Refugee bonds have the potential to complement public sector funds and support refugee host countries’ economic development, but an emphasis on refugees’ contributions to the labour market may jeopardise the protection offered to them.

Over the last decade, following a general decline in aid from traditional donors, the international community has dramatically changed how it seeks to fund humanitarian responses to refugee flows, with an increasing reliance on ‘refugee finance’. This term refers to new financial instruments aimed at attracting private capital, which are promoted as market-led solutions to the societal challenges raised by the arrival of large numbers of refugees.

This paradigmatic shift ‘from funding to financing’ is based on the assumption that private capital will successfully complement public sector funds to resource refugee responses and support host countries facing the fiscal stress of hosting refugees. The promise of refugee finance is that it will bridge the gap between humanitarian and development responses, while also supporting the economic development of the host countries. However, we know very little about the socio-economic, legal and financial implications of this shift towards refugee finance, and previous efforts to attract private capital, for instance, in the development and climate change contexts have proven unsustainable.

Through the example of the KOTO social impact bond in Finland (2017-2023),[i] aimed at integrating refugees into the Finnish labour market, it is possible to reflect on some of the broader challenges raised by this financial turn. More specifically, the concern is that it may increase the precarity and temporariness of protection and entrench policies aimed at externalising migration control and containing refugees in the area of origin.

Understanding refugee financial instruments

There are four main types of financial instruments which fall under the umbrella of refugee finance:

Concessional loans: loans made to a borrower by a government or a philanthropic investor at below market rates.
Technical assistance funds: funds aimed at supporting the setting up of a new business. Envisaged mainly as ‘ecosystem builders’, they facilitate refugee entrepreneurship and attract further private investment.
Guarantees and risk insurance: parametric insurance tools for natural disasters and pandemics are good examples of these types of instrument which are usually provided at below market rates.
Design-stage grants: these are usually linked to changes in the legal or policy framework of the host country. In the refugee context, for instance as part of the Jordan Compact, these instruments have been used to introduce legislation that enables refugees’ access to the labour market, within certain limited circumstances.

Social impact bonds for refugees

Social impact bonds (SIBs) take some of the characteristics of technical assistance funds (creation of new ecosystems) and guarantees (de-risking) to create a specific form of innovative, results-based finance used to address social issues. In practical terms, SIBs are multi-stakeholder contracts through which governments and external investors, such as foundations or development agencies, share the risk of investing in social policies. They are unlike traditional debt instruments issued by a government in that the remuneration of the investor depends on whether the outcomes stipulated in the contract are reached within a specified time period. If the outcome is successfully achieved, a return on investment is paid to the investors. SIBs for refugees are seen as attractive solutions with benefits for all the stakeholders involved.

In a SIB the government usually provides the funds to remunerate the investors when the agreed outcomes are reached. Governments may not want to mobilise capital in advance to fund refugee policies (for budgetary or political reasons), a SIB allows them to increase the pool of money available for refugee programmes without having to allocate money in advance. Banks or other financial institutions are the intermediaries responsible for setting up the SIB contract and overseeing the project implementation. They receive the funds from private investors and transfer them to the service providers. When the outcomes are achieved, they also receive the payment from the outcome funders (the government) and remunerate the investors. The financial institution benefits from the fee that they receive and from the opportunity to expand the portfolio of investments available to their clients.

Service providers are usually non-governmental or non-profit organisations tasked to work with the beneficiaries of the project linked to the SIB (in our case the refugees) and to achieve the social outcomes agreed in the contract. They receive the funds from the intermediary to implement the projects. The benefit for them is that they have more flexibility in how they carry out and adjust their activities because payments are based on final outcomes rather than on how such outcomes should be achieved. Once the SIB cycle ends, the government can decide whether to continue with the SIB or revert to a traditional form of funding.

A Finnish experiment

A refugee SIB was issued by the Finnish government, based on the model described above, as part of the response to refugee arrivals in 2015 following the escalation of the armed conflict in Syria. After an initial pilot in 2016, the Finnish Ministry of Economic Affairs and Employment issued the nationwide KOTO SIB in 2017. The bond was planned for implementation over three years with the aim of enabling labour market access for refugees through vocational and language training. As the first refugee SIB of its kind in Europe, it was co-financed by the European Investment Fund, the European Fund for Strategic Investments and the European Commission, together with private and institutional investors.

Approximately 14.2m euros were raised from investors, with the European Investment Fund providing 71% of the total investment, as well as significant knowledge and expertise about fund structuring and governance. The beneficiaries of the SIB were immigrants between 17 and 63 who had been granted a residence permit on the basis of international protection and who had registered as unemployed job seekers with the Finnish Employment and Economic Development Office. The vocational training offered to the beneficiaries was linked to key shortages in the Finnish job market and the impact of the KOTO SIB was tracked through the beneficiaries’ identification numbers, with the Social Insurance Institution of Finland (Kela) monitoring the data on unemployment benefits, and the Finnish Tax Administration monitoring the data on income tax.

