs.

27 National Bank of Ukraine, Financial sector statistics, https://bank.gov.ua/statistic/sector-financial/data-sector-financial28 Ukraine open for business, Number of credit unions in Ukraine shrinks to 378, 12 April 2018.

https://open4business.com.ua/number-of-credit-unions-in-ukraine-shrinks-to-378/29 UVCA, Ukrainian Venture Capital and Private Equity Overview 2018, 23 April 2019.

http://uvca.eu/en/news/uvca-has-presented-overview-of-the-ukrainian-investment-market

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4.3.2. Supply of subsidies and donationsGovernment programmes

The government of Ukraine has put in place several programmes at the national and regional levels to support access to finance for MSMEs (see Table below). These programmes are shaped by the Law of Ukraine “On De-velopment and State Support of Small and Medium Enterprises”30, and aim to support the SME Strategy 2020.

Table 5: Examples of National and Regional programmes for SMEs

National programmes Regional programmes

The State Finance Institution for Innovations

Preferential lending to SMEs (Odesa Regional State Administration)

The Ukrainian Foundation for Entrepreneurship Support

Financial support for agribusiness (Lviv Regional State Administration)

The Ukrainian National Start-up Fund Easy start programme (Dnipro City Council)

The Ukrainian Inventors Support Fund. Loan compensation (Kryvyi Rih City Council)

The State support of farming and cooperation

While these initiatives show a real interest of the government in supporting MSMEs, they are often limited in terms of reach and scope. For instance, the Ukrainian National Start-up Fund is endowed with UAH 50 mil-lion (EUR 1.5 million) of potential grants to start-ups and the Ukrainian Inventors Support Fund was granted UAH 100 million (EUR 3.0 million) to support innovative enterprises. At the same time, the financing demand of MSMEs is estimated to be around EUR 9.3 billion, showing that the current government financing is neg-ligible compared the SME financing needs. In addition, government programmes are often not well dissemi-nated, and in many cases, MSMEs are not aware of them.

Governments’ interventions are constrained by the legal environment31: Ukrainian government bodies are not allowed to be a founder/co-founder of, or a participant of Investment Funds32, 33.

This is partly explained by the fact that Investment Funds aim to generate profits, which is not in line with government’s mandate. This is a missed opportunity as co-financing (the combination of public and private money – including remittances and diaspora investments) and blending (the combination of financial instru-ments) offers a great opportunity to leverage public funds to attract private sector investments (including those from the smaller scale diaspora). These can in turn generate further socioeconomic impact.

Crowdfunding platforms

Crowdfunding platforms (especially international ones) have grown in popularity in Ukraine during the past few years. Entrepreneurs submit their business idea, thus requesting financing, and can receive donations from the public.

The development of crowdfunding platforms is limited by the lack of legal and regulatory framework.

30 The Law of Ukraine “On Development and State Support of Small and Medium Enterprises” No.4618-VI dated 22 March 2012. https://zakon.rada.gov.ua/laws/show/4618-17?lang=en

31 The Law of Ukraine “On Collective Investment Institutions” No.5080-VI dated 5 July 2012, Article 4. https://zakon.rada.gov.ua/laws/show/5080-17?lang=en

32 The only exception is participation through the legal entity in which state/municipal body’s hold less than 25% of the Charter Capital. Such legal entities are not forbidden to participate in Investment Funds.

33 The Law of Ukraine “On Collective Investment Institutions” No.5080-VI dated 5 July 2012, Article 4. https://zakon.rada.gov.ua/laws/show/5080-17?lang=en

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Ukrainian entrepreneurs and SMEs raised over USD 2 million (EUR 1.8 million) from crowdfunding in 201834. For example, the “FellVR” project, which aimed to raise USD 60,000 (EUR 55,000) managed to gather a total of USD 500,000 (EUR 450,000) on the Kickstarter crowdfunding platform. Another project “Ochis Coffee”, also used the Kickstarter crowdfunding platform to raise money. Instead of the USD 10,000 (EUR 9,000) target, they successfully leverage USD 13,000 (EUR 12,000), among which over 10 per cent of investors were Ukrainians.

Contrary to banks, which provide limited funding for start-ups and MSMEs35, start-ups launching a campaign on a crowdfunding platform such as Kickstarter often reached their fundraising objectives (83% did so in 2017)36.

In the current state, crowdfunding platforms in Ukraine can only function on a basis of donations. They hence cannot serve as investment vehicle (providing a return on investments to their investors)37. Such limitations create significant risks to investors, and transform crowdfunding platforms into a philanthropic, rather than investment, instrument. However, if a legal framework dedicated to crowdfunding platforms was to be de-veloped, then crowdfunding platform could be of interest for second or third generation Ukrainians living abroad, (which has higher financial capacity, risk appetite, and interest in financing social and philanthropic projects). Crowdfunding platforms could become investment platforms, matching the needs of the diaspora (financial through a return on investment; and social), and those of MSMEs and entrepreneurs.

4.4. Demand for microfinancingAccording to a survey conducted by the NBU, the SMEs’ demand for debt financing has constantly been increasing over the past few years. Even though the number of SMEs has decreased in comparison to 2013, their demand for financing has generally increased since 2016. SMEs are particularly looking for access to fi-nance covering their working capital and capital investment needs, according to the NBU survey of Q2:2019. The demand for short-term loans in UAH and USD is also expanding. It is also worth mentioning that the SMEs growth expectations are almost 6 per cent higher than the average within Ukraine’s economy38.

While over 60 per cent of SMEs report a need for a loan, only 15 per cent of small firms and 22 per cent of medium-size firms which requested a loan received one39. Recent surveys show that about 6 per cent of Ukrainian SME’s obtained financing in 201840; and about 69 per cent of SMEs finance their needs in capital investments with their own funds41.

34 AIN, Ukrainians raised over $2 million from crowdfunding in 2018. Here are 15 most successful projects, 20 December 2018. https://ain.ua/en/2018/12/20/crowdfunding-of-ukraine-2018/

35 Accoridng to the World Bank, only 15% of small size companies received a loan in 2013. 36 Interfax-Ukraine, Ukrainian projects raise some $2 mln on crowdfunding platforms in 2017, 15 September 2017.

https://en.interfax.com.ua/news/economic/448991.html37 This would include i.a. the supervision by the National Bank of Ukraine and/or the the Ukrainian government, tailored

to the characteristics and activities of microfinance; specific regulation framework around microfinance, defining what commercial and tax law as well as financial regulation apply etc.

38 National Bank of Ukraine, Survey on bank lending conditions, 2019. https://bank.gov.ua/control/uk/publish/category?cat_id=20231434

39 World Bank, Innovation and entrepreneurship ecosystem diagnostic, 2017 http://documents.worldbank.org/curated/en/126971509628933853/pdf/2-11-2017-14-55-6-UkraineInnovationandEntrepreneurshipEcosystemDiagnostic.pdf

40 Euronews, Fuelling Ukraine’s SME potential, 01 February 2019. https://www.euronews.com/2019/02/01/fuelling-ukraines-sme-potential

41 State Statistics Service of Ukraine, Mirgation survey, 2017.

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According to a recent study42, SMEs struggle accessing cheap debt financing, which is partly explained by the fact that:

• MSMEs find the interest rates of loans too high. According the NBU survey of Q2:2019, the majority of entrepreneurs claim that the high interest rate is the main reason preventing them from borrowing43.

• MSMEs are often discouraged by the high requirements for collateral.

• MSMEs are often discouraged by the complexity and the demanding nature of the documentation process. The NBU has put in place strict regulations relating to financing enterprises. One particular issue concerns the credit worthiness assessment that enterprises need to pass to obtain a loan. Such an assessment puts particular emphasis on the financial statement of enterprises. The latter need to prove that they are and have been profitable for a number of years – this aspect is often more import-ant for the loan decision than the availability of collateral, due to the inflation processes.

In 2015, the SME financing gap was estimated to be around EUR 9.3 billion, composed of EUR 0.9 billion of equity and EUR 8.4 billion of debt financing.

Table 6: SMEs financing gap

Type of finance Demand Supply Financing gap % of demand

Equity, EUR m 6,668.53 5,794.92 873.61 13%

Debt, EUR m 20,005.58 11,585.02 8,420.57 42%

Total, EUR m 26,674.11 17,379.93 9,294.18 35%

The Table above allows highlighting the lack of access to finance for SMEs, which is particularly emphasised for debt type of financing. Indeed, only 13 percent of SMEs have not obtained such type of financing. In con-trast, 42 per cent of the SME demand for debt financing was not met.

4.5. Lessons learnt and policy recommendationsThe lessons learnt and policy recommendations are structured in two parts. The first focuses on identifying and highlighting the needs of migrants when it comes to remittance investments. More specifically, it aims to answer the question: What do we need to know about migrants’ needs and interests before designing the tai-lored investment mechanism for migrants? The second part focuses on the MSMEs financing market, under-lining some of the interests and constraints of both the microfinance supply (banks) and demand (MSMEs). In particular, it aims to answer the following question: What we need to know about microfinance supply and demand before designing the tailored investment mechanism?

Migrants investments’ needs

Migrants are looking for opportunities to invest in businesses in their local communities . While mi-grants are not so confident about the economic prospects and stability of Ukraine, and do not trust fully the state institutions, they are motivated by both social and economic reasons to invest in businesses in their local communities. There is hence a need for a tool that can adequately combine these social and economic dimensions.

42 Institute for Economic Research and Policy Consulting, Improving SME Access to Finance in Ukraine, 2016. https://www.beratergruppe-ukraine.de/wordpress/wp-content/uploads/2016/03/PP_02_2016_en.pdf

43 National Bank of Ukraine, Survey on bank lending conditions, 2019. https://bank.gov.ua/control/uk/publish/category?cat_id=20231434

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Migrants have a limited awareness and understanding of their investment options. Even though an im-portant share of migrants is interested in investing, they are not necessarily aware and/or do not fully under-stand their investment options. This means that any new investment mechanism for migrants will have to be supported by a wide awareness-raising campaign, disseminated by public bodies, migrant associations and private sector actors.

Migrants opt for safe investments with a clear and predictable return on investment. Migrants’ investments’ behaviour is rather conservative and risk adverse. This is confirmed by migrants’ behaviour, who are mostly interested in deposits (rather than bonds, MSMEs or Investment Funds). This means that the investment mechanism should rather focus on providing them with a clear, predictable return on investment. In addition, the awareness-raising campaign afore mentioned should explain in an easy way what the investment option is about (financial and social benefits) and emphasise its safety and reliability.

From a legal perspective, there is no significant barrier for migrants to invest their remittances in deposits, bonds and Investment Funds’ products. Chapter 2 highlighted the three main options migrants have when it comes to savings and investments: deposits, bonds and Investment Funds. The first two require the open-ing of a bank account (and hence copy of passport and taxpayer card). In the case of the Investment Fund, migrants are required to provide their (і) Passport and (іі) Taxpayer’s Certificate. In case, if the amount of purchased shares exceeds UAH 150,000 (approx. EUR 5,500), individuals may be requested to provide docu-ments that can prove sources of funds of such individual.

The current legislative framework does not provide incentives towards productive investment. All invest-ments, independently whether they are productive (leading to the creation of jobs and/or to gross capital formation) or not, are taxed at the same level. The lack of incentives for productive investments is a missed opportunity for the country, as productive investments are most relevant to create jobs and contribute to local economic development.

The absence of legal and regulatory framework prevents both microfinance and crowdfunding platforms to play a role in raising funds and investing them in MSMEs. A proper legal framework for microfinance institutions would need to be developed for microfinance to grow in Ukraine.

Because of the legal and regulatory framework, the use of crowdfunding platforms is subject to general re-quirements of Ukrainian civil law. This means that crowdfunding platforms do not benefit from a specific sta-tus allowing them to facilitate investments. Instead, they rather function on a donation-basis. While migrants are interested in contributing to the local socioeconomic development in Ukraine, our study shows that their choices in terms of investment are guided primarily by the security and profitability of the investment op-tion. Therefore, crowdfunding platforms may not be the most relevant mechanism to collect remittances and channel them into productive investments (in the current legal and regulatory framework).

Ukrainian government bodies are not allowed to be a founder or a participant of Investment Funds44 . In many other countries, governments have set up a regulatory framework allowing them to finance invest-ments with the private sector, following the principle of leveraging public funds to attract private investments. In practice, blended finance offers an innovative approach to mitigating risk and managing returns to create competitive investment opportunities that can crowd in private sector capital at scale. This is not possible yet in Ukraine, and this will be a consideration for the design of the investment mechanism.

In the current legal and market environment, there is no actor that both raises and invests funds of individuals into MSMEs (and hence productive investments). As highlighted in the analysis, there is no investment mecha-nism in Ukraine that would bring together the individual investors (like migrants) and the MSMEs or entrepreneurs that seek investments. This gap has not been yet efficiently tackled by existing financial tools on the market.

44 The only exception is participation through the legal entity in which state/municipal body’s hold less than 25% of the Charter Capital. Such legal entities are not forbidden to participate in Investment Funds.

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What do we need to know about migrants’ needs and interests before designing the tailored investment mechanism for migrants?

1. There is a need to create an investment mechanism that would be able to raise the funds of individuals and invest them into MSMEs (i.e. productive investments).

2. Such a mechanism should focus on providing safe and predictable returns on investment, preferably in foreign currency (to hedge the currency exchange risks). In addition, this investment option should be easy to understand and to apply in practice for migrants.

3. The investment mechanism should be supported by an awareness-raising campaign, conveyed by migrants’ associations, banks, and public institutions.

4. If involved in the investment mechanism, the government will have mainly a support role (not at the driver seat), to ensure the credibility of the mechanism vis-à-vis migrants who do not trust state institutions fully. In addition, investment decisions should be done by independent investment professionals.

5. If located in Ukraine, the investment mechanism cannot be co-financed by the government; and cannot issue any bonds to investors (see Chapter 7). In addition, following the risk perception of migrants towards the prospects of the Ukrainian economy, and the risks related to financial instability and currency fluctuation, the investment mechanism could be located elsewhere than in Ukraine (depending on Free Trade Agreements and bilateral treaties).

Microfinance supply and demand characteristics

The lending characteristics of banks does not match with the needs of SMEs, especially those of micro-en-terprise and start-ups. Lending from the banking sector is rather risk-adverse (supplying loans and demand-ing a high level of collaterals) and traditional (financial products are mostly composed of loans, i.e. the use of risk-sharing mechanism is not common). Therefore, there is a need for another financial solution that could facilitate MSMEs and entrepreneurs’ access to finance.

As in the case of the banking sector, credit unions provide expensive loans to MSMEs, but require less doc-umentation. Therefore, entry barriers for MSMEs are lower, as well as their loan application rejection rates. The financial products provided by credit unions do not fit the (investment) needs of the MSMEs, as they are expensive. In addition, most of the financial products are short-term oriented, helping MSMEs with working capital loans rather than investment loans.

Venture capital and business angels focus on companies in the IT sector, providing them with a total vol-ume of over hundred million dollars investments. Venture capitalist focus mainly on already developed and competitive start-ups, with a high growth potential. It is not hence a solution for traditional MSMEs. There-fore, the investment mechanism cannot rely on such a source of finance to collect and invest rather small remittance in businesses.

Banks have a high-risk perception of the MSMEs sector, and do not offer often tailor financial products to this segment. The financial products offered by banks to SMEs are rather traditional (mostly loans and only a few guarantees) and follow a risk-adverse type of approach (short-term duration; high interest rates; heavy requirements in terms of documentation and collateral). In addition, although this is improving, the interest and appetite of banks to lend to MSMEs is limited due to the high-risk perception. There is hence a gap in financing for MSMEs, and especially the young ones with limited financial record history.

The MSMEs’ demand for financing is growing, and yet not fully addressed by the market. MSMEs often finance their own investments by using internal funds, which limit their capacities to develop and grow. As in the case of micro-entrepreneurs, facilitating their access to finance could result in a stronger local economic development and the creation of more and better jobs.

What we need to know about microfinance supply and demand before designing the tailored investment mechanism?

1. The investment mechanism should provide financial products tailored to the needs of banks and MSMEs. It should partly focus on de-risking banks and credit’s union investments in MSMEs.

2. MSMEs and entrepreneurs should access finance more easily, with banks and credit unions proposing lower interest rates, reduced collateral and documentation requirements etc.

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FOREIGN PRACTICES OF MIGRANT INVESTMENT MECHANISMS

5

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5. FOREIGN PRACTICES OF MIGRANT INVESTMENT MECHANISMS

5.1. Selection criteria for case studies

The analysis revealed that all foreign practices presented in Chapter 5 have innovative elements that could be used as an “inspiration” for development of a tailored investment mechanism for channelling savings of Ukrainian migrants into productive investments. Because our analysis revealed some of the weakness-es and risks, we present them as case studies, rather than best practices.

The investment mechanisms that use migrant remittances and savings as a basis for investment in the econ-omy take different shapes across the world. In this section, we are considering case studies from countries that are similar to Ukraine – especially in terms of migration trends, as well as level of economic development and market environment.

Generally, the migrants’ investment mechanisms implemented around the world can be categorised into five groups, based on the focus of the instrument and the mechanism behind it. Further in this section, we provide the examples for each of these mechanisms:

1. Migrant bonds. This mechanism foresees the government agency to raise funds from migrants via issuance of bonds.

2. Diaspora banking initiatives (often run by migrant returnees) and the “bibancarisation” concept (one account in the country of residence, one account in the country of origin).

3. MFIs providing microfinance to entrepreneurs and MSMEs in Western and Eastern Europe. Such models promote local business development, but are based on large institutional investors and oper-ators, such as the European Microfinance Network.

4. Migrant trust funds raising a low regular donations form migrants and diaspora to finance projects selected by the government.

