Beyond Consumption: The Investment Potential of Remittances in East Africa
Every month, millions of East Africans receive a familiar, much welcome alert – money sent by a loved one abroad. 'Money sent back home,’ or remittances, are payments sent by migrant workers to their home countries, most often to support family and friends. Remittances are an economic lifeline, covering essential expenses like education, healthcare, and housing. By sustaining households, they contribute to long-term human capital development and economic resilience. However, beyond household support, there remains an opportunity to channel a portion of remittances into investment vehicles that drive business growth and job creation.
Defining Diaspora: Why the Bother?
The African Union declares the African Diaspora to be '[consisting] of peoples of African origin living outside the continent, irrespective of their citizenship and nationality and who are willing to contribute to the development of the continent.' Conservatively estimated at 200 million people, the African diaspora is a considerably sized demographic with the potential to influence Africa’s economic and social development.
The sentimentality of their countries of origin initiates investments, home-host country networking, job creation, and the dissemination of knowledge and technology. Moreover, these are not necessarily done for financial gain, but for socio-economic improvement motivated by feelings of patriotism and duty. Remittances, then, are a major form of engagement with family, community and country in Africa for members of the African diaspora - they reinforce the conception and perception of diaspora identity. As such, it is crucial to recognise and harness the African diaspora’s role in sustainable development by creating frameworks to facilitate their engagement.
Remittances: $12B for East Africa, 6% of GDP, and Growing
Remittances are a vital component of the East African economy, contributing a significant percentage of its financial inflows. Uganda, for example, received remittance inflows of $1.49 billion in 2024. Somalia received $1.73 billion in 2024, which represented 13.6% of the nation’s GDP. Kenya was, by far, the highest recipient of remittances in East Africa last year, with inflows of $4.95 billion in 2024, an 18% increase from the previous year. The East African region received around $12 billion in remittances - 6% of the sub-regional GDP. Clearly, remittances are a major driver of economic activity in the region.
Notably still, remittances tend to be relatively stable when compared to other sources of foreign capital. While foreign direct investment (FDI) is on the rise, it is often subject to global economic fluctuations and geopolitical considerations, making it a less stable, less reliable source of capital. In contrast, remittances have proven to be countercyclical and more resilient to economic downturns than other sources of finance. In the case of a natural disaster, for example, where FDI might ebb, diaspora remitters usually increase the amount of funds sent back home to support friends and family. Remittances remained resilient even during the COVID-19 pandemic: when global income shrank by 3% in 2020, global remittances fell only by 1.1% - global FDI, in contrast, experienced a 42% plummet.
Stability notwithstanding, remittance flows are showing serious potential for growth. Global remittances for 2024 are expected to reach $685 billion in 2024, with an estimated growth rate of 5.8%. Remittances, further, have been steadily outpacing other external financial flows in low-and-middle-income countries (LMICs); while remittances have increased by 57% in the last decade, FDI has declined by 41%. The figure below demonstrates the stability, incline and size of global remittances (more than FDI and official development aid [ODA] combined).
Figure 1. Global external financial flows over time, in billions of dollars. Source
From Consumption to Investment
Despite its potential, remittance capital remains untapped as a structured source of capital, leaving significant investment opportunities unrealized. An estimated three quarters of remittance income is used to cover basic (albeit essential) expenses, such as consumption goods, education, and healthcare. In essence, most remittance funds are consumed, not invested (at least, not formally).
This presents a crucial challenge: how to create avenues that enable remitters to channel a portion of these funds into productive investments in the recipient nation. A potential solution is the creation of an East African diaspora mutual fund (DMF) – a well-structured, diversified, and scalable investment platform which works by pooling funds from members of the East African diaspora and investing them in their home country’s private sector, bridging the gap between remittances and productive capital.
Instead of sending remittances only for consumption, diaspora investors contribute to a professionally managed fund that allocates capital to high-potential ventures like small and medium-sized enterprises (SMEs), infrastructure, or emerging industries. Remitters-turned-investors can participate by purchasing units or shares in the fund, allowing them to enjoy both financial returns and supporting their home country’s economic growth.
