Small Enterprise
Remittances:
Development
Journal:
The New Development
Jan Wimaladharma,
Douglas
Pearce
March 2004 (forthcoming)
Finance?
and David Stanton 1
Introduction
In recent years, global flows of remittances have become steadily larger and more
important as a source of development finance for poor countries. Official flows to
developing countries reached an estimated $88 billion in 2002, and unofficial ones
may more than double this figure (Ratha, 2003). Remittances are now second only to
foreign direct investment (FDI) as a capital flow into developing countries, and
substantially exceed development aid.
Remittances can be defined as sums of money that a migrant worker sends back to
his or her country of origin. Remittance transfers are a crucial source of income to
developing country economies as a whole, as well as to millions of individual
households, particularly poor women and their children. Unlike aid or private
investment flows, they reach the poor directly, and the poor decide how the money is
spent. Importantly, remittance services also offer a means for financial institutions to
increase their outreach and relevance to poor clients.
Historically, remittances have played a major role in sustaining and developing
societies and regions. After the Great Famine of 1846-1848\the Irish diaspora that
spread across the British Empire supported rural communities in Ireland and became
their most important source of capital. Current interest in remittances is high, and
has led to them being dubbed the "new development finance". Reflecting this
interest, the UK's Department for International Development (DFID), and The World
Bank, in collaboration with the International Migration Policy Programme held a
seminal International Conference on Migrant Remittances, Development Impact,
Opportunities for the Financial Sector and Future Prospects. This was the first global
meeting on this topic, bringing together over 100 participants from 42 countries,
representing central and private banks, government policy makers, multilateral and
bilateral donors, NGOs, academics and other stakeholders. The .event attracted
considerable interest, and resulted in agreement on future actions by donors,
including the development of core principles for international remittances. An interagency task force is being established to coordinate and contribute to this work led
by Th.e World Bank and supported by DFID and others.
This article builds on that conference and explores the role for development agencies
and governments in in::lproving the development impact of remittances, and
promoting access for poor people. The public and donor agencies are not leaders in
remittances, and never will be. Unlike microfinance, the remittance industry has been
private sector led from the start, and increasing competition is transforming the
1David Stantonis Chief EnterpriseDevelopmentAdvisor at the Departmentfor International
Development(DFill). DouglasPearceis SeniorFinancialSectorAdvisor and JanWimaladharmais
AssistanfEnterpriseDevelopmentAdvisor; both work in the FinancialSectorTeamin DFill's Policy
Division in London.The authorswould like to thankcolleaguesin Londonfor their usefulcomments,
especiallyRichardBoulterandparticipantsatthe Londonremittanceconference,discussionswith
whomhaveinformedthis paper.This paperrepresents
the views of the authorsand not necessarily
thoseofDFill.
industry rapidly. Large international banks such as Citibank, HSBC, and Bank of
America are increasingly active, as well as credit card providers and large money
transfer companies. Transfer fees to remittance customers are falling, and customer
service and transparency are improving. Savings and postal banks are also
expanding their involvement, with a conference to share experiences held in
December 2003 in Brussels by the World Savings Bank Institute (WSBI). The
appropriate role for governments and donor agencies in this context deserves
attention.
'
Some Facts and Figures
The largest remitting countries in volume terms are the United States with $28.4
billion, Saudi Arabia with $15.1 billion and Germany with $8.2 billion (official flows
only). More than three-quarters of remittances go to lower mid-income and lowincome developing countries. India receives the largest volume ($10 billion), then
Mexico with $9.9 billion, followed by the Philippines with $6.4 billion. (Ratha, 2003,
using IMF Balance of Payments statistics)
Remittances can be significant in terms of the GDP of developing countries. In some
cases inward flows exceed income from international trade. At the extreme end of
remittance dependency, remittances make up over 25% of the GDP of Tonga,
Lesotho and Jordan. Research shows that remittances tend to be a more stable form
of finance than FDI and portfolio investments, and they remain steady, or even
increase, during times of crisis and acute economic hardship in the receiving country.
When the going gets tough, remittances
180
160
120
$bn
100
80
60
40
20
0
Source: Ratha 2003
keep flowing
Official remittance transfers are made through banks, money transfer companies,
and using credit cards such as Mastercard. A plethora of other entities also offer
remittance services (with varying degrees of legality), including bus companies, taxi
drivers, furniture removal firms, travel agents, and convenience stores. Quite
sophisticated informal transfer systems have existed for generations (since China's
T'ang dynasty, in fact) to transfer monies more efficiently to the receiver. These
systems operate par.tly outside of the banking sector, minimize paperwork, and rely
on trust, with wide networks of agents in sending and receiving countries. The
Hawala (or Hundi) system in South Asia comprises an international network of
agents operating in sending and receiving countries interlinked with global
commodity trading networks. Recent research conducted by the ILO indicates that
over half of remittances to Bangladesh were channelled through unofficial sources
such as Hundi or Hawala (40%), friends and relatives (5%), the rest being physically
brought back by the migrants (8%). (Siddiqui & Abrar, 2003)
Recent research
supported by DFID (Seddon 2003) suggests that this informal transfer exceeds the
formal transfer by a ratio of as much as 10: 1.