5. Migrant entrepreneurship co-financing model. This mechanism is based on the government or donor co-financing of the migrant’s investment in setting up their business. Such models can take a form of 1+1 financing (equal shares of migrant’s and public financing) or 1+2 financing.

The concept of bibancarisation foresees the collaboration between banks in the country of origin and country of destination of migrant. It includes a wide range of products and services: opening a remote account, from the country of residence in the country of origin, granting real estate loans in the migrant’s country of residence for acquisition in his country of origin, setting up savings products in the country of residence for investment in the country of origin and setting up savings products (including home savings) in the countries of origin for non-residents45.

The specific case studies were selected following several criteria:

1. Value and relevance of the measure:a. Aim to channel migrant savings in to one investment instrument?b. Does the instrument provide the investment support for local development in the country?

45 African Development Bank, Five ways to optimize the development impact of migrant remittances, 2012. https://www.afdb.org/fr/topics-and-sectors/initiatives-partnerships/migration-and-development-initiative/afdb-migration-activities

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2. Similarity of the environment: how large is the migrant trend in the country?

3. Scope: Are the initiatives far reaching in terms of impact? What is the size of the targeted beneficiaries?

4. Stakeholders involved: How much control did Federal/governmental authorities have on the project (e.g. can investments be earmarked to specific projects or is there a participative process involving migrants and communities to assess their needs)

5. Sustainability: Is the mechanism sustainable in the long term?

6. Uptake: Was there a significant uptake/absorption or incorporation of the initiative?

7. Transferable/Scalable: Is the initiative (and the experience gained from the measure) potentially transferable, scalable or adaptable to the Ukrainian context?

Based on these criteria, we have selected six case studies, which lessons learnt can feed into our own inno-vative model.

Table 7: Longlist of case studies

No Case Study Country of implementation Description

1 Israel bonds Israel A state agency collecting USD 43 billion (USD 1 billion per year) since 1951 by issuing bonds to the Israeli population and migrants without specifying the specific investments (except for specific do-nations).

2 Moroccans living abroad (MRE) banks

Morocco A network of banks in the key destination countries for Moroccan migrants, providing them with beneficial conditions and banking services between the countries. Moroccan migrants with beneficial conditions and banking services between the countries. Moroccans Resident Abroad (MRE) created their own bank, Al Amal, 30 years ago to finance projects in Morocco (is now part of Banque Popu-laire), which attracted most of MRE savings with BMCE and Atti-jarawafa banks. These three banks were able to adapt the French banking law and now continue their profitable bibancarisation con-cept at the EU level.

3 ADIE microcredit mechanism

France / International

ADIE is the largest microfinance organization of its kind and is based on microcredit experiences in Africa. ADIE has established a trans-Europe-an association as one of the most effective tools to provide SME loans and create self-employed/entrepreneurs from jobless people (among which new migrants are overrepresented).

4 Ethiopian Diaspora Trust Fund

Ethiopia The fund established with the support and active promotion of the Prime Minister Abiy Ahmed (2019 Nobel Peace Prize winner) aim-ing to raise donations from the migrants and diaspora to finance im-portant infrastructural and social projects in the country.

5 EEPCO sub sovereign corporate bond

Ethiopia Two types of sub sovereign bonds issued by the State for Ethiopian diaspora to raise USD 56 million for financing the construction of the Grand Renaissance Dam in Ethiopia.

6 PARE 1+1 Moldova The PARE programme is based on a “1+1” pairing scheme for business financing, in which the Government (through the Organisation for the Development of Small and Medium Enterprises – ODIMM) match-es amounts invested by successful applicants into their businesses.

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5.2. Longlist of case studiesThe current section provides a short analysis of each of the longlisted practices.

Table 8: Israel bonds

Name Israel Bonds Country Israel

Short description Government bonds and donations from the DCI (Development Corporation of Israel)

Logo

Mission Raising money from abroad (Israeli diaspora as well as any supporters and institutions) for the economic development (e.g. innovation) projects, infrastructure projects and donations (e.g. to support universities).

Timeframe Worldwide annual sales every year since the first bonds issuance in 1951.

Key numbers Above USD 43 billion since 1951, 6th consecutive year where more than USD 1 billion are raised.

Success factors • Availability of large migrant and diaspora community

• Strong financial capacity of diaspora

• Jewish solidarity as an enabling factor

• Financial security of bonds as an instrument

• Long track record of implementation as a strong demonstration effect

Investment purpose

Israel Bonds can be used by migrant for bond financing, retirement plans, gifts/donation for philanthropic purposes with tax deduction.

Target group of investors and beneficiaries

Mainly the Jewish community abroad, but also private investors and institutions.

Over 90 U.S. state and municipal pension and treasury funds have invested more than USD 3 billion in Israel bonds until 2019.

Investment mechanism

Bonds are available in USD, EUR, GBP and can be purchased in NY, Paris, Frankfurt and London by filling an online form on the dedicated websites.

Governance structure

The Israel Bonds are sold by the Development Corporation of Israel, which is incorporated in United States. Offices are present throughout the USA, in London, Paris and Frankfurt.

Investment products (loans, grants)

Current bonds issues:

US (Max 3,10% interest rate) GBP (Max 2% interest rate) EUR (Max 1,05% interest rate)

• eMitzvah Bonds (8th Series)

• Jubilee Issue Bonds (11th Series)

• Libor Floating Rate – FINANCED (16th Series)

• Libor Floating Rate (16th Series)

• Maccabee Issue Bonds (11th Series)

• Mazel Tov Bonds (8th Series)

• Sabra Savings Bonds (8th Series)

• Sterling Jubilee Bond (10th Sterling Series) (2-year)

• Sterling Savings Bond (10th Sterling Series) (1-year)

• Sterling Savings Bond (10th Sterling Series) (2, 3 and 5-year)

• Sterling Mazel Tov Savings Bonds (10th Sterling Series) (5 year)

• Euro Floating Rate Bonds (15th Euro Series) (2-year)

• Euro Savings Bond (14th Euro Series) (1-year)

• Euro Savings Bond (14th Euro Series) (2, 3 and 5-year)

• Euro Mazel Tov Savings Bonds (10th Euro Series) (5-year)

Use of funds Israel uses the net proceeds from the sale of the bonds to finance the investment needs of the state, without specific targets mentioned to the migrant (except donations).

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Strengths • State guarantee

• High patriotic discount: migrants are will-ing to support Israel in any case

Weaknesses • Low interest rates (max 3.10% in USD, 1.05% in EUR, 2% in GBP)

Opportunities • Endorsement of trusted politicians and investors

Threats • The political environment is still fragile and could impact Israel economy

Relevance for migrants

This type of state guaranteed bonds are specifically designed for migrants and even with a low patriotic dis-count (diaspora distrust towards the government of their country of origin), it could be found attractive and secure for migrant investments.

Ability to fund SME loans

Government bonds are financing national expenses; investing in SME will require a fair balance between regions and industries or to ask migrants for their preferences and to apply them through the governance structure.

Applicability in Ukraine

Ukraine rating is improving year after year while migrant savings are among the World top 10. The govern-ment would have to organize/structure its diaspora and migrants to facilitate such fundraising. To ensure the high participation rate of migrants, a wide awareness raising campaign would be required.

Table 9: MRE Banks

Name MRE Banks Country Morocco

Short description 3 major banks are attracting MRE46 savings Logo

Mission These 3 banks were able to show to bank regulatory authorities the benefits of the concept of bibancari-sation, a diaspora banking service relying on one account in the country of residence and one account in the country of origin, with transfers facilitated – often free between both. It enables migrants’ bank branch in Europe to sell bank products in the country of migrant’s origin.

Timeframe • 2009 G8 meeting Dominique Strauss Kahn – Director of the International Monetary Fund promoted the concept of bibancarisation

• 2011 G20 meeting confirmed the ability of foreign banks to sell their products under certain conditions

• 2014 article 11 of the French law n° 2014-773 of July 7th, 2014 “of orientation and programming relating to the policy of development and international solidarity” and its decree of application of December 4th, 2014 and then lobbying at the European level47.

Key numbers 20% (EUR 10 billion) of bank deposits in Morocco belong to the diaspora (MRE: Moroccans living abroad) sending EUR 7.4 billion to Morocco (6.2% GDP) annually.

Success factors Moroccan banks are expanding in Europe (opening branches), America and Africa (buying banks),

Availability and capacities of large migrant and diaspora community.

Investment purpose

Through the remote management of an account in the country of origin, the migrant can become an entre-preneur himself, an investor or a saver with higher yield.


Moroccan diaspora and migrants: more than 5 million people (80% in France, Italy, Belgium, the Netherlands, and Germany).

Large migrant communities in Israel (486,000) and USA (230,000)

MRE can be investors and entrepreneurs at the same time.


All the 3 banking groups from Morocco have bank licenses in Europe with branches in the key destinations for Moroccan migrants. So, migrants living in Europe and going back to Morocco at least once per year, have all the financial tools to get lending in Morocco and control their SME payments remotely.

46 Marocains Résidant à l’Etranger (Morrocans Residing Abroad).47 Le Monde, Une ouverture des frontières aux services bancaires étrangers sous contrôle, https://www.lemonde.fr/idees/

article/2015/02/24/une-ouverture-des-frontieres-aux-services-bancaires-etrangers-sous-controle_4582099_3232.html

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Migrants are not involved in the governance. The bank operates on both sides and can provide all required financial tools to manage SME from Europe.

Investment products (loans, grants)

Apart from MRE advantages for mortgage loans (no processing fees), SME lending is available for MRE at the same conditions as for Moroccan citizens, except for the fact that their financial strength coming from their activities in Europe can serve as guarantee in Morocco. MREs have an account history with the bank on both sides: Europe and Morocco.

MRE created their own bank Al Amal 30 years ago to finance projects in Morocco; this bank belongs to Ban-que Populaire of Morocco.

Product details (interest rates, maturity, min/ max/average amount),

Attijariwafa Bank48: free pack of services

BMCE: Offer MRE first49: Free pack and exempted from account maintenance fees, pre-authorized payments fees, free transfers to Morocco, free transfer fee at reception as well as free processing fees for the mortgage.

Banque Populaire offers a fee free checking account, free debits, checks and transfers.

Free transfers ≤ EUR 1,000 from Chaâbi Bank to Banque Populaire, free subscription fees for the «Chaabi Net», «Chaabi Mobile» services, free mortgage constitution file, etc.

Strengths • Special status of MRE (MRE not consid-ered as a foreigner)

• A lot of free services for migrant

Weaknesses • Individual approach; no common um-brella initiative

Opportunities • Widening the network of banks and branches

Threats • While France is supporting bibancari-sation at EU level, NL did the contrary


The concept of bibancarisation in the case of MRE banks provides the migrants with the full package of bank-ing services available from top destinations of Moroccan migrants. Bibancarisation model allows migrants to establish and manage its SME remotely both in Europe and in Morocco.


With assets and accounts in the same bank in Europe and Morocco, MRE can develop a business and provide guarantees to get a SME loan.


The Ukrainian banking system is underrepresented abroad and it will require a strong partnership with banks in the main migrant destinations (e.g. Poland, Canada, Italy, Germany) to create such an offer.

Table 10: ADIE

Name ADIE Country France

Short description Largest microcredit organization in Europe for unemployed people among others wanting to become entrepreneurs

Logo

Mission Adie is a large French not-profit association, recognised by French authorities of public utility. ADIE is repre-sented throughout the territory of France (including overseas territories). It enables individuals and MSMEs to access debt financing and technical assistance to become entrepreneur50.

Timeframe 1989: ADIE established

1993: First regional offices in France

1995: First loan with bankers

1996: 1,000 loans landmark

1999: 69 regional offices, 103 employees 300+ volunteers 2003 REM Euro network established

2009: 11,500 loans/year

48 Attijariwafa bank, Marocain Résidant à l’Etranger, https://www.attijariwafabank.com/fr/profil/mre49 BMCE Bank, Pack MRE first, https://www.bmcebank.ma/fr/marocains-du-monde/votre-banque-au-quotidien/choisir-votre-

forfait/pack-mre-first50 ADIE platform, www.adie.org/notre-mission/

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Key numbers 180,000 entrepreneurs financially supported for 30 years, 20,000 loans are issued per year, 140 branches/360 temporary offices in France and overseas territories, 2,000 employees and volunteers

2018 results:

• 54,788 active borrowers (+7.4% within a year),

• outstanding loans EUR 148,7 million (+13.5% in 2018 with a loss of 4.1%),

• new loans: EUR 92 million, 16,942 loans to firms, 23,449 loans to individuals (17,701 for professional activ-ities, 5,748 loans for mobility),

• 2,980 micro insurances (+23.2%),

• 4,903 honorary loans,

• total assets: EUR 262,8 million.

ADIE providing services through companies abroad: Microstart (Belgium), Taysir (Tunisia), AFI (Greece), Mi-crolux (Luxembourg), technical assistance in Comoros.

Success factors Provision of grant and subsidies by the State, because the cost of being unemployed is more than the cost of creating an entrepreneur.

Network of skilled volunteers (often retired bankers).

Investment purpose

Provision of loans and technical support to entrepreneurs to boost job creation and entrepreneurship.


642 public and private donors are also contributing to a fund with more than EUR 1 million per year to sup-port loan activities and technical assistance.

Investors:

• 56% public (of which: 26% Europe, 24% Regions, 12% State, 19% public institutions, 10% municipalities, 8% departments),

• 14% private, 30% auto financing with margin on loan activities (profit reinvested).

Beneficiaries:

• 54.6% Men, 45.4% Women,

• 43% living below poverty line (national average 17.5%), 35% are receiving social transfers (average 8%),

• 22% urban poor (average 7%), 25% rural (average 20%),

• 26% with no diploma (average 12%).


The borrowers can make a simulation on the eligibility and cost of the loan online51. Then the borrowers apply online for a loan, describing specifically their financing needs. The loan application will be reviewed by ADIE staff assisted by high skilled volunteers like retired bankers.

After receiving money from public and private investors and granting a loan to an entrepreneur, the portfolio of loans is refinanced by the main banks and guaranteed by FOGEFI and EIF in case of loss.


The board have 24 volunteer members and the bureau has 6 members gathering monthly.

To manage a team of 2,000 employees and volunteers, the staff has a corporate structure with a Managing Director, 2 Deputy MD, Chief of Department (IT, Audit, Network, Compliance, Communication, Risk Manage-ment, Studies) and Regional Managers.

Investment products

Loans for income generating activities, loans for mobility (usually used car), honorary loans and technical assistance services.

51 ADIE platform, https://www.adie.org/pour-creer-ou-developper-mon-entreprise/

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Product details Professional microcredit (to create a job): average amount EUR 4,524 (maximum EUR 10,000 over 36 months or less)

APR 11.01% for EUR 10,000 over 36 months

APR 17.25 % for EUR 5,000 over 12 months

Mobility microcredit (to help mobility for work, usually to buy a used car): average amount EUR 3,313 (be-tween EUR 300 and EUR 5,000 over 6 to 36 months)

Honorary loans (up to EUR 3,000) to complement financing

Outstanding loans (EUR 148 million) are refinanced mainly by banks (24,28% BPCE, 18,37% BILLIONP Paribas, 11,47% Société Générale, 9,16% Crédit Mutuel, 8,38% Crédit Agricole).

Guarantees: FOGEFI below EUR 7,000, EIF above EUR 7,000 until the end of 2020.

Strengths • Many skilled volunteers to assess loans and train

• 2 out of 3 newly created companies are surviving after 3 years

• Non-repayment rate of 4.1%

Weaknesses • Mostly self-employed (1.3 jobs created per enterprise)

• Lack of sustainable availability of high skilled volunteers

• High price of financing

Opportunities • Support from public authorities because Job creation is less costly than unem-ployed people

Threats • Sustainability: risk of loss of funding source


At ADIE, migrants are a significant part of the beneficiaries.


ADIE mechanism is dedicated to provision of debt financing for entrepreneurs.


Potentially, ADIE model can be considered for Ukraine, as it has proved to be successful in Western Balkans and Eastern and south European countries (e.g. Albania, Bosnia and Herzegovina, Bulgaria, Kosovo*, Kyrgyzstan, Montenegro, Poland, and Serbia). However, the sustainability risks and high price of debt financing should be taken into account, as well as developing an adequate legal and regulatory framework for microfinance.

Table 11: Ethiopian Diaspora Trust Fund

Name EDTF Country Ethiopia

Short description Ethiopian Diaspora Trust Fund Logo

Mission The primary objective of the EDTF is to finance people-focused social and economic development projects. The EDTF focuses on investing in financial inclusion and entrepreneurship development: projects focusing on youth, women, small holder farmers, small enterprises and entrepreneurs, who can be agents of inclusive social and economic development.

Timeframe Launched on August 9th, 2018

Call for project proposals closed on September 16th, 2019

Key numbers Results as of October 21st, 2019: 77 countries participated; 46 chapters participated, 25,645 donors, USD 5.1 million raised (USD 300,773 in CBE Addis, USD 4.8 million in Citibank US).

No investment disbursed until now.

Success factors Prime Minister endorsement (with the high trust to the Prime Minister among the population),Top-Down approach trying to listen to the migrant wishes and population needs,Experience from previous fundraisings

Investment purpose

The Fund aims to finance projects that meet critical needs of the country. The projects are selected by the government and are based on the potential positive impact on groups and communities in Ethiopia. The investment is done in the areas of health, education, water and sanitation facilities, habitation and reha-bilitation of persons with disability, agricultural development, technology, small scale entrepreneurship, etc.

* References to Kosovo shall be understood to be in the context of United Nations Security Council resolution 1244 (1999).