The Potential of High-Potential Ventures
High-potential ventures stand to benefit the most from a steady flow of investment capital. SMEs, in particular, are infamous for their lack of access to the very same. Time and again, SMEs have been called the backbone of the East African economy: they generate 29% of its GDP, provide 60% of employment, and play a crucial role in promoting regional integration. However, more than 70% of SMEs are faced with a significant financing gap, particularly in capital acquisition. The current estimated financing gap in East Africa is $41 billion. SMEs face near-punitively high costs of capital relative to larger firms due, for example, to commercial banks’ limiting collateral policies and general reluctance to allocate long term financing. This locks SMEs out of formal financing opportunities – they instead bootstrap or loan money from friends and family – and severely dampen opportunities for scale.
Emerging markets in East Africa can similarly benefit from structured investment, as they often face the same barriers to capital that hinder SME growth. Sectors like renewable energy and agribusiness have immense potential but struggle to attract the patient, long-term funding that is necessary for scale. One of the consequences of this is an over-reliance on foreign investments, leading to increased vulnerability to changes in interest rates or geopolitics. These investments then become riskier, which may cause investors to pivot toward safer, higher returns elsewhere. Without access to capital, innovation is stifled, and promising enterprises and economies remain small.
A DMF can bridge this financing gap by providing a structured, locally anchored investment mechanism that channels remittance funds into high-potential ventures. Unlike traditional foreign investors that may withdraw due to external economic shifts, a DMF funded by diaspora members is likely to be more stable. Firstly, the motivations of a diaspora investor are hard-won and uneasily shaken: patriotism, feelings of duty, and sentimental attachment are less flimsy than financial incentives. Secondly, diaspora investors are privy to a more sophisticated understanding of the governance and business atmosphere of the recipient country than other investors. Therefore, they may have a different understanding of and appetite for risk than their non-diaspora counterparts. For these reasons, a DMF backed by remittances can offer a more resilient and long-lasting funding source for SMEs and high-growth sectors.
Other Forms of Diaspora Investment
Mobilising diaspora funds has been done before – quite successfully, too, in some cases. Diaspora bonds are one form of diaspora direct investment (DDI) that stands out for its ability to raise significant amounts of capital. For example, Nigeria’s Diaspora Bond, first issued in 2017, was hugely successful: it was oversubscribed by 30% and raised an impressive $300 million in its first year.
However, diaspora bonds and similar initiatives are government-led, often financing public sector projects rather than directly supporting private enterprise. While they can effectively raise large-scale capital, they do not necessarily address the financing gaps faced by SMEs and high-growth private ventures. This is where the DMF offers a compelling alternative: diaspora investors can fund private sector growth and directly support the SMEs and high-potential sectors that most need it. In this way, remittances can move beyond consumption and become a structured, high-impact investment tool. With the right governance and risk management frameworks, such a vehicle can provide the long-term capital that other foreign investors often hesitate to offer in emerging East African markets.
Conclusion
A diaspora mutual fund (DMF) presents a unique opportunity to transform remittance income into a structured investment vehicle that can directly fuel private sector growth. Unlike government-led diaspora bonds, a DMF allows for flexible financing tailored to private businesses, fostering innovation, entrepreneurship, job creation, and economic resilience at a more granular level. By leveraging the patriotic motivations and nuanced risk appetite of its diaspora investors, East African DMFs can offer a stable alternative to traditional foreign investment, reducing the region’s reliance on possibly volatile capital. Doing so will provide SMEs and other private ventures with much-needed access to capital, from which they may otherwise be barred.
Structuring diaspora remittances into investment capital isn’t merely about financial returns. It’s about helping homegrown businesses fulfill their potential by deepening diaspora engagement beyond basic financial support. It’s about changing the mindset from simply ‘sending money back home’ to building wealth back home.