The Finnish Ministry of Foreign Affairs and Employment selected Equipus Ltd, and later FIM Impact Investing Ltd, as intermediaries responsible for setting up and overviewing the SIB. The agreed outcome was the inclusion of 2,500 participants in the job market over three years. According to available data, 2,217 people participated in the programme, with 1,692 participants receiving training for at least 70 days, and 1,062 in employment by the end of 2020. The 50% success rate of the KOTO SIB was presented by the Finnish government as a ‘win-win-win’ for the host state, the refugees and the investors. Yet, the initiative was not extended, and the KOTO SIB has been replaced by a broader performance-based employment programme targeting those in long-term unemployment.

Possible implications for international protection

Based on the example provided above, it is still early to conclusively evaluate the benefits and drawbacks of refugee bonds. Undoubtedly, they provide financing for social projects which governments might otherwise be reluctant to implement, and they offer refugees the opportunity to receive training for future access to the labour market. There are, however, also legitimate concerns that these instruments may create reliance on volatile financial markets, whilst increasing the precarity and temporariness of the protection offered. Refugee bonds and other innovative financial instruments are promoted and encouraged by the 2016 New York Declaration for Refugees and Migrants, the Comprehensive Refugee Response Framework and the 2018 Global Compact on Refugees.[ii] One of the objectives of the Comprehensive Refugee Response Framework is to expand access to third-country solutions while enhancing refugee self-reliance. Current policy trends reveal that these objectives have gone hand in hand with an increased reliance on temporary solutions and with attempts to close off spontaneous arrivals and limit access to territorial asylum.

As we can see with the KOTO SIB, governments have so far prioritised projects that fill their labour market gaps rather than longer-term investments to meet the needs of refugees. Whilst the two objectives might not be mutually exclusive, this approach may, in turn, lead to the prioritisation of a certain ideal type of refugee, who is able to work, produce and ultimately achieve self-reliance. The risk is that this approach may create a new spectrum of refugeehood, with the ‘refugee entrepreneur’ on the one end of the spectrum and the ‘hyper-vulnerable refugee’ on the other. This spectrum would place emphasis on the pre-existing skills of refugees (such as being literate in the Latin alphabet, as in the case of the KOTO-SIB) and on the likelihood of them quickly accessing the labour market and becoming self-reliant, rather than on their actual protection needs and rights. Based on this approach, projects aimed at providing shelter, basic education or health support may not be prioritised. Against a background of recent European policies embracing an increased reliance on temporary protection, returns and the proactive review of a refugee’s continued need for protection (for instance in Denmark and Sweden), the prioritisation which appears to be linked to refugee bonds could jeopardise refugee protection.

What happens to the principles of durable solutions and international protection when the emphasis of refugee response moves towards supporting refugees’ self-reliance and creating an enabling environment for sustainable investors? Both the targeted beneficiaries and the agreed outcomes for the repayment of the KOTO SIB revolved around the characteristics of an idealised refugee, capable of quickly accessing the labour market. At the core of the protection interventions funded by refugee bonds, are activities aimed at skill building, vocational training, business development, market facilitation and start-up grants. When protection measures are reoriented towards providing a return on investment, private investors also become key partners in enabling and co-providing protection. Thus, their interests and the outcome targets agreed in the contracts underpinning the refugee bonds become instrumental in shaping which refugees national and international policies can ‘protect’. Despite the increasing calls to expand and strengthen innovative finance for refugees, the challenges outlined in this article remain so far unexplored and only time will tell how refugee finance will impact the trajectory of international protection measures currently deployed at EU level and beyond.[iii]

Daria Davitti
Associate Professor, Lund University, Sweden
daria.davitti@jur.lu.se
X: @DariaDavitti

Sara Arapiles
Postdoctoral Fellow, Lund University, Sweden
sara.arapiles@jur.lu.se
X: @Arapiles_Sara

Pablo Pastor Vidal
Doctoral Researcher, Lund University, Sweden
pablo.pastor_vidal@jur.lu.se
X: @past_pablo

Disclaimer: This research has been funded by the European Union (ERC, REF-FIN, project number 101117081_REF-FIN). Views and opinions expressed are however those of the author(s) only and do not necessarily reflect those of the European Union or the European Research Council. Neither the European Union nor the granting authority can be held responsible for them.

[i] KOTO is a shortening of Kotouttamisen, meaning ‘integration’. More information: https://kotoutuminen.fi/en/integration-sib-project

[ii] Zagor M (2024) From Borders to Pathways: Innovations and Regressions in the Movement of People into Europe ANU Press

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