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The EDTF is targeting the Ethiopian diaspora and migrants abroad. The funding beneficiaries will be selected according to eligibility and selection criteria set up in the call for project proposals. The 46 EDTF Chapters rep-resent a defined group of Ethiopian Diaspora belonging to a specific religious, professional, civic, social, city or country. Each is increasing public awareness of EDTF goals, objectives and programmes, expanding the sup-port base for EDTF, mobilizing the local community for fundraising, and sponsoring special events, after duly notifying the Advisory Council. Each chapter can raise funds under the control of EDTF and 15 per cent of the funds mobilized are allocated to the general EDTF Operations Account.


Responding to the Prime Minister Abiy Ahmed’s call for USD 1 a day to support critical unmet needs in Ethiopia, Ethiopians of the diaspora are invited to make a pledge (donations) online through Bank Wire, Go-FundMe, or through a bank card transfer. The amount of USD 30 is the minimum suggested amount with a monthly, quarterly or yearly periodicity.


EDTF is organized as a not-for-profit organization in accordance with the Delaware General Corporation Law. The Board comprises of 11 members appointed by the Prime Minister drawn from Government, Diaspora and Civil Society. The 18 members of the Advisory Council are also appointed by the Prime Minister. The Board appoints the Executive Director leading EDTF secretariat.52

Investment products

Grant for local NGOs, civil society organizations, and public entities, but also private sector organizations in Ethiopia with a positive social impact project or international NGOs with a branch office in Ethiopia.

Product details Grant from USD 200 to EUR 350,000

Strengths • Clear and transparent selection process

• Support from PM

Weaknesses • No history record to be able to mea-sure impact and good governance

• Not yet at the level of EEPCO bonds

Opportunities • Diaspora network more and more struc-tured/connected

• Economic growth

Threats • Many small monthly donors (USD 30/months) could be disappointed if their project is not selected

• Not a sustainable lending fund, as based on voluntary donations without any income to migrants


Designed by the government for migrants to meet their needs and wishes in terms of philanthropy. It is not clear whether the products could evolve after the first call with more business-oriented projects providing ROI to migrants.


Loans are not envisaged. In the future, the call for proposals could have mix loans and grants to avoid running out of funds too quickly and improve sustainability of the fund.


The donation model can be used for the diaspora to invest in the socially important projects. However, the do-nations are seen to be less interesting for migrants, as they are more sensitive to the return on investment.

52 Ethiopia Trust Fund, EDTF Chapters, https://www.ethiopiatrustfund.org/about-us/edtf-chapters/

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Table 12: EEPCO diaspora bonds

Name EEPCO diaspora bonds Country Ethiopia

Short description In 2008 and 2011, Ethiopian Electric Power Corporation launched two sub sovereign cor-porate bonds targeting citizens and diaspora

Logo

Mission EEPCO diaspora bonds provided funds to the Ethiopian Electric Power Corporation (EEPCO) to finance the construction of the Grand Renaissance Dam. The Dam aimed to increase the production of the electricity for the area, where only 27 per cent of the people had access to electricity.

Timeframe Launched on December 23rd, 2008.

The second bond issuance was in 2011.

Key numbers Since 2009, USD 56 million were raised from the diaspora with EEPCO diaspora bonds53. The construction of the Dam began in April 2011 with an estimated construction cost of USD 4.8 billion. As of June 2018, EEPCO has issued over USD7 billion in domestic bonds54.

Success factors Unmet demand for electricity

Structured diaspora community

Tangible asset to be financed

Investment purpose

Construction of the dam for the power supply. The project had spill over effects on the increase of energy exports, fish production, tourism, etc.


The Ethiopian diaspora is structured in local chapters in 77 countries, mainly in US and UK.

The EEPCO diaspora bonds raised USD 56 million from diaspora in seven years.

The beneficiaries are not necessary the people living in the region (internally displaced persons) but the whole nation.


EEPCO diaspora bond is a regular sub-sovereign corporate bond subscription. In order to participate in the initiative, the investor (e.g. migrant) should fill in the bond purchase form and transfer the payment once the form is approved.

The first bond issuance (Millennium Corporate bond) aimed at raising funds for the Ethiopian Electric Power Corporation (EEPCO). The first diaspora bond issuance did not meet the expectations. Sales were slow during the first months of offering despite the efforts of the Commercial Bank of Ethiopia and the embassies and consulates to sell them. Low demand for the first issuance of bonds was linked to:

• risk perceptions on the payment ability of EEPCO on its future earnings from the operations of the hydro-electric power;

• lack of trust in the government as a guarantor; and

• general political risks.

The second issuance of bonds (Grand Renaissance Dam bond) is being consolidated with the Millennium bond; the government took considerable marketing and awareness-raising campaigns to encourage the Di-aspora to buy it.

The bond is being offered in minimum denominations of USD 50 to make the product accessible to individu-als. The Commercial Bank of Ethiopia is covering any remittance fees associated with the purchase of these bonds.

The bond can be transferable to up to three people. It can also be used as collateral in Ethiopia. Subscribers were invited to transfer money directly to an account in Ethiopia and to fill a form to receive bond certificate.

53 Ethiopia sells 56 mln USD bond to diaspora to finance mega dam, 30 March 2018. http://www.xinhuanet.com/english/2018-03/30/c_137077518.htm

54 Cepheus Research & analytics, Ethiopia’s Billion-Dollar Sovereign Bond: Recent Performance and Outlook, 18 January 2019. https://cepheuscapital.com/wp-content/uploads/2019/01/Sovereign-Bond-Paper.pdf

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EEPCO is a state-owned electricity producer. The distribution is shared with Ethiopian Electric Utility. EEPCO is the largest bond issuer of sub sovereign debt in Ethiopia.

Investment products

• Millennium Corporate Bond (2008)

• Grand Renaissance Dam Bond (2011)

Product details Currency: USD, EUR, GBP

Minimum denomination: USD /EUR/GBP 50

Maturity: 5–10 years

Interest rate:

• 5 years: LIBOR +1.25%

• 6–7 years: LIBOR +1.5%

• 8–10 years: LIBOR +2.0%

Payment of the bond: at maturity

Payment of the interest: every 6 months

Strengths • Government guarantee

• Underserved demand

Weaknesses • High risks and delays in the construc-tion of the Dam

Opportunities • Large institutional investors (Chinese banks co-financing USD 1.8 billion)

Threats • Political risks: disputes with Egypt and Sudan

• Alleged oversizing, delays in construc-tion


From the 1st to the 2nd bond and then the Trust Fund launched in 2018, Ethiopian government has learned how to connect to the diaspora and to maintain a permanent link with the country of origin.


Not designed for SME lending.


EEPCO was able to get a government guarantee because it is a state-owned company. Success of similar initiative Ukraine would require state guarantees, high returns on investment and strong awareness raising campaign. However, the example of EEPCO diaspora bonds could serve as an example of mechanism for suc-cessful raising of migrant saving.

Table 13: PARE 1+1

Name PARE 1+1 Country Moldova

Short description The PARE programme is based on a “1+1” pairing scheme for business financing, in which the Government matches amounts invested by successful applicants into their businesses up to a maximum grant limit of USD 14,000

Logo

Mission Moldovan Government’s flagship effort to “mobilize the human and financial resources of Moldovan mi-grants in Moldova’s sustainable economic development by fostering the establishment and development of small and medium enterprises.”

Timeframe Established in 2010 in accordance with the Government Decree №972 and extended until 2015, 2018 and 2021.

Key numbers Maximum grant amount per SME is USD 14,000. A total budget of USD 18 million was allocated from the state budget to support 1,507 SMEs. Total investment into economy (state budget + migrants (1+1)) equals to USD 54 million. 3,600 new job places created. Over 570 migrant workers returned to Moldova.

Success factors Simple and straightforward funding mechanism, co-funding from programme beneficiaries ensured high motivation towards business success, transparent and competitive based selection process of programme beneficiaries.

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Investment purpose

Motivate migrants invest their savings and remittances into productive economy and self-economic sustain-ability instead of general consumption.


Moldovan migrant workers and their first-degree relatives.


The programme relies on (grant) funding from the Moldovan government, donors and development agencies.

The Programme provides one type of financial products: matching grants. This means that any grants provid-ed to Moldovan migrants to create their MSMEs will be equal to the investment of the migrants in the MS-MEs. Contrary to a grant, where the money is directly attributed to the beneficiaries based on eligibility criteria, the matching grant requires the beneficiaries to also provide financial resources. In turn, this means that the risks are shared between the programme and the beneficiaries themselves.


The programme is implemented, coordinated and monitored by ODIMM, a non-profit and non-commercial organization that coordinates directly with Moldova’s Ministry of Economy – thus making it a public institu-tion. The Programme is comprised of 4 components – information campaign, enrolment and business train-ings, grant disbursement and M&E.

Investment products

Matching grants

Use of funds Migrant’s funds are matched with the State grant of up to USD 14,000 which are invested into existing SME or a business start-up.

Strengths • Simple and straightforward funding mech-anism

• Leverage effect stronger than anticipated, going from 1+1 to 1+3

• De-risk investments in MSMEs for mi-grants; but the matching component of the grant incentivise migrants to succeed

• Tailored to migrants’ needs and interest

Weaknesses • The Programme is not financially sus-tainable, relying only on grants

• Lack of diversity in terms of the in-vestment products offered (no loans or guarantees)

Opportunities Still untapped migrants financial and knowl-edge/skill potential

Threats Limitations of the State budget to con-tinue the Programme beyond 2021


Designed to motivate migrants to return and invest their savings in local economy.


Although it is not designed to fund SME loans, it provides support to microenterprises and SMEs.


The Programme had been replicated by IOM Ukraine in 2019 as a pilot initiative that generated high in-terest among Ukrainian migrant workers and their family members willing to invest their savings earned abroad in SME.

5.3. Case Study 1: EEPCO GERD Bonds of the Grand Ethiopian Renaissance DamDuring the last decade, several African governments have developed initiatives aiming to attract migrants’ investment through diaspora bonds, with a view to help finance the development of their country of origin (see Table below).

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Table 14: Overview of diaspora bonds initiatives

Country (Bond Name) and purpose Date Eligibility

Issuing Authority;

Ability to Issue

Denominations (Minimum and

Maximum)

Amount (Local or Foreign

currency or Both)

Interest Rate (Fixed,

Floating)

Ethiopia (Millennium corporate Bond); financing Ethiopian Electric Power Company (EEPCO)

2008 Eligibility limited to Ethiopians with access to foreign exchange

Parastatal: EEPCO

Minimum USD 500

Denominations of USD 100

Unknown;

project cost was USD 4.8 billion

Foreign currency

4%, 4.5%, 5% (fixed)

Ethiopia (Grand Renaissance Dam Bond); financing dam

2011 Wide eligibility, not restricted to Ethiopian diaspora

Government (Ministry of Finance)

Minimum USD 50; USD, GBP, EUR in denominations of 50

Unknown

Local and foreign currency

(USD, GBP, EUR, ETB)

5 year: Libor +1.25%

6-7 years: Libor+ 1.5%

8-10 years: Libor+2% (floating)

Kenya (infrastructure bond) series 1-3,5 onwards; infrastructure: transport, energy, water and irrigation

Since 2009

Available to all investors

Central Bank of Kenya

KES 100,000 minimum (approx. USD 100);

KES 10,000 increments

KES 35 billion (approx. USD 350 Million)

Local

11% (fixed)

Kenya (infrastructure bond with diaspora component) series 4

2011 Only nationals living in Kenya and abroad are eligible

Central Bank of Kenya

As above KES 20 billion (approx. USD 200 million); uptake of KES 14 billion

Local

12% (fixed)

Ghana (Jubilee Savings Bond); infrastructure financing

2007 Ghanaian nationals only, living in Ghana and abroad

Government of Ghana

Unknown GHS 50 million (uptake GHS 20 million)

15%

Nigeria (federal Government of Nigeria Diaspora Bond); budgeted capital expenditure

2017 All investors in the United States, United Kingdom and Nigeria; marketing targeted to Nigerian diaspora

Government of Nigeria

USD 2,000 (minimum) and multiples of USD 1,000 thereafter

Uptake USD 300 million

Foreign

5.625% (fixed)

Sources: Paza (2011) (Ethiopia); www.centralbank.go.ke/bills-bonds/treasury-bonds/ (Kenya); International Organization for Migration (2012) (Ghana); Federal Republic of Nigeria (2017) (Nigeria)

Ethiopia is no exception to this trend, with the development of the Millennium Corporate Bond and the Grand Renaissance Dam Bond, which will be the focus of this case study.

Background

The Ethiopian diaspora is structured in local chapters in 77 countries, mainly in United States and in the Unit-ed Kingdom. Ethiopia is notably the second largest African diaspora in the US after Nigeria, with potential migrant savings of USD 1.9 billion (6.5% of GDP) in 201155. Ethiopian migrants and their hence represents a potential vector that can contribute to the socioeconomic development of the country.

55 Chakco, E., and P. Gebre, Leveraging the Diaspora for Development: Lessons from Ethiopia, Paper presented at the International Conference on Diaspora for Development, World Bank, Washington, DC, 2009.

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Aware of this potential, the government has developed several initiatives aiming to facilitate the involvement of Ethiopian migrants in the development of the country, such as the so called “yellow card”, granting Ethi-opian migrants with foreign citizenship the same benefits and rights as domestic investors; or the recently passed parliament bill allowing Ethiopian migrants (with foreign citizenship) to buy shares in local banks and start lending businesses56.

Millennium Corporate Bond and Grand Renaissance Dam Bond

In addition to changes in the regulatory framework, the Ethiopian government offered in 2008 the Ethiopi-an diaspora Millennium Corporate Bond, and in 2011, the Grand Renaissance Dam Bond. These were nota-bly used to mobilise the funds from diaspora to finance the Grand Ethiopian Renaissance Dam (then known as the Millennium Dam) on the River Nile.

To do so, the Ethiopian Electric Power Corporation (EEP-CO – a State-owned Enterprise) issued the Millennium Corporate Bond, Ethiopia’s first diaspora bond, guaran-teed by the Ethiopian government. These bonds targeted Ethiopians and offered an interest rates between four percent and five percent depending on their duration (from five to ten years). In addition, the interests on investment were not subject to taxes and bondholders could use the bond certificate as collateral when borrowing from financial institutions within Ethiopia57. Last, the bonds were marketed by the Commercial Bank of Ethiopia (CBE) and the embassies and consulates.

However, the first diaspora bond issuance did not meet the expectations of the diaspora and hence of the government. The demand for bonds from the diaspora was low despite the efforts to market and dis-seminate them.

This was partly explained by the following factors:

• The diaspora did not fully trust the government in its role of a guarantor58.• The diaspora was concerned about the potential risks on the payment ability of EEPCO on its future

earnings from the operations of the hydroelectric power.• The minimum threshold to purchase bonds was high – USD 500.• The market targeted was quite restrained with only Ethiopian nationals able to purchase the bonds,

through the CBE and the consulate and embassies.• The fixed-interest rates were an instrument not deemed attractive by the diaspora.

Importantly, the government strongly promoted the bonds through comprehensive marketing and aware-ness-raising campaigns.

Building on the lessons learnt from this initiative, EEPCO issued its second diaspora bond, the “Grand Renais-sance Dam bond”. Therefore, contrary to the Millennium Corporate Bond, the bonds offered varying interest rates structured using London Interbank Offered Rate (Libor): they offered five years at Libor +1.25%, six to

56 In 2019, Ethiopia further opened up the banking sector to its diaspora – thus opening up the country’s financial sector to an estimated five million of its citizens who have taken other nationalities, including allowing them to buy shares in local banks and start lending businesses.

57 Oji, Bonds: A Viable Alternative for Financing Africa’s Development, 2015. https://saiia.org.za/research/bonds-a-viable-alternative-for-financing-africas-development/

58 Rustomjee, Issues and Challenges in Mobilizing African Diaspora Investment, 2018. https://www.cigionline.org/publications/issues-and-challenges-mobilizing-african-diaspora-investment

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seven years at Libor +1.5% and eight to 10 years at Libor +2%. The minimum threshold for bonds purchase was also lowered to USD 50, and the payment of interests scheduled bi-annually (vs. yearly for the Millenni-um Corporate Bond).

To boost demand, the Commercial Bank of Ethiopia covered all remittance fees associated with the purchase of these bonds. Subscribers were invited to transfer money directly to an account in Ethiopia and to fill a form to receive bond certificate. Subscribers were invited to transfer money directly to an account in Ethiopia and to fill a form to receive bond certificate.

The comparison of the two bonds issuance is provided in the table below:

Table 15: Comparison of EEPCO bonds

Criteria EEPCO Millennium Corporate Bonds Renaissance Dam Bond

Purpose Raising funds for the Ethiopian Electric Power Corporation Financing of the Grand Renaissance Dam

Currency USD, EUR, GBP, Ethiopia Birr USD, EUR, GBP, Ethiopia Birr

Minimum denomination

USD 100, but minimum purchase USD 500 USD/Euros/Pounds Sterling 50

Maturity 5, 7 and 10 years 5 years; 5–10 years

Interest rate 4%; 4.5%; and 5% depending on the maturity Without interest

with interest:

• 5 years: Libor +1.25%

• 6-7 years: Libor +1.5%

• 8-10 years: Libor +2%

Payment of the bond

At maturity, the bond holder can:

i) receive the face value of the bond in foreign currency,

ii) purchase another bond with the same face value,

iii) deposit in foreign currency or birr account,

iv) pay for import commitments

At maturity

Payment of the interest

Annually Every six months

Repayment of the interest

i) in birrs in person,

ii) deposit in foreign currency or birr account,

iii) transfer abroad,

iv) repurchase additional bonds,

v) pay for import commitments

Paid in the currency in which the bond was originally purchased

Transferability The bond can be transferred to a second party The bond can be transferable to up to three people

Taxes Interest income from the bond free from any income tax Revenue accrued will be free from any tax

Governance of the mechanism

The EEPCO diaspora bonds were issued by EEPCO, a state-owned electricity company. The government of Ethiopia guarantees the bonds issued by the state, providing additional security for the investors.

