(Ecofin Agency) - On September 7, Senegal’s Prime Minister Ousmane Sonko revived a proposal to create a bank dedicated to the Senegalese diaspora. This initiative aims to channel the significant funds sent home by Senegalese living abroad into impactful and sustainable projects.

The diaspora sends over $2.9 billion annually to Senegal, representing about 12% of the country’s GDP. This amount surpasses both foreign direct investments and public development aid. Sonko, speaking in Matam, a city about 620 miles from Dakar, emphasized that the new bank will help harness these funds more effectively. "In President Bassirou Diomaye Faye’s program, we plan to launch a bank for the diaspora. They transfer around 1500 billion CFA francs each year, more than the public aid received," he said, referring to the $1.4 billion in aid received in 2021.

Remittances are a vital source of foreign currency for Senegal, which heavily relies on these financial flows to support its economy. In 2023, these transfers totaled $2.9 billion, according to the World Bank. This amount far exceeds the $2 billion in foreign direct investments, which are more susceptible to international economic shocks. Remittances have remained relatively stable, even during the COVID-19 pandemic.

Most of these funds are used for immediate needs like food, housing, and education. However, the government now aims to direct these resources toward more sustainable projects, including small and medium-sized enterprises (SMEs), real estate, and social infrastructure.

The new diaspora bank will work to lower the high costs of money transfers, which remain significant despite technological advances. The World Bank reports that the average transfer fee to sub-Saharan Africa was 6.4% for sending $200 in late 2023, well above the 3% target set by the Sustainable Development Goals. Traditional banks contribute to these high costs, while digital transfer costs were lower at 5% compared to 7% for traditional methods in 2023.

The creation of a dedicated bank could also help formalize financial flows and use them as a lever for economic development. Nearly 60% of Senegalese SMEs, which make up 90% of the country’s economy and create 60% of jobs, struggle to access credit. The new bank would offer loans at favorable rates to support entrepreneurial initiatives and social infrastructure projects.

Dakar also hopes that this institution will help attract more national capital, reducing reliance on foreign funding, which currently accounts for over 60% of public investments.

The concept of a diaspora bank is not new and has been successfully implemented in other countries. Ethiopia, for example, has the Commercial Bank of Ethiopia, which offers foreign currency accounts and investment products for its diaspora. In 2023, Ethiopian diaspora remittances reached $6 billion.

Morocco has also leveraged its diaspora by offering tailored financial services through BMCE Bank, which helps Moroccans abroad access real estate and SMEs. In 2020, remittances to Morocco totaled $11.7 billion.

India and Israel have issued diaspora bonds, raising $11 billion and $35 billion, respectively, to fund public infrastructure. Nigeria and Ethiopia have also successfully tried similar approaches.

However, challenges remain. Some Senegalese in the diaspora are wary of local financial institutions due to past experiences with poorly managed investments, particularly in real estate.