The EEPCO diaspora bonds can be purchased through the Development Bank of Ethiopia (DBE) and commis-sioned agents including Commercial Bank of Ethiopia (CBE) and Regions Micro-Finance institutions.

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These banks have branches in many parts of the country, which makes it easier to buy bonds. In order to buy the bond, the investor (e.g. migrant) should fill in the bond purchase form and transfer the payment once the form is approved.

Success factors

From the comparison above it is clear that the second issuance of EEPCO bonds, namely the Grand Re-naissance Dam bond had more flexible and advantageous conditions for migrants and diaspora.

It offered considerably lower entrance ticket for investors (EUR 50) and a better market interest rate (linked to LIBOR rate, contrary to a fixed rate previously). In addition, payment of the interest was foreseen more fre-quently, every six months at the same currency than the purchased bond. Finally, the bond can be transferred as a gift or as an inheritance by signing on the back of the coupon, as well as it can be sold to a third party via secondary market.

Apart of the advantageous conditions, a strong marketing and awareness raising campaign was a necessary tool to ensure the growing demand for bonds. These two components allowed for the success of the instru-ment to raise over USD 56 million from diaspora in seven years.

All these conditions made the Grand Renaissance Dam bond an attractive investment instrument, responding to the needs and interests of the diaspora.

Reputation and credibility of the bonds and the actors supporting them are key elements to consider.

Risks

Despite raising over USD 56 million with the Grand Renaissance Dam bond, some researchers59 consider that the full potential of the bond was not reached. This is linked to several factors:

• Suboptimal marketing campaign. The marketing campaign run by the EEPCO did not focus on the tar-get amount of investment, possible currencies of bond, intermediaries that are selling the bonds. In addition, there was a low media awareness campaign on the bonds outside Ethiopia.

• Negative information campaign by the political opposition. The government awareness raising cam-paign on the bonds was immediately picked up with the counter campaign by the political opposition. The negative information campaign took a shape of social media information campaign focusing on the weaknesses and risks of the bond and organisation of the disrupting fund-raising events.

In addition, the marketing and communication aspects of the bonds need to be carefully thought: the success of the bonds lay as much in its characteristics, as in the way these characteristics are communicated.


From the 1st to the 2nd bond issuance, Ethiopian government clearly took on board the lessons learned and tailored the bond to the needs and wishes of the migrants and diaspora investors. The bonds became hence more and more relevant. Lowering the threshold also contributed to enlarge the potential market of migrant investors – including not only the well-established Ethiopian diaspora, but Ethiopian migrant workers and first generation living outside of Ethiopia.

Transferability to Ukraine

Both the failure of the Millennium Corporate Bonds and the relative success of the Grand Renaissance Dam bond reveal interesting insights on the implementation of bonds issuance, which will be relevant for the in-vestment mechanism as envisaged. In particular, there is a need to ensure that:

59 Beyene, B.M, The Grand Ethiopian Renaissance Dam and the Ethiopian Diaspora, http://www.aigaforum.com/articles/GERD-and-the-Ethiopian-Diaspora.pdf

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• The mechanism (the bonds) needs to be credible and legitimate. This means that the actors leading its implementation should also be legitimate and reputable. This will help make the bonds a safe and reliable instrument.

• The mechanism needs to be tailored to the needs, interests and constraints of its targets. For ex-ample, as this was the first time that Ethiopia used diaspora bonds, there was some uncertainties around the actors and mechanism as such. Providing interest on a six months basis can help highlight the benefits to the diaspora; as well as providing a state guarantee on the bonds. The threshold for bonds purchase should also be relatively low – especially at the start of the issuance (though this may increase transaction costs for the bonds issuer), to allow migrants and the diaspora to “try and see”, thus minimising their perceived risks.

• “It is not only what you sell, but how you sell it”. The example of Ethiopia highlights the need to market massively the diaspora bonds and make them available and accessible to the final targets. While diaspora bonds may provide better income than e.g. deposit account, the diaspora may not even be aware of them, and will keep favouring low-return deposits. In addition, embassies and consulate may not be the best entry point to reach out to the diaspora, especially with the idea to provide a market-based product.

5.4. Case Study 2: 1+1 PAREContext

When comparing Moldova to Ukraine, one can find many similarities. Both are former Soviet Union States, which suffered from a deep economic crisis after its disintegration in 1991, forcing millions of its citizens to emigrate in search of better economic opportunities abroad, a trend that continues until today. With a popu-lation of 3.3 million people, Moldova has lost almost one third to external migration (970,000 Moldovans are working abroad according to the UNDESA). Migrant workers, by transferring remittances to Moldova, have become a significant source of financial flow entering Moldova. In fact, the remittance flow accounted for over 16 per cent of its national GDP, ranking the country in the top 10 remittance receiving countries.

Overtime it became clear that remittances mostly fuelled consumption-led economic growth model of the country as Moldovans were engaged in short-term seasonal migration.

To mitigate the issue of large emigration, the Moldovan Government has sought ways to incentivise mi-grant workers to return and invest their financial resources, skills and to create sustainable income gen-erating opportunities or MSME development. In 2010, the Government launched the Programme for Attracting Remittances into the Economy “PARE 1+1”.

The PARE programme is based on a “1+1” pairing scheme for business financing, in which the Government (through ODIMM) matches amounts invested by successful applicants into their businesses up to a max-imum grant limit of MDL 200,000 (approximately USD14,500). This arrangement therefore envisages that within the financing limit, a business owner would bear half of his or her start-up/expansion costs while the other half would be covered by the Government. Successful appli-cants who are granted financing can opt for a lump sum payment of the total amount granted, or payments made over instalments.

Since the launch of the Pro-gramme in 2010, Moldovan Government has disbursed USD 18 million in grants having

Information campaign

01

02

03

04

Business trainings and consultations

Grant disbursement

Monitoring and evaluation

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supported over 1,500 competitive MSMEs. At the same time migrants’ investment as a co-funding require-ment have reached an additional USD 54 million which has surpassed the initial expectation of 1+1 co-funding ratio to 1+3. The success of the Programme led to its extension three times until 2015, 2018 and 2021.

Success factors

Co-funding from the programme target audience (migrants) ensured a high level of motivation towards suc-cess of the business. projects.

The success of the Programme is explained by the simple and straightforward funding mechanism from the State budget, which entails a transparent and competitive based selection process of the programme beneficiaries.

Risks

The Programme is not financially sustainable, as it relies on a grant mechanism only. Once the budget is de-pleted, the Programme cannot continue, except if additional funding is provided. The programme is thus fully dependent on the availability of the funds in the State budget. There is no revolving mechanism in place, to ensure that (part of) the resources are regenerated through the activities of the Programme.

Governance of the mechanism

PARE 1+1 is implemented, coordinated and monitored by ODIMM, a non-profit and non-commercial orga-nization that coordinates directly with Moldova’s Ministry of Economy – thus making it a public institution. The Government’s goals with respect to the programme are 1) to increase the volume of remittances invested in the Moldovan economy by USD 8.5 million, and 2) to create up to 2,000 new businesses and 6,000 new jobs (70% of which would be in rural areas).

Relevance to migrants

The programme was specifically designed to motivate Moldovan migrant workers to invest their remittances and savings into MSMEs.

Transferability to Ukraine

In 2019, PARE 1+1 was replicated in Ukraine by IOM as a pilot initiative. It has generated a high interest among Ukrainian migrant workers and their family members to invest their saving earned abroad into MSMEs.

5.5. Comparative analysis of case studiesAs presented in the introduction, these case studies all have their pros and cons, which should be carefully considered in view of the i) Ukrainian economic, social and political landscape; ii) objectives of the investment mechanism: and iii) the needs, interests and constraints of Ukrainian migrant workers.

Based on the analysis of the case studies presented above, we provide an overview and comparison of their relevance for migrants and ability to foster local investment.

The comparison of selected case studies is presented in the Table below.

Table 16: Comparative analysis of the case studies

Name Country Relevance for migrants



Israeli Bonds Israel ***** *** ***

MRE banks Morocco ***** ***** **

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Name Country Relevance for migrants



ADIE France/ Europe ***** **** ****

EEPCO bonds Ethiopia ***** ** ***

EDTF Ethiopia ***** ** ***

PARE 1+1 Moldova **** **** *****

The diaspora bonds, as presented in the case of the Israeli Bonds, the Millennium Corporate Bonds and Grand Renaissance Dam bond, are all relevant investment products to attract diaspora and migrants’ remittances. It appears clearly that providing a safe and reliable mechanism that generates a predictable income is relevant to migrants. Put in the context of Ukraine, diaspora bonds could help addressing the high-risk perception of migrants towards investments and provide an attractive alternative to the traditional financial products avail-able to migrants, such as savings. However, the diaspora bonds entail several challenges:

1. There is no involvement of the private sector in such schemes, whether at the instrument level, or at the final beneficiary level. It is hence a missed opportunity to leverage public funds and attract private investments.

2. The government is often at the driver seat (or perceived to be) of the diaspora bonds. Ukrainian mi-grants do not fully trust state institutions and so the diaspora bonds may not have the desired credi-bility or legitimacy that is necessary for their success.

3. Only a sophisticated (and mature) approach – as in the case of the Israeli bonds, seems to work in a sustainable manner. The bonds developed by EEPCO proved to be challenged as they were not fully tailored to the interests and constraints of migrants. As a result, they did not fully succeed in reaching their objectives.

4. Last, the diaspora bonds studied did not contribute to local business development but rather to State-led (often infrastructure) projects.

Contrary to diaspora bonds, the EDTF does not provide any economic return to the diaspora, nor invest in state-led projects.

The EDTF follows a similar approach than the one of the diaspora bonds. It was designed by the government to tap into migrants’ philanthropic interests. The EDTF focuses on investing in financial inclusion and entre-preneurship development. The latter aspect is particularly relevant in the context of the investment mech-anism, as it also aims to channel remittances in productive investments contributing to local socioeconomic development. However, several issues regarding the EDTF model need to be considered:

1. Its functioning is based on a donation type of basis. While Ukrainian migrants are interested in contributing to the socioeconomic development of their country, they are also motivated by fi-nancial returns.

2. The EDTF functions by using grants, which will ultimately run out. There is no financial mechanism ensuring the sustainability of the fund.

The PARE 1+1 initiative differs from the EDTF in at least two aspects: first, the investment product is not a grant, but a matching grant. Thus, it implies a leverage effect: for USD 1 from the Programme’s grant; USD 1 will be provided by migrants, with a view to start and develop its MSMEs in Moldova. Additionally, migrants also feel more ownership and are incentivised to succeed as part of their money is invested. Second, PARE 1+1 also considers migrants as investors, but also as beneficiaries, while the EDTF considers only the investor facet of migrants. In doing so, the PARE 1+1 also incentivises migrants to return to their home country. At the same

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time, the PARE 1+1 also suffers from the same pitfalls as the EDTF: it only provides grants, and hence cannot be sustained on the long run.

ADIE can help develop the capacities of entrepreneurs through the technical assistance component of their lending.

In contrast to the diaspora bonds and the EDTF, the ADIE and MRE banks initiatives involve both private and public sector actors and are rather market-led. ADIE provides microfinance products (loans) to (mi-grant) entrepreneurs, with the support of state institutions. This support allows ADIE to provide debt financing characterised by lower-than-average interest rates to entrepreneurs, who would not be able to do so at market terms.

This model is highly relevant to the Ukrainian context, as i) MSMEs struggle accessing finance; ii) MSMEs are a key economic actor when targeting local economic development; iii) there are no MFIS in Ukraine. At the same time, ADIE’s model relies on an adequate and supportive legal and regulatory framework that is missing in Ukraine. Finally, the ADIE model is partly financially sustainable, contrary to the previ-ous initiatives mentioned above.

The MRE banks model is slightly different than ADIE in that it shifts the focus from microfinance to bibanca-risation. As highlighted above, such a system i) provides migrants with the full package of banking services available from top destinations of Moroccan migrants; and ii) allows migrants to establish and manage its SME remotely both in Europe and in Morocco.

The model is also relevant to Ukrainian migrants as it tackles a sensitive issue (facilitation of migrants’ remittance transfer and investment). At the same time, the Ukrainian banking systems is underrepre-sented abroad and has not shown yet signs and ambition of striking partnership agreements with banks in the main migrant destination.

In conclusion, these case studies provided a wide range of international practices, that are relevant to mi-grants and the broader Ukrainian context. When considering the objectives of the feasibility study, i.e. to channel remittances in productive investments, several lessons learnt are important to highlight:

1. The diaspora bonds are most relevant when it comes to attracting migrants’ workers and diaspora. They provide an investment option that is safe, predictable and that ensures continuous income.

2. The PARE 1+1 mechanism showed the importance of providing an investment product tailored to the needs of migrants’ workers, who intend to come back to their home country. It also shows that providing not just a grant, but a matching grant was a key ingredient to ensure the ownership, interest and willingness to succeed of migrants. The only limitation encountered regards its financial sustainability.

3. ADIE provided useful insights in regards with providing migrants with microfinance products, which are financially sustainable. In practice, migrants can obtain loans at preferable interest rates (in comparison to the market’s), and the latter (interest rates) allow ADIE to be financially sustainable.

INVESTMENT MECHANISM

6

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6. INVESTMENT MECHANISMChapter 6 aims to present the best-fit investment mechanism, by means of which migrant remittances and savings could be viably channelled into local business investment in Ukraine.

The proposed investment mechanism considers i) regulatory and legislative framework of Ukraine; and ii) (microfinance) market environment to ensure that it is fully tailored to the local context and best responds to its underlying constraints and opportunities. It is further based on lessons learnt from international prac-tices and experiences that are relevant to the Ukrainian economic and legal contexts. These will help identify some of the key success factors and hindering factors that are important to take into account when designing and implementing the proposed investment mechanism.

Chapter 6 is divided into five main sections. The first one aims to describe the proposed investment strategy. The sec-ond section focuses on the investment mechanism as such, explaining its structure, logic, functioning and gover-nance modalities. The third section dives into the legal structure of the proposed investment mechanism which is based on the current constraints (and opportunities) of the existing legal and regulatory framework. The fourth section further describes the potential development options that could be exploited once the investment mecha-nism is implemented. Last, the fifth section focuses on key elements of the mechanism and main findings.

6.1. Proposed investment strategyThe objective of the investment strategy is to present the mechanism for migrant investments that could address the financial gap between the entrepreneurs and MSMEs that need affordable finance, and migrants who are looking for investment opportunities.

The precise characteristics of the investment mechanism proposed, including the funds allocated, the gov-ernance structure, the proposed mechanism of work, co-financing logic and the repayment conditions are based on the current understanding of these conditions.

This section describes in detail the investment mechanism. It suggests different modalities for participation, e.g. with direct or indirect government co-financing. Further, this section describes the governance of invest-ment mechanism. Specifically, several options for the implementation of the instrument are discussed as well as relevant stakeholders for the implementation of the mechanism are identified. Finally, the proposed governance structure of the mechanism is presented in detail.

Methodology

To prepare the investment strategy, we consulted the good practices of successful investment mechanisms for migrant investment around the world. In addition, the specific legislative and market environment of Ukraine was taken into account when designing this investment strategy.

The current investment strategy is designed to be implemented in the existing legal and market frame-work of Ukraine, requiring no changes of the regulation and minimal distortion of the market competi-tion. ADIE can help develop the capacities of entrepreneurs through the technical assistance component of their lending.

The proposed investment mechanism can be implemented in a short-term perspective, as:

• it is based on the current regulatory framework of Ukraine;• it fits into the current market environment and has a minimal impact on the competition among

the providers in the financial sector;• it can be implemented without the government co-financing;• the proposed mechanism is protected from the regulatory and legislative changes in Ukraine;

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• the proposed mechanism allows for flexible scalability and involvement of a variety of private and public investors as well as financial intermediaries;

• the proposed mechanism includes the scheme to protect the investors (migrants) from the currency exchange risk, therefore, reducing overall risks for the investors;

• the proposed investment mechanism unblocks the access to microfinance for the entrepreneurs and MSMEs in Ukraine.

Successful roll out of the investment mechanism heavily depends on the active involvement of the Promoter.

In addition, to assist the implementation of the proposed investment mechanism, it is recommended that the Promoter considers utilising technical assistance to support the implementation of the mechanism. Such technical assistance may be used at the level of financial intermediaries (e.g. banks or credit unions), but also at the level of the final beneficiaries (entrepreneurs and MSMEs), thereby facilitating the disbursement of investments and their efficient absorption. The section 6.3.2 Provision of technical support details the need and benefits of possible technical assistance.

Promoter in the context of this feasibility study refers to the organisation that drives the first stages of creation of the Investment Fund, selects the Fund Manager (together with other stakeholders), and helps to raise money for starting the activity of the Fund.

The Promoter could be a governmental organisation (e.g. Ministry), an International Financial Institution (IFI) (e.g. EIB, EIF, EBRD, KfW, etc.) or a donor organisation (e.g. European Commission, IOM, World Bank, USAID). The Promoter plays a key driving role in the creation of the Fund. To support the creation and running of the Fund, the Promoter should have the team, mandate and capacity to manage the creation of such a fund.

We expect that IOM will have a catalytic role in bringing together all interested parties to discuss the idea of creating the Investment Fund. The first step should be for the IOM to organise a round table with key stakeholders, investors and donors to raise the awareness on the idea of the Investment Fund and help identify the potential Promoter for the Investment Fund.

While the Investment Fund would be able to work only with migrant investments, it could also benefit from the co-financing from the IFIs (EIB, EIF, EBRD, KfW, etc.), as well as donor organisations (European Commis-sion, World Bank, IOM, USAID, etc.) in a form of additional lending or grants to increase the financial volume of the Investment Fund. Such co-investment also aims to decrease the price of financing to the financial in-termediaries and will lead to cheaper and more accessible financing for the MSMEs.

6.2. Investment mechanism

Based on the analysis of the market and regulatory environment associated with migrants’ remittances and micro investment needs, a microfinancing loan instrument in a form of an Investment Fund is considered to be the best suited investment mechanism to channel migrant savings into productive local investment.

More specifically, this instrument would allow providing loans to entrepreneurs and MSMEs with lower in-terest rates and more flexible eligibility criteria in terms of collateral and financial history requirements. For the migrants, such instrument will provide a safe investment tool, protected from the currency exchange risks and with market or higher returns on investment.

The successful implementation of the proposed microfinancing loan instrument requires wide reaching tar-geted awareness raising and promotional campaign.

As the instrument is new from the migrants and for Ukrainian environment in general, the information dis-semination efforts should be significant. The initial uptake of the instrument by the migrants and other in-

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vestors will define the success of initial pilot stages. Therefore, the awareness raising campaign and targeted marketing via traditional and social media are necessary.

Once the Investment Fund will show the first success result, it will serve as a demonstration effect of the effi-ciency of such instrument for the migrants and other investors. That is why the awareness-raising and promo-tion campaigns should have a cyclic character, evolving with the development of the Fund itself and bringing forward the impact that the Fund has made to the local development at each given stage.

Schematically, the investment mechanism is presented in the figure below. The functioning of the mechanism has five logical steps.

Figure 15: Proposed investment mechanism

Migrants

Diaspora

Donors (e.g. EC, IOM)

IFIs (e.g. EIB, EBRD, KfW, WB)

Ukrainian Government

Promoter

Escrow account

Investment Fund registered abroad

EUR / USD

Bank(s) in Ukraine

SME MSME Entrepreneurs

2

1

4

3

Microfinance in UAHBeneficiaries reimburse

the loan and the interest to the bank

Increased assets in EUR/USD with credit letterAbility to provide microloans at affordable interest rates

Credit letter in EUR/USD

Investment

InvestmentDividend based on

the performance of the fund

Concessional finance

Loans

Loans

Investment Fund releases the credit in EUR/ USDBank pays the fee for issuance of the credit letter

5

Bonds with the fixed interest rate in foreign currency

The investment mechanism is based on the Investment Fund that is registered outside of Ukraine in one of the countries with the safest and most developed Investment Fund markets (e.g. Luxembourg, the Nether-lands). Being based outside of Ukraine, the Investment Fund will be able to mitigate the risks perception of Ukrainian migrants. Indeed, for most of them, investing in Ukraine means exposing themselves to political and economic risks and instability. The rationale behind the registering of the Investment Fund in the foreign jurisdiction is further detailed in the section 6.3.2 Potential destinations for opening an Investment Fund.

During the first step, the Promoter and the involved stakeholders will select the Fund Manager. The proce-dure of selection of the Fund Manager is described in detail in the section 7.1 Selection of the Fund Manager. As described above, the Promoter takes the driving role on the initial steps of the Investment Fund’s imple-mentation. Therefore, the role of the Promoter could be played by organisations focusing on the migrants in

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Ukraine (e.g. IOM), donor organisations (European Commission, USAID), IFIs (EIB, EBRD, KfW, WB) or the Gov-ernment of Ukraine.

In operational terms, the Fund Manager, selected by the Promoter in collaboration with the other stakehold-ers (in some cases competitive procedure might be required, subject of public procurement rules), in turn will create the Investment Fund and register it in the selected jurisdiction (according to the selected type of Investment Fund).

During the second step, the Investment Fund will raise the funds of migrants via the dedicated platform (e.g. internet platform) and issue migrant bonds with a fixed interest rate in the foreign currency (EUR or USD). The Investment Fund may also raise the co-financing from donors in the form of grants or from IFIs in a form of loans or guarantees.

The Government of Ukraine can also co-invest to the Fund, directly or indirectly (step three). By investing directly, the Government will transfer the co-investment amount directly to the Fund. In case if the Govern-ment of Ukraine does not consider investing in the Fund abroad directly, it can co-invest in the Fund by allo-cating the funds via an escrow account.

Escrow account is an account opened by a bank on a contractual basis for crediting the funds and trans-ferring them to the person (persons) specified (indicated) by the client (beneficiary or beneficiaries), or repayment of such funds to the client on the grounds provided for contract60. Escrow account in the context of proposed investment mechanism is a financial instrument where an asset or escrow money is held by a fi-nancial intermediary on behalf of the Government until the transaction (investing in the SME) is completed.

By using the escrow account the Ukrainian Government (e.g. Ministry of the Economic Development, Trade and Agriculture) can co-invest in the fund, but still physically keep the money in the bank account in Ukraine. The mon-ey will be invested through the Fund, only if the set of pre-defined conditions for investment will be met.

During the fourth step, the Investment Fund will invest the raised funds through the selected financial inter-mediaries via letters of credit.

Letter of credit in this context is a letter issued by the Investment Fund that engages the Investment Fund to provide the financial intermediary the financing against the pre-defined contractual payment condi-tions. Letter of a credit represents a formal engagement of the Investment Fund to cover the investment in cases of non-respect of payment clause (similar to guarantees).

By using the letter of credit in the investment mechanism, the Investment Fund protects the investors from the currency exchange risks, as the credit letter is provided to the bank in the foreign currency, as well as the pay-ment back is also to be done in the foreign currency. In addition, the letter of credit allows the Investment Fund not to physically disburse the funds to financial intermediaries, keeping the level of security of funds.

For the financial intermediaries, using the letter of credit will allow to write the amount of funding in the for-eign currency as balance assets, increasing the total assets and the ability of the financial intermediary to issue loans. Moreover, by increasing assets in foreign currency, the financial intermediary strengthens its financial stability and creditworthiness. Finally, is it expected, that financing from the Investment Fund will be cheaper for the financial intermediaries, than what they can obtain from the National Bank of Ukraine, thus providing them with the possibility to offer better loan conditions for borrowers (MSMEs).

The mechanism of letter of credit also foresees the procedure of converting a letter of credit by the financial intermediary into the volume of cash available for lending.

60 The Law of Ukraine “On payment systems and funds transfer in Ukraine”, № 2346-III dated 05.04.2001. https://zakon.rada.gov.ua/laws/show/2346-14

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When receiving a letter of credit in foreign currency, the financial intermediary increases its assets (in the bal-ance sheet) by the amount of the letter of credit. This allows the financial intermediary to reinforce its total assets. By reinforcing its assets, the financial intermediary can free up the assets that were kept covering un-foreseen loses and risks from lending and to direct this “reserve” into lending, converting them into liabilities. This way, the letter of credit plays the role of a guarantee for the financial intermediary, allowing to free up the resources and increase the lending capacity. Therefore, the letter of credit allows the financial intermedi-ary to re-distribute the available assets for lending and multiply its lending capacity. Importantly, the mech-anism using a letter of credit will be successful only for the financial intermediaries with a strong liquidity, which have a strong “reserve” in place that can be directed to lending and replaced by a letter of credit.

It is also considered that the selected financial intermediaries (e.g. banks in Ukraine) will invest their own resources in addition to the ones foreseen by the letter of credit to the maximum of pari-passu level (up to 50%-50%). This will therefore increase the potential volume of investment available for final beneficiaries. The blended investment (funds guaranteed by the letter of credit and additional funds of the bank) should be applied at loan level (i.e. up to a pari-passu basis applied for each loan), depending on the market conditions.

The precise contribution of the financial intermediaries should be determined during the negotiation of the funding agreement with the Fund Manager.

An investment is considered pari-passu when it is made under the same terms and conditions by public and private investors, where both categories of operators intervene simultaneously and where the inter-vention of the private investor is of real economic significance61. In other words, pari-passu means equal exposure to risk by different groups of investors when lending funds to borrowers.

Leverage effect is capacity to multiply the public investment by attracting private co-investors to the invest-ment mechanism.

In case of public co-investment, the mechanism of co-investments, as well as stratification of investors have to be envisaged based on the jurisdiction and type of Investment Fund. For example, it could be envisaged that public investors in the Fund will have a more junior tranche, while other private investors (e.g. IFIs) will have a mezzanine tranche, with the migrants having the most senior tranche. In this way, the Fund can secure the investments of migrants.

The catalytic effect of co-investors to the Fund (including donors and public investors) allow the Fund to re-duce the cost of capital and to have higher risk-taking capacity, would reduce the interest rates requested to the final beneficiaries, thus decreasing the price of financing.

Catalytic effect is a capacity to attract additional public and private co-investors to the fund.

In addition, by combining the funds with an equivalent or lower participation of the financial intermediaries, this microfinance loan instrument would reduce the price and the amount of capital requirements needed by the financial intermediaries, thereby increasing its capacity to provide loans.

By using the letter of credit and financing of the Investment Fund, the financial intermediaries will pay back the Investment Fund the fee that should cover the operational expenses of the Fund (e.g. fees of the Fund Manager).

The steps for granting, analysing, documenting and allocating loans to the borrowers should be carried out by the financial intermediary/ies according to the procedures developed for micro financing (step five). The fi-nancial intermediary/ies will retain a direct credit relationship with each borrower. The final loans to the ben-eficiaries will be provided in Ukrainian Hryvnia (UAH) and will be repaid back to the financial intermediary in UAH. As the financial intermediary will repay back to the Fund financing in the foreign currency (e.g EUR

61 European Commission, Guidelines on State aid to promote risk finance investments, https://ec.europa.eu/competition/state_aid/modernisation/risk_finance_guidelines_en.pdf

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or USD), the financial intermediary will take on itself the currency exchange risks of currency conversion. The currency risks will be priced in the loans provided to the final beneficiaries.

The availability of additional (to migrants) co-investors that can provide grant financing (e.g. government of Ukraine, international donors) or debt co-financing, can provide a catalytic effect. In addition, the se-lected Fund Manager could also co-invest into the Fund, thus ensuring its participation and commit-ment into the Funds’ activities. Considering the co-investment of financial intermediaries, we expect that the leverage effect of the money raised by the Fund will be up to 100% (max x2), depending on the spe-cific agreements done with each financial intermediary.

The return on investment for the investors of the funds will depend on the market conditions and composi-tion of investors. Considering the current market situation in Ukraine, we assume that the migrants will look for a market-or-higher rate of return on their investments to the Fund. Similarly, to bridge the financing gap for the MSMEs and entrepreneurs, it is crucial that micro investment provided by the Fund is affordable (the goal is to provide the financing at the lower interest rates than the current lending to SMEs).

The Box below represents a theoretical example on how the return on investment can be formed in the Fund (depending on the types and shares of different investors). The example below is indicative. The final return on investments and price of the capital of the Fund will depend on the market conditions, specific portfolio of investors, as well as negotiated rate with the Fund Manager and financial intermediaries.

This example describes a theoretically possible distribution of return on investment and linked generation of the price of the capital of the Fund to be provided to the financial intermediaries, based on the current market conditions. This example aims to illustrate the possible magnitude of impact of migrant investment on the volume and price of micro investment available for the entrepreneurs and MSMEs.

Example of Return on investment of the Fund

Bank co-finances to the volume of funding

received from the Fund

Bank receives the funds 1.6% + 0.5%

Fund Manager fees 0.5%

Weighted interest rate 1.6%

2% interest rate

3% interest rate

0.5% interest rate (grant)

IFIs and private co-investors

Government and Donors

Migrants

Bank is able to provide loans on better conditionsFinal beneficiary

Bank

IFIs and private co-investors 40% of Fund volume

Government and Donors 40% of Fund volume

Migrants20% of Fund volume

The scenario considers a theoretical case where the Fund is financed by three groups of investors: mi-grants (20% of the volume of the Fund), government and donors (40% of the volume of the Fund) and IFIs and private co-investors (40% of the volume of the Fund).

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Each of these groups of investors have different expectation on terms of return on investments. For mi-grants it is important to receive stable and secure income. The current scenario estimates the return on investment for migrants at the level of 3 per cent in EUR (competitive on the EU level). At the same time, the interest rate to IFIs and private institutional investors is estimated at 2 per cent, following the market trends. Finally, government and donors are expected to provide grants to the Fund, and therefore, will receive a limited return on investment of 0.5 per cent. Therefore, the weighted price of the financing of the Fund will be at 1.5 per cent. Additionally, the Fund Manager will receive the fees of 0.5 per cent of the volume of funds and can co-invest to the Fund (subject to negotiations).

Summing up the return on investment for investors and the fees for the Fund Manager, the final cost of capital raises to 2.1 per cent in foreign currency. This could be an indicative price of capital to be provided to the banks in Ukraine.

The banks, in turn, will co-finance the capital received from the Fund, based on the negotiated amount of financ-ing (up to 50% co-investment). Considering the co-investment from the banks, the blended final interest rate of loans to the beneficiaries in the national currency could be significantly below current market rates (18%–21%).

Further to this, technical assistance is a necessary element for the success of the Investment Fund. It can be provided by the Technical Assistance Platform of the Investment Fund at the level of financial intermediaries and at the level of the final beneficiaries. Section 6.2.4 Provision of technical support details the scope and benefits of technical assistance. The Technical Assistance scheme, despite correlated will be separate from the Fund management and provided by different source funding but from the same donors.

6.2.1. Governance structureThis sub-section describes and clarifies the governance structure of the microfinance loan instrument, ex-plaining the roles and responsibilities of each actor. It goes one step further to identify potential relevant actors that may be interested in participating in the Investment Fund governance.

Proposed governance structure

The governance of the investment mechanism should include the following bodies:

1. Promoter

2. Board of the Fund

3. Fund Manager

4. Consultative Panel

5. Technical Assistance Platform

6. Financial Intermediaries

The Promoter is responsible for overall driving the creation of the Investment Fund, as well as setting up its strategy and objectives. More specifically, the role of Promoter is:

• to take a decision setting up the Investment Fund;

• to raise the interest of potential investors and key stakeholders;

• to set up the objectives and scope of the Fund;

• to select the Fund Manager;

• to develop an agreement with Fund Manager;

• to approve the annual budget of the Fund Manager.

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Importantly, once the Investment Fund is created, the mandate of the Promoter ends, and he becomes the member of the Board of the Fund.

The Board of the Fund is composed of the key shareholders of the Fund. The members of the Board are insti-tutional investors that are holding the part of the Fund.

Migrants cannot be members of the Boards, as they do not hold the shares of the Fund, but buy bonds issued by the Fund.

The Board of the Fund is responsible for:

• developing the investment strategy of the Fund;

• supervising the operation of the fund and compliance of the operations with the goals set up in the in-vestment strategy;

• approving amendments or revisions to the investment strategy and terms of reference to select finan-cial intermediaries;

• approve the selection of the financial intermediaries;

• providing opinions on operations to be selected, including the business plan and guidelines for co-in-vestments;

• reviewing implementation progress and approving progress reports;

• monitoring the performance and impact of Investment Fund on the national economy in line with the objectives of the investment strategy.

The Fund Manager handles creation of the fund, implementation of its activities and monitoring, including the reporting of financial intermediaries. It is also responsible for preparing the progress report to the Board each year, which included a detailed analysis of implementation. The Fund Manager is responsible for attract-ing public and private investors to the Fund, maximising its volume, as well as to select financial intermedi-aries (to be approved by the Board) and to control that the investments of the financial intermediaries are in line with the investment strategy of the Fund.

The Consultative Panel is an advisory body to the Fund, composed from the policy and industry experts, as well as NGOs and civil society representatives. The Consultative Panel is set to support the Board on ad-hoc basis. The activities of the Consultative Panel can include:

• providing the recommendations to the investment strategy;

• providing the recommendations to the funding agreement with the Fund Manager and agreements with the financial intermediaries;

• monitoring the impact of the Fund to the local economy; and

• ensuring the operation of the Fund in a transparent and lawful manner.

The Technical Assistance Platform, which will be separately financed by donors including the Government (the same or different from the participants to the Fund), is an external body to the fund that provides tech-nical assistance to the financial intermediaries and to the final beneficiaries. The Technical Assistance Plat-form works to ensure that the financial intermediaries have the necessary skills and capabilities to distribute the financing of the Fund in line with the investment strategy and in the most efficient way. At the same time, at the final beneficiary level, the Technical Assistance Platform aims to help final beneficiaries to build up bankable investment proposal and increase their capacity to manage projects. More details on the scope and activities of the Technical Assistance Platform are provided in the section 6.3.4 Provision of technical support.

The existence and operation of the Technical Assistance Platform is a necessary condition to the successful implementation of microfinance loan instrument, especially in developing markets.

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The financial intermediaries are responsible for selection and disbursement of financing to final beneficiaries, according to the business plan set out in the operational agreement. In addition, financial intermediaries:

• pursue the objectives set out in the operational agreement;

• report to the Fund Manager in a standardised format and scope;

• allow access to documents for national or international auditors, and comply with auditing pro cedures;

• carry out adequate marketing and publicity campaigns to raise awareness of the initiative among MSMEs;

• submit annual accounts for the financial intermediaries to the Investment Fund. The operational agreement also entitled the financial intermediary to management costs.

Schematically, the proposed Governance structure of the Investment Fund is presented below.

Figure 16: The proposed Governance structure of the Investment Fund

Fund Manager

Promoter

Board of the Fund

Financial intermediary

Cons

ulta

tive

Pane

l

Tech

nica

l Ass

istan

ce

Platf

orm

Final beneficiaries

Promoter sets up the Board of the Fund

Fund Manager selects the financial intermediaries, Board approves them

Fund Manager reports to the Board of the Fund

Promoter selects the Fund Manager

Fund Manager attracts co-investors to the Fund

Financial intermediaries receive the loan applications, select

beneficiaries and disburse the loans

Board of the Fund assesses the performance of the Investment Fund and proposes amendments to

investment strategy

Fund Manager monitors the investments of the financial

intermediaries is in line with the investment strategy

Financial intermediary disburse the investments and reports

to the Fund Manger

Technical Assistance Platform builds the capacity of final beneficiaries

and financial intermediaries in developing and assessing bankable

projects

Consultative Panel advices the Boardon ad-hoc basis and monitors

the operation of the Fund

Identification of main stakeholders

Based on the proposed governance structure of the Investment Fund, the key stakeholders can be identified for the management of the Fund.

The stakeholders suggested in this section are selected based on their capacities, resources, and expertise in a way that best respond to the needs of the investment mechanism.

As mentioned in the section Proposed governance structure, the main bodies involved in the management of the Investment Fund are: Promoter, Board of the Fund, Fund Manager and Financial Intermediaries.

According to the role and responsibilities of the Promoter, we believe that the best candidates for the role of the Promoter are:

1. Ministry of Economic Development, Trade and Agriculture of Ukraine (MoEDTA);

2. International Organization for Migration (IOM);

3. IFIs (e.g. EIB, EBRD, KfW, etc.).

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The criteria for the selection of the Promoter include:

• understanding the SMEs’ needs and mechanisms of microfinancing;

• understanding and influence on the national SME policy;

• experience in the implementation of the investment mechanisms for microfinance and SMEs;

• availability of financial means to set up the Investment Fund;

• availability of experiences team to supervise the Investment Fund;

• efficient coordination with other policy makers and potential institutional investors.

We believe that the Ministry of Economic Development, Trade and Agriculture (MoEDTA) of Ukraine would be the best placed body in Ukraine for the role of Promoter of the Investment Fund.

This is based on several observations:

• MoEDTA is a key policy making body in Ukraine to develop and implement policies related to SME support;

• MoEDTA has a proven experience implementing or supporting the implementation of investment mechanisms for SMEs;

• MoEDTA is shaping the regulatory environment for SMEs;

• MoEDTA received annually financing for the implementing SME policies related to access to finance.

In case if the MoEDTA cannot drive the creation of the Investment Fund, we suggest that the relevant candi-dates can be the International Organisation for Migration or the European Investment Bank. IOM is a leading inter-governmental organisation in the field of migration. The IOM Mission in Ukraine has a good understand-ing of migrant perspective on investment, but also the experience implementing the investment schemes for migrants (e.g. pilot 1+1 scheme).

The Board of the Fund is the key decision-making body for the Investment Fund. The Board of the Fund is composed of the key shareholders of the Fund. Therefore, the composition of the Board will depend on the specific institutional and large private investors to the Fund.

As mentioned in the section Proposed investment strategy, the Fund Manager should be an independent and reputable asset manager. As the investment mechanism suggest the registration of the Investment Fund abroad, the Fund Manager should be selected on the open competitive basis (subject to the public procure-ment rules). More details on the possible process of selection of the Fund Manager can be found in the sec-tion 7.1 Selection of the Fund Manager.

The Consultative Panel should be composed of policy makers and/or independent observers. These could in-clude relevant agencies (e.g, SME development office), migrant associations (e.g. Ukrainian World Congress), regulators (e.g. National Bank of Ukraine), and transparency organisations.

The Technical Assistance Platform should consist of professional service provider of business and banking strategy services. For example, the technical assistance to the final beneficiaries could be provided through the network of the Business Support Centres. More details on the modalities of the technical support and the potential providers could be found in the section 6.3.4 Provision of technical support.

Financial intermediaries that will disburse the funds of the Investment Fund can be banks (public and private) or credit unions. Similarly to the Fund Manager, the selection of financial intermediaries should be based on a transparent competitive process. Importantly, the financial intermediaries should have a wide network of branches in Ukraine, work with SME lending and be ready to co-invest in the instrument. It is also important to highlight that several Financial Intermediaries already worked with International Finance Institutions using similar financial instruments targeting SMEs. More details on a proposed process of selection of financial intermediaries are provided in the section 7.2 Selection of financial intermediaries.

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6.2.2. Provision of technical supportThe findings of analysis of the microfinance market in Ukraine reveals that the access to finance for MSMEs is not only hampered by the limited financial capacities of entrepreneurs, but also relates to a number of technical reasons. To fully exploit the potential of the investment mechanism for migrant savings, technical assistance should be included as a service to the financial intermediaries (banks and credit unions) and final beneficiaries of microfinance (see figure below).

Technical assistance from the Investment Fund on both levels could be provided through a dedicated Technical Assistance Platform.

The Technical Assistance Platform could be set up within an existing or new external entity to the Fund Man-ager of the Fund (e.g. it could be included as a part of the SME development office). The main objective of the Technical Assistance Platform will be to support the capacity building of financial intermediaries and final beneficiaries.

Representatives of the Fund Manager or reputable independent consultancy companies can provide the ser-vices to the financial intermediaries.

Figure 17: Technical assistance in the investment mechanism

Migrants

Diaspora

Donors (e.g. EC, IOM)

IFIs (e.g. EIB, EBRD, KfW, WB)

Ukrainian Government

Promoter

Escrow account

Investment Fund registered abroad

EUR / USD

TechnicalAssistancePlatform

Bank(s) in Ukraine

SME MSME Entrepreneurs

84


Under this scheme, the Technical Assistance Platform would:

1. Support financial intermediaries. The technical assistance for financial intermediaries would be di-rected to increase their capacity and knowledge on the microfinancing, develop relevant procedures for assessment of the eligibility and bankability of microfinance projects, and develop the monitoring and reporting processes needed for the regular reporting to the Fund Manager. The technical assis-tance might also include capacity building on building up the pipeline of microfinance projects and raise awareness of such a product among MSMEs and entrepreneurs.

2. Support to MSMEs. The technical assistance to final beneficiaries should focus on supporting their loan applications. This can include a wide range of business planning services, as well as complying with administrative and monitoring requirements of the financial intermediary.

Technical assistance to final beneficiaries

Entrepreneurs often lack financial literacy. This hinders their capacity to prepare business plans and to ade-quately structure their financial model. Businesses with mature business plans and consolidated financing are more likely to obtain the limited financing available, while the others experience more difficulties in accessing finance, particularly given the higher associated risk presented by these potential beneficiaries.

Final beneficiaries (e.g. MSMEs and entrepreneurs) will be asked to present an ”investment-ready” project or comply with other eligibility criteria to financial intermediaries for loan approval. This process requires significant expertise in business case development, project finance, marketing, etc., which final beneficiaries may not have, particularly if they do not dispose of previous experience in requesting such type of products.

Thus, to support projects in reaching sufficient maturity to be presented for a micro-loan application, final beneficiaries would require technical support. Such support should be available for a full cycle of projects, thus maximising chances of success for financing.

Technical assistance to final beneficiaries could include the following aspects:

• eligibility requirements check/ administrative support• business case development• business model• identification of co-financing sources• financial structure• preparation of loan application• technical advice.

Technical assistance for final beneficiaries should cover both technical and financial feasibility. In addition, attention should be paid to the provision of guidance at the level of project management to ensure that the final beneficiary has sufficient capacity and necessary skills to deliver the project as planned. Financial feasibility investigates the soundness of the financial aspects, notably business case development, financial analysis and projections.

Provision of technical support for final beneficiaries is crucial to ensure the soundness of their loan ap-plications, reduce the risks for financial intermediaries and generally increase the financial literacy and capacity of MSMEs and entrepreneurs. In this respect, availability of the technical assistance for final beneficiaries is a very important condition for the success of the investment instrument.

Operationally, the technical assistance to final beneficiaries could be provided by:

• Upgrading the skills of existing Business Support Centres. There are several existing Business Support Centres supported and supervised by the Ministry of Economic Development, Trade and Agriculture

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and the SME Development Office. These Centres can play a key role in providing technical assistance to MSMEs and entrepreneurs as well as raise awareness on the existence of the microfinance instrument.

• Creating a new Technical Assistance Platform dedicated specifically for the Migrant Investment Fund . However, such a possibility seems viable only at the later stages of the development of the in-strument, upon reaching a critical mass of projects that would require technical assistance.

• Existing enterprise incubators and accelerators, complementing the services provided by Business Support Centres. In particular, they would focus on providing incubation and acceleration services to MSMEs entities and providing them with tailored support in order to enhance the financial sustain-ability of business models as well as to increase their operational efficiency and to foster their growth. However, this option would be only available in the cities where business incubators and accelerators exist and are sufficiently developed to provide services to a wide range of sectors.

Technical assistance to financial intermediaries

Though the portfolio of services to SMEs is increasing, financial intermediaries (banks and credit unions) do not often serve the MSMEs and entrepreneurs.

On the one hand, some of the requirements (e.g. credit worthiness assessment) which are imposed by the Na-tional Bank of Ukraine, shape the (low) level of risks that financial intermediaries can take when lending to companies. At the same time, while financial intermediaries tend to be risk-adverse, lending to MSMEs is riskier than for established, mature and/or large companies. They do not always have a financial history (such as in the case of start-ups), documented management structure or business plan in place etc. As a result, financial intermediaries are also reluctant to lend to the MSMEs sector.

In parallel to the assistance to final beneficiaries, the Technical Assistance Platform could provide techni-cal assistance to financial intermediaries, in particular concerning knowledge and understanding of mi-crofinance lending, and in setting up a monitoring and reporting framework for the microfinance facility.

The objective of this technical assistance is to allow financial intermediaries to better understand the chal-lenges and specificities of microfinance lending (that is currently not sufficiently covered by its regular busi-nesses). Notably, the technical assistance to financial intermediaries should focus on:

• Transfer of knowledge on microfinance lending including best practices and solutions;

• Capacity building on the methodologies for developing risk management system for microfinance loans, assessing the loan applications and their appraisal;

• Setting up, monitoring, reporting and performance framework of the financial intermediaries, need-ed to report to the Fund Manager.

The level and extent of the technical assistance should depend on the existing skills and experience of the fi-nancial intermediary in the microfinance lending.

Specific technical assistance could assist the financial intermediaries in several ways:

• Provide financial intermediaries with training to and on the job learning activities to integrate best market practices emerging from the EU market experience, on MSMEs (and especially microfinance) lending.

• Support the development of a project pipeline, with a classification and prioritisation of the most relevant MSMEs projects.

• Help financial intermediaries (such as banks and credit unions) define the optimal funding strategy, i.e. how to better assess the most adequate financial mix (i.e. own capital vs. loan vs. equity).

• Support in the definition and implementation of a framework for the monitoring and impact assessment of financial intermediaries’ portfolio companies. Indeed, financial institutions prove to lack a frame-

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work to appropriately assess the risk of MSMEs entities. This could entail e.g. defining specific KPIs for activities and results of the portfolio companies, as well as helping with the elaboration of a reporting framework (including organisational aspects of the reporting, reporting frequencies, and formats).

• Identify, analyse and document emerging success stories among financial intermediaries’ portfolio companies. IOM could organise an event to highlight success stories, or share them though social media, a newsletter or a dedicated online platform. This would be beneficial for the MSMEs entities concerned in terms of visibility and reputation.

• Support the design and implementation of awareness-raising and promoting campaigns to increase the demand of entrepreneurs and MSMEs for microfinance.

Operationalisation of the Technical Assistance

The technical assistance will be financed by donors separately from their contribution to the Fund. While the investment mechanism will rely partly on commercial funds from migrants and loans from the In-ternational Finance Institutions, the technical assistance is typically a component financed by the public sector and international donors as there is no financial return on investment. Technical assistance will hence take the shape of grants.

The budget of the technical assistance should then be adjusted depending on the requirements set and the expected number of target beneficiaries.

6.2.3. Summary of the proposed investment strategy

Table 17: Summary of the investment strategy

Microfinance loan instrument

Nature / Type of product Microfinance loan instrument for MSMEs and entrepreneurs

Funds allocations Target share of migrant investment: 20%

Target Public funding contribution (including donor contribution): 40%

Target IFI’s financing contribution: 40%

Expected leverage effect (at the level of financial intermediaries)

max x2

Loan Amount EUR 500 – 10,000

Loan Duration 6 months – 3 years

Scope of the FI and target recipients

Scope of the FI:

Micro loans with low interest rates, extended payback periods

This investment mechanism has a broad area of intervention and a large target MSMEs, since the market gap identified for the loans covers entrepreneurs, micro and small enterprises

Applicable to micro investments across all sectors of economy

Can be put in place by one or several financial intermediaries

Target beneficiaries:

Entrepreneurs, micro and small enterprises that are not eligible for the current commercial loans.

Objectives Channel migrant savings into the investment pool that will improve access to finance for entre-preneurs and small businesses in Ukraine.

Expected advantages Provides more affordable debt financing for entrepreneurs and SMEs, channel migrant savings into formal economy, support the development of local businesses in Ukraine.

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Microfinance loan instrument

Expected socioeconomic results / Added-Value of the instrument

• catalytic effect

• leverage effect

• reuse of public funds

• development of entrepreneurship and SME market

• development of microfinance market

• creation of jobs

• keep migrant’s savings in the formal economy

• support the liquidity of banks

• support the local development.

Consistency with other interventions targeting the same market

The implementing financial intermediaries will be selected through a Call for Expression of Inter-est or tender. No other investment mechanisms targeting migrant investments were identified.

Estimation of Public and Private resources

Based on a simulation made in this feasibility study, at the Level of the fund, the distribution of investment is desired as:

Target share of migrant investment: 20%

Target Public funding contribution (including donor contribution): 40%

Target IFI’s financing contribution: 40%

At the level of financial intermediaries, the private contribution could be up to 50% of the invest-ment volume.

Use of reflows of the instrument

Resources paid back to the investment mechanism from the repayment of resources committed for letter of credit, and any other income generated shall be re-used for:

• further investments, through the same or other investment mechanisms;

• preferential remuneration of private or public investors;

• reimbursement of management costs and payment of management fees of the investment mechanism.

The use of reflows of funds should be included in the call for tenders for the selection of the fi-nancial intermediaries and be defined in the funding agreements between the Promoter and the Investment Fund, as well as between the Investment Fund and the financial intermediaries.

Because the maturity of loans can be of up to 3 years, principal and interest payments coming into the investment mechanism on an annual basis will comprise just a fraction of the total allocation.

Evaluation of the optimal remuneration levels allowing to maximise the leverage of counterpart funds from private investors

Preferential remuneration of migrant investors shall have priority over other investors.

The establishment of remuneration levels for investors and Fund Manager(s) is at the discretion of the Promoter, and should be determined through discussions between the Promoter, the Fund Manager, and the financial intermediary(ies) as appropriate or through call for tenders.

This instrument should have a contribution of up to 50% of the volume of investment from the fi-nancial intermediary.

Expected results and corresponding key indicators

Expected results:

The expected results are focusing on the facilitating access to microfinance by MSMEs as well as channelling migrant investment to local business development. Quantification of the results can only be made once the parameters for the instrument are defined further.

Key indicators:

• Volume of raised migrants’ investments

• Number of SMEs / entrepreneurs supported

• Additional (to migrant investment) public and private investment raised

• Amount of jobs created by the SMEs / entrepreneurs supported

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6.3. Legal structure

6.3.1. Legal obstacles for the establishment of an Investment Fund in UkraineDuring our analysis we have identified several legal issues that create obstacles (deal breakers) to using the In-vestment Funds registered in Ukraine with the aim to raise the funds of individuals and invest them, namely:

Lack of safeguards to receive profit or recover investments

The Law of Ukraine “On Collective Investment Institutions” provides that participants of either Corporate Investment Funds or Share (Unit) Investment Funds hold the risk of possible losses related to investment activities of respective Fund in the amount of their shares or investment certificates purchased.

There are no state or private guarantees for investors for receiving dividends on their shares or investment certificates. Moreover, payment of dividends from securities of Open and Interval Investment Funds are not accrued or paid at all. Dividends may be paid only on securities of Closed Investment Funds.

At the same time, Closed Investment Funds are not making commitments to buy out their issued securities unlike Open and Interval Investment Funds. Investments can only be recovered before the final termination of such a Closed Investment Fund. In practice, it means that investors should wait until the moment of expi-ration of such Closed Investment Fund to receive their funds back.

Key implications Investment Funds will not be able to ensure timely payment of dividends (returns on investment) or recover migrants’ investments.

Obstacles related to the issuance of bonds

If a Collective Investment Institution is raising funds by making a public offering of bonds, it will be unable to specify in advance the type of purchasers of such bonds. It means that it will be impossible to limit public offering only to certain groups of investors (e.g. for individuals only). Every interested investor will be able to purchase bonds regardless of its’ organisational form and business interests. Thus, public offering of bonds is unsuitable for the purpose of raising only migrants’ funds.

Also, Collective Investment Institution can make a private offering of bonds among a pre-determined circle of investors. In this case, the number of unqualified investors (e.g. individuals) among the pre-determined circle may be equal to and not exceed 150 persons.

Key implications Although Investment Funds may issue bonds, it will be difficult (if possible at all) to limit offering of bonds only to migrants.

Prohibition on attracting funds of individuals with an obligation of their subsequent return

According to the Law of Ukraine “On Financial Services and State Regulation of Financial Services Markets”, financial institutions may attract funds from individuals with an obligation of subsequent return of such funds (including borrowing of loans from such individuals) only subject to obtainment of a respective license from the National Commission for Regulation of Financial Services Markets.

Attraction of funds with an obligation of subsequent return of such funds means attraction of funds based on a written agreement with a person (depositor), which is not a financial institution, with an obligation of subsequent return of funds after expiration of the term defined in the agreement with a mandatory payment of interest (remuneration) to the depositor.

According to the effective law, only banks and credit unions are permitted to attract individuals’ funds with an obligation of their subsequent return subject to obtainment of a respective license.

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Collective Investment Institutions are not allowed to conduct such activities and they will not be able to ob-tain such a license.

Key implications In Ukraine, Investment Funds are created with the purpose to hold and manage assets of their clients by making investments in risk-free assets (almost in all cases) like real estate, securities, deposits, currency etc. Fund raising by means of individuals’ funds with an obligation of their subsequent return is a financial service that must be pro-vided by other financial institutions (either banks or credit unions) and the purpose of this activity is different from the day-to-day activities of Investment Funds.

Prohibition on granting loans or credits using assets of Collective Investment Institutions

According to the Law of Ukraine “On Collective Investment Institutions”, Corporate Investment Funds are prohibited from granting loans. This restriction does not apply to Venture Funds to a certain extent. Loans at the expense of Venture Funds may be granted only to legal entities, provided that at least 10 per cent of the charter capital of the respective legal entity belongs to such a Venture Fund.

As well as Corporate Investment Funds, this restriction also applies to Share (Unit) Investment Funds. An Assets Management Company that manages assets of respective Share (Unit) Investment Fund is prohibited from granting loans using assets of such Fund.

Key implications Investment Funds registered in Ukraine cannot be used as micro-financing institutions.

Given all the above, it does not seem legally feasible to establish an Investment Fund in Ukraine in order to attract migrant savings.

6.3.2. Potential destinations for opening an Investment FundDuring our analysis, we have considered several European countries, which are potentially eligible jurisdic-tions for establishing and operating of Investment Funds of different types and purposes.

Generally, there shall be no restrictions for raising fund from outside the EU by these funds (unless such fund raising might seriously disturb the domestic or external monetary or financial situation of the re-spective state).

As a result, we have identified a number of convenient destinations with a variety of investment mechanisms and instruments, among which are the following:

1. Luxembourg

Luxembourg is one of the top investment destinations in Europe. Luxembourg’s economy is mainly based on financial services and provides for a wide range of investment vehicles.

The Luxembourg investment market is represented by several types of entities, in particular:

• UCITS or Part I – Undertakings for the Collective Investment in Transferable securities;

• UCI or Part II fund:

- SIF (Specialised Investment Fund): a flexible investment fund, which is efficient multipurpose vehicle;

- SICAR (Investment Company in Risk Capital): Investment Fund specifically designed for private equi-ty investment and venture capital;

- RAIF (Reserved Alternative Investment Fund): a fund with a quick time-to-market, indirectly regulat-ed via the alternative Investment Fund Manager.

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The investment legislation is created in such a manner that it can welcome all types of local and foreign inves-tors, such as institutional, retail or qualified investors.

It should be noted that the taxation of Investment Funds occurs based on the type of fund registered in Lux-embourg. The main taxes which need to be paid by Investment Funds in Luxembourg are:

• the registration fee which is the first tax to be considered with establishing a fund in Luxembourg;

• the subscription tax which is what makes Luxembourg an appealing Investment Fund destination;

• the value added tax (VAT) which is applied under specific circumstances on Investment Funds;

• the corporate tax, the municipal tax and the wealth tax which are imposed on investment manage-ment companies.

Environment for collective fundraising is extremely diverse, which makes Luxembourg one of the best destination jurisdictions for the establishment of an Investment Fund (one that is most convenient and applicable for any particular purposes form).

2. The Netherlands

The legislative framework applicable to Investment Funds in the Netherlands is structured on regulations for UCITS and AIFs. The legislation in the Netherlands follows the directives of the European Union (EU), as the jurisdiction is a Member State of the EU. The Dutch region also implemented the Alternative Investment Fund Managers Directive, which regulates the registration and activity of hedge fund start-ups and other similar investment vehicles.

Funds in the Netherlands can be registered under both corporate entities and non-corporate entities. Invest-ment vehicles may be registered as limited liability companies (private or public), investment companies with variable capital, cooperatives, limited partnerships or as funds for joint account (mutual funds). The investors and their investments are protected by the Authority for the Financial Markets (AFM), which requires from all Investment Funds provision of sufficient safeguards for investors. For instance, the AFM will require that buy outs can be requested by investors at any time.

Due to transparent and flexible tax system, Investment Funds in the Netherlands can be structured in different ways. Certain types of Investment Funds (e.g. established as funds for joint account or limited partnerships) can be qualified either as an Exempt Investment Institution (VBI) or as a Fiscal Investment Institution (FBI).

VBIs’ are fully exempt from Dutch corporate income and dividend withholding tax. However, due to its tax-ex-empt status, the VBI lacks protection from tax treaties.

At the same time, FBI’s are subject to the Dutch corporate income tax, but at a rate of zero percent. An FBI benefits from tax treaty protection and the scope of activities that it may perform is broader than VBI’s.

We believe that variety of Investment Funds and instruments that Investment Funds may use in the Neth-erlands, as well as reliability of the jurisdiction itself, makes the country a good destination for opening an Investment Fund.

3. Ireland

From a statistical point of view, Ireland is the home to more than 900 Fund Managers, residents in more than 50 jurisdictions; more importantly, a wide proportion of the international Fund Managers have set up an Irish Investment Fund (17 out of 20).

There are two main categories of funds authorised by the Central Bank of Ireland, being (i) UCITS and (ii) AIFs.

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In 2017, the Irish investment market was characterized by a large proportion of assets held under UCITS funds (EUR 1,831 billion), while a total value of EUR 566 billion was held in AIFs.

Irish Collective Asset-management Vehicle (ICAV) is quickly becoming the vehicle of choice for funds estab-lished in Ireland. An ICAV is a suitable fund vehicle for both UCITS and AIFs and can be used for self-managed or externally-managed, open-ended or closed-ended collective investment schemes.

Other types of Investment Fund vehicles available in Ireland are:

• the investment companies,

• the unit trusts,

• the common contractual funds (CCF),

• the investment limited partnerships (ILP).

All the above vehicles are suitable for both UCITS and AIFs with the exception of the ILP, which may only be used for AIFs. Various factors impact on the choice of fund vehicle, including potential distribution channels and the location and preferences of prospective investors.

All Irish Investment Funds authorised by the Central Bank of Ireland, which are available to the public are exempt from tax on their income and gains irrespective of where their investors are resident. No Irish stamp, capital or other duties apply on the issue, transfer or buy out of shares/units in an Investment Fund.

4. Cyprus

Being one of the first EU member states to transpose the Alternative Investment Fund Managers Directive into national legislation and together with the enactment and constant modernization of the Cyprus Alter-native Investment Funds Law, Cyprus has transformed into an attractive and competitive environment for the development of the national alternative investments industry.

In Cyprus, it is possible to set up Investment Funds under the regulations referring to AIFs and UCITS. The AIF can be registered under one of the following legal structures:

• fixed capital investment company – can be set up with a share capital that cannot be modified;

• variable capital company – this type of company can be selected when starting an AIF, but it can also be registered for UCITS structures;

• limited partnership – it is registered by one or more partners who have unlimited liability and one or more partners who have limited liability for the partnership’s financial debts;

• common fund – it is set up under a contractual document – the Common Fund Rules contract.

In Cyprus, there are two types of AIFs (i) with a limited number of persons – up to 50 persons (which is con-sidered to be more flexible) and (ii) an unlimited number of persons.

A Cyprus AIF is cost-efficient and simple to set-up, manage and operate. It offers a modern regulatory frame-work that is in line with relevant EU directives, is supervised by a competent and accessible regulatory author-ity and enjoys reduced reporting requirements.

Almost all dividend income and capital gains of a Cyprus tax resident Investment Fund is tax-free. Interest income is taxable, but effective tax can be significantly reduced considering the notional interest deduction (NID) on new equity. Services provided by the investment manager of the fund are not subject to VAT.

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Figure 18: Pros and cons of the proposed legal structure

Pros Cons

Not subject to limitation, set by Ukrainian law for attraction of funds from migrants with the purpose of their investment (see above).

A previously unknown instrument in Ukraine, which might slow down the interest from migrants.

Hedging forex risks via link to a foreign currency (USD/EUR).

Potential difficulties if migrants are to remit funds from Ukraine (related with the necessity to prove the source of funds and payment of applicable taxes in Ukraine).

No need to declare migrant investments into a foreign Investment Fund within the Ukrainian authorities.

It is expected that financing from the Investment Fund will be cheaper for the financial intermediar-ies, than they can obtain from the National Bank of Ukraine, thus providing them will possibility to offer cheaper loans for borrowers (MSMEs).

6.4. Development optionsThis section aims to present some of the potential options that could be envisaged in the short and medi-um-term to further develop the fund.

6.4.1. GuaranteesOne of the key findings of the market assessment presented in the section 4.4 Demand for microfinancing is the large unmet demand of Ukrainian SMEs for debt financing. First, there are no MFIs in Ukraine (due to the absence of legal and regulatory framework), and the microfinance market is not developed. Second, SMEs may have a poor history in terms of financial records, and/or with limited collaterals, and are considered high risk and are hence unable to obtain the desired financial support. Therefore, traditional lending products are not suitable for this type of actors. At the same time, the lack of access to finance targeting SMEs investment needs, is also explained by the risk-adverse behaviour of banks, which have demanding requirements in terms of documentation, interest rates and collaterals, which most SMEs cannot satisfy.

Given these conditions, a guarantee instrument62 could be a solution to support the investment financing needs of SMEs63 aiming to grow and develop (see figure below). This differs from the microfinance lend-ing, which rather focuses on helping provide microloans to MSMEs and entrepreneurs.

In addition, guarantees are shown to be a relevant instrument in difficult contexts – including those char-acterised by fragility and conflict, where private capital is challenging to mobilise64. They can notably help jumpstart investments.

62 According to the European Commission, a guarantee is a “Written commitment to assume responsibility for all or part of a third party’s debt or obligation or for the successful performance by that third party of its obligations if an event occurs which triggers such guarantee, such as a loan default”.

63 A guarantee instrument can also target large enterprises develop their business.64 CSIS & CDC, Innovations in Guarantees for Development, 2019. https://csis-prod.s3.amazonaws.com/s3fs-public/

publication/191016_BanduraRamanujam_Innovations_WEB.pdf

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Figure 19: Relevance of financial instruments according to SMEs Development Stages

Business angels, Technology transfers

Business angels, Technology transfers

Leasing, Factoring & Export Credit

Loans & Credit Lines

Formal VC Funds & Mezzanine Funds

VC Seed & Early Stage

Microcredit

Pre-Seed Phase Seed Phase Start-up Phase Emerging Growth Development

SME Development Stages

SMEs

Cas

h flo

ws

Source: European Commission (2016)

As reflected in the figure above, the guarantee instrument will target growing companies, i.e. those which are expanding in their sector/industry, across sectors, and/or exporting to foreign markets. In doing so, the guarantee instrument will contribute not only to the creation of more and better jobs, but also to im-proved productivity and competitiveness of SMEs.

The guarantee instrument will mostly work through the banking sector, as the latter already works with the targeted market, and offers financial products and services that are more relevant to growing SMEs than credit unions. Additionally, this instrument would allow these enterprises to benefit from bank financing on more favourable conditions, including:

• Reduced collateral requirements;

• Reduced loan interest rates because of a lower risk profile and possible increase in the maturity of loans;

• Potentially longer grace period / deferred repayment.

In this context, a “Capped First Loss Portfolio Guarantee” (CFLP) could be a considered as a relevant instru-ment to target the investment needs of growing SMEs. By focusing on a market of growing SMEs, this type of guarantee can be used to “create a demonstration effect and to develop a market in fragile contexts: if the investment performance is strong, this brings new investors into the development of a new sector”65.

The CFLP covers the losses of a loan portfolio until a predefined amount or percentage of the loan and for the port-folio in default i.e. (the cap). Once the cap is reached, the banks is exposed to lending risks. In other words, this instrument is used to cover the junior tranche of a given project, meaning that the guarantee provider is the last to be paid in case the project fails. This makes it more likely for banks to recoup their money and hence decreasing their risk. To illustrate the functioning of the CFLP, we will take the example of the figure below.

65 CSIS & CDC, Innovations in Guarantees for Development, 2019. https://csis-prod.s3.amazonaws.com/s3fs-public/publication/191016_BanduraRamanujam_Innovations_WEB.pdf

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Figure 20: Capped first loss portfolio guarantee

Guarantee AmountGuarantor risk

Bank’s Risk exposure

Guarantee Cap Rate (80%)

Guarantee Cap Rate (80%)

The guarantee instrument will reduce the bank’s risk perception and therefore increase their willingness to provide a loan, resulting in an increased liquidity to the benefit of growing SMEs.

The CFLP covers the first loss of a portfolio of new loans on a loan by loan basis for a portfolio of loans, cover-ing for example, up to 20% of the guarantee cap rate (i.e. 20% of the total loan portfolio) and 80% of the guar-antee rate (i.e. 80% of the defaulted amount of each loan).

In other words, the CFLP guarantee will provide a credit risk coverage on a loan by loan basis for the creation of a portfolio of new loans targeting growing SMEs investment needs, up to the maximum guarantee cap rate. The percentages of guarantee rate and cap rate would create a strong multiplier effect while at the same time attracting banks as the first loss of the portfolio would be de facto covered. In fact, given that this scheme covers the first loss of the portfolio up to 80%, risk exposure of banks is reduced considerably, thus increasing their willingness to provide loans to growing SMEs for their growth and development phases.

Table 18: Pros and Cons of guarantees

Pros Cons

High leverage effect. The guarantee only represents a risk reserve for the lender and does not provide liquidity.

Addresses specific risk capacity constraints in a given market segment.

Revolving effect is slower than for loans as money set aside for guarantees cannot be reused until repayment is ensured.

Can form part of a broader strategy to increase lending to risky projects.

Estimating the appropriate cap, or maximum limit, can be challenging.

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Pros Cons

Disbursement only in the event of default.

Unfunded products such as guarantees require less initial resources than funded products such as loans.

In comparison with the provision of loans with the same financial obligation, the management costs are lower.

Source: European Commission (2015)

While the CFLP target an entirely different market than the investment mechanism (growing SMEs) and has a different objective (not only the creation of jobs but also the improved productivity and competitiveness of SMEs), it can be integrated in the latter in at least two manners:

1. The CFLP can be part of the Investment Fund, and offered to financial intermediaries such as banks;

2. The CFLP can be set up as a separate fund, where a Fund Manager will be selected to only deal with guarantees. In this case, it could either offer guarantees to financial intermediaries and/or to other funds (as in a fund of funds model).

The choice among those two options will be tailored to the Ukrainian economic context, and the inter-ests and constraints of stakeholders. A detailed analysis of each of these possibilities will contribute to shed light on the advantages and disadvantages of each structure, with a view to help take a well-in-formed decision for the integration of the guarantee mechanism. In addition, a market and gap analysis will be conducted to ensure that a proposed solution will best address and contribute to the objective of addressing growing SMEs needs.

6.4.2. Integration of the diaspora in the investment mechanismThe investment mechanism is flexible. i.e. it is designed with a view to accommodate to potential chang-es in the market and additional objectives. Therefore, while the investment mechanism targets primarily migrant workers, it can also be adapted and tailored to one more type of stakeholders: the Ukrainian diaspora. The latter is defined by migrants or descendants of migrants, whose identity and sense of be-longing have been shaped by their migration experience and background – but who do not have tangible links with Ukraine.

This section will first dive in some of the Ukrainian diaspora’s characteristics66, that need to be taken into account in order to provide relevant financial product (and tailor the investment mechanism). For this pur-pose, we will look particularly at the US and Canadian-based Ukrainian diaspora as i) they are one of the most important in numbers; ii) they are well-organised and could hence be more easily targeted by the investment mechanism. On this basis, the second part will present the means and modalities by which the diaspora can be involved in the investment mechanism.

As initially presented, migrant workers and the diaspora present different capacities, interests, needs and constraints. The diaspora (first and second generation) is generally well-educated, with more 94% graduat-ing from University – including more than half concluding their studies with a master’s degree. While their professional career is diverse, about 30 per cent of the diaspora work in business, management and finance.

66 This section is to a large extent based on the following USAID report “Ukrainian diaspora investment study” (2016), which is to date one of the most comprehensive attempt to capture the US and Canada based Ukrainian diaspora characteristics.

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As a result, the level of income of the Ukrainian diaspora in rather high: 30 per cent of them reported a mod-erate-to-high net worth of USD 100,000 or more.

The Ukrainian diaspora often invest in Ukraine for multiple reasons. These can be classified in five categories:

1. Financial return (investment profits)

2. Emotional return (feeling good about contributing to Ukraine’s development)

3. Social-status return (gains in respect and social hierarchical standing)

4. Political return (political access, protection or influence)

5. Institutional change (contribute to socioeconomic development)

Figure 21: Diaspora investment motivation (scale 1-7; 1=do not agree at all; 7=extremely agree)

Emotional return

Institutional change

Financial returnPolitical return

Social return

5.05

5.24

3.342.62

3.66

Source: USAID (2016)

The primary motivations for the Ukrainian diaspora to invest relate to institutional change, emotional and so-cial return. Financial return is not the first incentive for the diaspora to invest, though it cannot be neglected either – its scores follows closely the social return’s. While the diaspora is generally interested in investing in Ukraine (through remittances; charity and business investments), perceived corruption, unfair business prac-tice, investment failure stories and the lack of knowledge about potential business opportunities are among the key factors preventing them from investing.

This clearly demonstrates that the Ukrainian diaspora has different investment capacities, motivations, and constraints than migrant workers. In turn, this implies that different and tailored financial products should be offered to the Ukrainian diaspora.

First, while migrant workers are the main target of the bonds, the latter will also be open to the diaspora. Second, the investment mechanism will provide the diaspora with the opportunity to buy a share of the in-vestment fund and become a private investor/shareholder. As for any investors, a dividend will be paid to the diaspora, which will vary depending on the performance of the Investment Fund.

As the diaspora is more sensitive to institutional development and emotional return, the investment mecha-nism will try to maximise such a value by putting in place a comprehensive Monitoring and Evaluation frame-work that will show how the investments contributed to socioeconomic development in Ukraine, and by highlighting some success stories. The latter will be branded through marketing channels to further attract

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diaspora’s investments. The return on investment will not be neglected: we expect the investment mecha-nism to generate dividends to diaspora’s investments, in line or slightly below other safe type of investments.

The above described mechanism can easily be open to this typology of investors. In this case a direct invest-ment in the Fund shares will be preferable than the subscription of the bonds issue by the Fund.

This imply that the Funds despite will remain close to advised investors will need to have a senior tranche dedicated to this private individual. However, another option could be also to open the bond distribution to diaspora investors with a dedicated issue or increasing the threshold of an individual subscription. Those ele-ments could be also considered as a natural evolution of the Fund since it will not have any structural impact on the described structure but simply an evolution of the activities and of the business model.

While the minimum ticket to buy bonds will be affordable for migrant workers, investment in the share of the investment mechanism are regulated by the jurisdiction of the Fund location.

6.5. Key takeaways

Microfinancing loan instrument

1. In order to have an impact on local economic development, the migrant financial mechanism should aim to raise funds for microfinance for entrepreneurs and MSMEs.

2. Based on the economic and behavioural profile of Ukrainian migrants, the investment mechanism should provide migrant with the stable and reliable return on investment, preferably in foreign currency. This bond will be as liquid than any other similar instrument in the market.

3. In order to address the lack of trust of migrants into the public institutions and banking system, the investment mechanism should be implemented in a form of an independent Investment Fund.

4. The successful implementation of the investment mechanism requires an active role of Promoter in raising the awareness of the Fund among potential investors and selecting the Fund Manager.

5. In order to ensure the successful implementation of the investment mechanism, the Promoter should ensure a wide-reaching targeted awareness raising and promotion campaign.

6. In order to mitigate economic, regulatory and currency exchange risks, the Investment Fund should be registered abroad and managed by a reputable European fund manager.

7. In order to mitigate the currency exchange risks, the Investment Fund will provide the partner bank(s) with a letter of credit, instead of direct disbursement of funds.

8. Government and donor co-investment to the Fund will make the financing for the entrepreneurs and MSMEs more affordable.

9. The financial intermediaries should also co-finance the microfinancing up to the 50/50 share.

10. The Investment Fund should be governed by the Board, consisting of the key shareholders.

11. Availability and accessibility of technical assistance for financial intermediaries and final beneficiaries is a necessary element for the success of the mechanism.

ROADMAP OF ACTIONS

7

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7. ROADMAP OF ACTIONSChapter 7 aims to guide the key stakeholders through the implementation process of the instrument, thus supporting its relevance, efficiency, effectiveness and sustainability. The Action Plan presents the set of ac-tions required to implement the investment mechanism, as introduced in Chapter 6.

Chapter 7 is divided in four sections. The first focuses on the selection of the Fund Manager – an essential com-ponent to ensure the impact of the mechanism. The second section dives into the identification, selection and negotiation with financial intermediaries. The third section then looks at the Monitoring and Reporting process of the instrument, which aims to ensure that the implementation of the instrument meets the objectives for which it has been established (e.g. results aligned with the targeted priorities); and that the available funds are used efficiently. Last, section 5 concludes by providing an indicative calendar for the implementation of the instrument.

7.1. Selection of the Fund Manager

The proposed structure would require the selection of an external (to the investors and Promoter) and independent Fund Manager.

The selection of the Fund Manager might be a subject to public tender procedure (this will depend on the Pro-moter and specific rules that apply to Promoter).

In case if public procurement rules do not apply to the Promoter, it may select the Fund Manager directly without the tender procedure.

In case, if public procurement rules apply to the Promoter, the tender procedure should be launched in order to identify and select the Fund Manager. More specifically, the Promoter will need to launch a Call for Expres-sion of Interest, detailing most of the key elements of the draft investment strategy (e.g. targeted beneficia-ries, selections of financial intermediaries, investment amounts and ceilings, etc.).

The Call for Expression of interest will require interested Fund Managers to:

1. Detail their experience and technical capabilities to implement requested type of instruments; and

2. Provide a proposed strategy:

a. For the deployment of the funds and;

b. To attract additional public and private investors.

Indeed, the final investment strategy will be defined in the funding agreement signed between the Promoter and the selected Fund Manager (see further detail below).

The experience and reputation of a Fund Manager will be essential to build the credibility of the instrument among investors.

Based on the lessons learned and the findings from the market and legal analysis, as well as on the nature of the instrument (i.e. Fund registered abroad), it is recommended to open this Call for Expression of Interest to European Fund Managers.

In turn, this will help Promoter to (1) enlarge the scope of potential candidates from the country of the regis-tration of the fund; and (2) attract highly-skilled international Fund Managers and experts for the deployment of the Investment Fund.

The procurement process is expected to take at least three to four months. Through this competitive selec-tion process, the Promoter will be able to assess the capacity, experience and proposals made by the interest-

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ed Fund Managers. Importantly, while the Call for Expression of Interest will present an outline of the struc-ture of the instrument and its investment strategy, some of the parameters of the fund (e.g. the remuneration scheme) will be subject to the value proposition of the interested Fund Manager. Therefore, it will be up to the interested Fund Manager to propose some of these parameters to the competent authorities. These pa-rameters would include the following:

• experience and reputation of the Fund Manager;• operational capacity in Ukraine, prior experience working with financial intermediaries;• financial contribution to the instrument;• portfolio management strategy;• capacity to attract private co-investors;• remuneration scheme and performance fees.

By leaving these parameters to the proposal of the interested candidates, the Promoter will be able to better as-sess the maturity of the Fund Managers and the quality of their proposal, and thus obtain a more attractive deal.

Once selected, the Fund Manager will be in charge of setting up and managing the Fund in an indepen-dent manner, operating in line with the agreed investment strategy.

The activity of the Fund Manager can be di-vided into four key pillars, as described in the figure. In addition to the management of the instrument, the Fund Manager will also be required to commit its own funds (minor contribution) into the instrument in order to secure and demonstrate its commitment to-wards the Fund. The Fund Manager will also be in charge of identifying and attracting addi-tional public and private co-investors, and to report on the use of these funds.

The remuneration scheme could incentivise the investment in MSMEs on the local level or in the defined sectors of economy.

According to our experience, the remuneration of the Fund Manager is a key element to ensure its performance. The remuneration scheme will be defined during the selection of the Fund Manager. It is advised to establish a pre-defined remuneration percentage with the Fund Manager, taking into account (1) the total available funds within the Fund, (2) number of financial intermediaries, and (3) the capacity to select and monitor financial inter-mediaries in order to target the expected beneficiaries and create a positive impact on the economy. In addition, a performance fee could be provided if the performance of the Fund Manager exceeds the pre-agreed thresholds.

The process of selection of Fund Manager could take three to four months.

The roles and responsibilities of the Fund Manager should be presented in a Funding Agreement. Funding Agreement certifies the cooperation between the Fund Manager and the Promoter, establishing the precise conditions between both parties and covering the modalities for the remuneration of the Fund Manager. In short, the Funding Agreement is the legal commitment between the Promoter and the Fund Manager in which the specific conditions are established. The Funding Agreement must include, inter alia:

• The investment strategy, including all implementation arrangements, the financial products offered, target beneficiaries and any specific conditions;

• Business plan, including the expected leverage effect and/or the multiplier ratio.

Fund manager

Manages Co-finances Looks forCo-investors

Reports

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In summary, the selection of the Fund Manager consists of four consecutive steps:

1. Review, appropriation and finalisation of the tender file by the Promoter. This should take approxi-mately one to three months.

2. Launch of the Call for Expression of Interest. Once the tender file is ready, an international Call for expression of interest can be launched. We believe that such a call should remain open for three to six months. During this period, we encourage the Promoter to raise awareness and further promote the launch of this call among the potential interested Fund Managers.

3. Evaluation and selection of the Fund Manager. The Promoter will be responsible for the selection procedure in compliance with the relevant regulation. In this regard, a technical analysis of the busi-ness plans presented by each candidate, as well as a due diligence of the selected candidate, will need to be undertaken in order to select the Fund Manager. We expect this step to take one to two months.

4. Negotiation of the funding agreement and finalisation of the contract. Following the award of the mandate, and prior to the establishment of the fund, the Promoter will need to finalise, nego-tiate and sign the funding agreement with the selected Fund Manager. We expect this stage to last one to two months.

7.2. Selection of financial intermediaries

7.2.1. Identification of potential financial intermediaries

A wide awareness raising campaign following the validation of the feasibility study is a key element for at-tracting potential financial intermediaries and for raising the awareness of both potential intermediaries and beneficiaries with regards to the proposed instrument.

The workshop held on 14th November 2019 as part of this feasibility study, has provided indications of the in-terest and appetite of financial institutions to participate in an eventual call for tenders to manage the pro-posed investment mechanism. At the same time, the literature review and interviews revealed a strong de-mand for access to finance from MSMEs and entrepreneurs.

In addition, the organisation of a consultation session with potential financial intermediaries having expressed their interest in the investment mechanisms would allow the Fund Manager to present the precise conditions under which it wishes to set up the investment mechanisms. Further, this consultation session would allow the potential financial intermediaries to develop a deeper understanding of the expectations of the Fund Manager, thus ensuring that the potential financial intermediaries have a comprehensive understanding of the requirements prior the submission of their offers. This consultation session should comply and not inter-fere with the required procurement steps.

The following description can vary depending on the selected public procurement procedure.

7.2.2. Definition of the procedure to select the financial intermediariesThe Fund Manager is responsible for the selection of the financial intermediaries. The Fund Manager shall is-sue a Call for Expression of Interest to identify and select appropriate financial intermediaries that will receive resources from the Investment Fund to provide microfinance loans to entrepreneurs and MSMEs.

The selection of the financial intermediaries would be structured in two main steps:

• Call for expression of interest. The Fund Manager will invite the potential financial intermediaries to submit an Expression of Interest (EoI) to participate in the selection procedure. The EoI shall in-

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clude the applicant’s presentation, the supporting documents, the declaration of absence of conflict of interest and statements regarding situations of exclusion. This EoI will first be assessed against the exclusion and eligibility criteria. Then the eligible EoIs will be assessed against the selection cri-teria, which should be defined in the terms of reference. In addition, all financial Intermediaries shall acknowledge the Anti-Fraud Policy of the Fund Manager.

• Selection process. All EoIs will be evaluated by the Fund Manager on a comparative basis, con-sidering the selection criteria. The further selection based on the quality assessment criteria, and the due diligence process if any, will follow the standard procedures and guidelines applied by the Fund Manager. The evaluation of proposals at this phase will be conducted under compet-itive terms, and the applicant(s) with the best quality-price ratio will be selected (according to the award criteria). The number of selected applicants may not be limited to one. It is advisable to select at least three financial intermediaries to increase the awareness and absorption of the funds available within the investment mechanism.

When selecting a body to implement an investment mechanism, the Fund Manager should ensure that finan-cial intermediaries have:

• entitlement to carry out relevant implementation tasks under Ukrainian Law;

• adequate economic and financial viability;

• adequate capacity to implement the investment mechanism, including organisational structure and governance framework providing the necessary assurance to the Fund Manager;

• existence of an effective and efficient internal control system;

• use of an accounting system providing accurate, complete and reliable information in a timely manner;

• agreement to be audited by Ukrainian audit bodies or relevant international Audit Bodies.

In addition, the nature of the investment mechanism to be implemented, the financial intermediary’s experi-ence with the implementation of similar investment mechanisms, the expertise and experience of proposed team members, and the operational and financial capacity of the financial intermediary should be taken into account. Precisely, the following minimum requirements should be met:

• robustness and credibility of the methodology for identifying and appraising MSMEs and entre-preneurs;

• the level of management costs and fees for the implementation of the investment mechanism and the methodology proposed for their calculation;

• terms and conditions applied in relation to support provided to MSMEs and entrepreneurs, including pricing;

• the ability to raise resources for investments in MSMEs and entrepreneurs additional to programme contributions;

• the ability to demonstrate additional activity in comparison to present activity;

• proposed measures to align interests and to mitigate possible conflicts of interest.

7.2.3. Negotiation of the operational agreements with the financial intermediariesFollowing the publication of the call for expressions of interest and the selection of the financial intermediar-ies, the selected applicant(s) shall be invited to negotiate and define the final terms and conditions of the Op-erational Agreement with the Fund Manager prior to the final signature of the agreement.

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7.3. Monitoring and reporting

7.3.1. Key performance indicatorsThe investment strategy of the Fund should outline the main performance indicators to be measured for the in-vestment mechanism. These performance indicators should be monitored closely in order to make sure that:

• the implementation of the investment mechanism meets the objectives for which it has been estab-lished (e.g. results aligned with the targeted priorities);

• the available funds are not used in an inefficient way.

The performance indicators must enable the identification of the strengths, as well as the possible weaknesses or areas of improvement, allowing the Board of the Fund to undertake the necessary corrective/preventive actions.

Initially, the key performance indicators that could be established for the microfinance loan instrument include:

• volume of raised migrants’ investment• number of SMEs / entrepreneurs supported• additional (to migrant investment) public and private investment raised• amount of jobs created by the SMEs / entrepreneurs supported

In addition, the Board of the Fund should carry out management verifications throughout the programming period and during the set-up and implementation phases of the investment mechanism to ensure efficient and transparent use of resources of the Fund.

Finally, it is advisable to define the performance indicators in line with the reporting requirements of the Board of the Fund.

7.3.2. Monitoring and review of the investment strategyThe Promoter and the Board should take into account the fact that market conditions and investment trends may vary before and in the course of the implementation of the investment strategy. Hence, the investment strategy might be updated in the following cases:

• poor accuracy or relevance of the proposed targets compared to results;

• inadequate volume of the support scheme compared to observed demand;

• miscalculation of the risk taken by the Investment Fund;

• changes in the political settings;

• improvement of the economic conditions;

• market gaps are fully addressed and there is no longer a need for intervention.

7.3.3. ReportingOne of the key tools that the Board of the Fund will have to ensure an adequate overseeing of the activities of the Fund Manager is the reporting. Reporting is essential for keeping track of the activities undertaken by the Fund Manager (and Financial intermediaries), as well as for assessing the extent to which the investment made is contributing to the achievement of the objectives for which it was implemented.

The Fund Manager will be required to provide the Board with an activity report. The Promoter and the se-lected Fund Manager should agree on objectives, indicators, methodology and reporting template prior to the launch of the instrument, to be used in a consistent and comparable manner. To the extent possible, this

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model should be aligned with other models currently used for assessing the impact of the public policies in Ukraine and/or be based on good practices worldwide.

It is recommended that this report is submitted every six months, thus allowing the competent authority to keep a close monitoring of the investment activities, as well as the impact of the different investments made.

7.4. Indicative calendar for the implementation planThe following table outlines the key steps that the Promoter should take in the coming months after the ac-ceptance of this feasibility study in order to commence the implementation of the investment mechanism.

The calendar presented below is indicative and based on the activities described in the previous sub-sections and aims to provide the Promoter with effective guidance for the implementation of the investment mecha-nism proposed. This calendar should therefore be a roadmap to help the Promoter to understand the steps and timing for an effective implementation.

It is important to note that some of the activities outlined in the table below can be run in parallel, and therefore this calendar should not be seen as a linear process but as a relatively flexible action plan, de-pending on the capacity of the Promoter to coordinate these activities.

Nevertheless, should the Promoter decide to adjust the investment strategy or the governance structure, the present implementation calendar should be modified accordingly, as it is based on the current proposed investment strategy and governance model.

Table 19: Indicative calendar for the implementation plan

Action Owner Indicative duration67

1. Validate the results and confirm the strategic orientations

Confirm the orientations and available budget based on the results of feasibility study

Promoter 30 days

Confirm the creation of the Investment Fund Promoter 15 days

Confirm the implementation phase approach and overall timeline

Promoter and other stakeholders 15 days

Identify and confirm internal resources (human and financial resources) for the implementation


Develop detailed business plan of the Investment Fund, specifying investment conditions and product specifications for migrants and diaspora


2. Selection of the Fund Manager

Deploy a wide-reaching awareness raising and promotional campaign

Promoter 90 days

67 The indicative duration doesn’t correspond to the workload required for the different actions.

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Action Owner Indicative duration67

Drafting the tender documentation for the Call for expression of interest

Promoter 60 days

Run the Call for Expression of Interest Promoter 90 days

Evaluation and selection of the Fund Manager Promoter and other stakeholders 60 days

Negotiation and signing of the funding agreement Promoter 45 days

3. Setting up the Investment Fund

Select the jurisdiction/location of the Investment Fund Promoter 45 days

Set up the Investment Fund Fund Manager 90 days

Set-up the governance structure Fund Manager 60 days

Deployment of awareness raising campaign to attract investors (migrants and institutional investors)

Fund Manager 120 days

4. Selection of the financial intermediaries

Drafting the tender documentation for the Call for expression of interest


Approve the tender documentation Board of the Fund 15 days

Deployment of awareness raising campaign to attract financial intermediaries


Publication of the Call for expression of interest Fund Manager 90 days

Selection of the financial intermediaries Fund Manager 45 days

Approve financial intermediaries’ selection Board of the Fund 30 days

Sign the operational agreement with the selected financial intermediaries


5. Monitoring and reporting

Approve Investment Fund’s Goals and Objectives Board of the Fund 60 days

Definition of performance indicators per investment mechanism

Board of the Fund 30 days

Definition to data collection methods and timeline Board of the Fund 30 days

Creation of reporting templates Board of the Fund 60 days

The figure below provides the indicative timeline of the implementation of the Fund in line with the above-men-tioned calendar.

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FEASIBILITY STUDY TO IDENTIFY A MECHANISM FOR MIGRANT...

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