Remittances can be critical source of income for poor households, making up 40% or
more of a receiving household's income (Wise & Ramirez, 2001). Transfers average
about $200 in size, although anywhere between $100 and $1,000 is common.
(Ratha, 2003) The recipients of remittances are drawn from all social groups,
including the middle class as well as the poor (e.g. families of South Asian domestic
workers employed in the Gulf States). Evidence points to people using the majority of
remittance monies (over 75% for Mexico, Nicaragua and EI Salvador, for example)
on household expenditure such as food, clothing, and health, and most of the
remainder as savings, for housing, or for a microenterprise. (Orozco, 2003a)
The cost of sending remittances varies by mechanism, volume of transaction, and
country. Fees vary from as little as 2% of remittance value to as high as 35%. Since
flat rates are common, the percentage cost of fees tends to be inversely related to
the size of the remittance, affecting the poor disproportionately. One of the lowest
reported costs for transferring money is found in the hawala systems for migrant
workers in most bazaars in South Asia. Costs are usually around 2-3%, although this
can vary depending on the negotiating skills of both parties and their understanding
of how the market operates. (Maimbo, 2003)
Priorities for Government and Donors
Remittances have recently come under close scrutiny as part of international efforts
to counteract terrorism and to control immigration. Developed country domestic
policies on migration and on terrorist financing impact on remittance policies, and
need to be well informed regarding their developmental impact. The GATS mode 4
negotiations2 are attempting to define new modalities for the flexible movement of a
global labour force. But inappropriate regulations and guidelines can restrict the
remittance options available to the poor, and push up costs to the poor. More
appropriate regulations, increased transparency, improved technology, and greater
outreach to rural areas offer significant developmental gains. The following are areas
where donors and governments can add value, building an infrastructure for
remittances as a financial service that benefits the poor.
i) Improving Transparency and Competition
2 Temporary
and Services.
movement
of natural
persons
(mode
4) under the General
Agreement
for Trade
A primary role for government is to promote competition, transparency, and higher
standards for this emerging and dynamic industry. This will help reduce costs over
time, as well as improving the efficiency, security, and transparency of remittances.
Governments should focus on promoting transparency in pricing and product design,
and on creating conditions for healthy competition, rather than risk restricting or
distorting markets by trying to correct market prices or supporting one private sector
actor over another.
High costs are a legitimate concern for governments and development agencies.
The initial market leaders in the fast-developing global remittance industry were
indeed able to charge relatively high costs. But increased competition and the
introduction of technology is lowering costs and making transfers more rapid and
reliable. In the competitive and well developed US-to-Mexico remittances market, the
cost of sending money has more than halved since 1999, from between $26 (money
sent from New York) and $39 (from Houston) in August 1999, to $13 and $11
respectively, in October 2003. (Islas Torres, 2003) Mastercard estimates that the
average cost of sending a small remittance through a formal bank will fall to 5% in
the near future although issues of access are likely to continue to constrain -the very
poorest. A UK bank, Lloyds TSB, has a pilot scheme for non-resident Indians living
in the UK that allows them to send cost-free remittances to India. An arrangement
with IGIGI bank (the second largest bank in India) allows them to hold accounts in
both the UK and India, and to transfer amounts at no cost between those accounts,
as long as they maintain a minimum balance of about £150 (in Rupees) in their IGIGI
account. IGIGI bank has about 540 branches throughout India, and 4,500 ATMs.
As in all financial services, new technology offers potential for greater efficiency,
lower costs, and extended outreach. A range of technological solutions are
increasingly available, including satellite telecommunications, improved wire transfer
and management systems, mobile telephony add-on services, and financial products
such as debit cards. Government has a potential regulatory role here to ensure that
access to monopoly services such as telephone and electricity infrastructure is
available to poor rural users, and is not unnecessarily expensive. In countries where
governments have a stake in a postal service or bank, investment in improving
money transfer mechanisms could help improve remittance access and stimulate
competition. More than 60% of official remittances to Morocco go through a majority
state-owned bank, Groupe Banques Populaires, which allows Moroccans in Europe
to move funds at a very low cost (0.1 % for wire transfers). (Orozco 2003b)
ii) Introducing appropriate regulation and modifying existing laws
International money transfers have come under intense political scrutiny since
September 11, 2001. Hawala systems are thought to have played a part in
international money laundering, and in the movement of al-Qaeda funds. G-8
Countries including the US, France and the UK are seeking to curb funding of
international terrorist networks through the Financial Action Task Force (FATF) on
money laundering and other bodies. The FATF has produced a set of
recommendations
for money laundering, and also more recently for terrorist
financing. The FATF promotes 'Know Your Customer' requirements for remittance
service providers, encourages licensing of informal remittances agents more in line
with formal sector banking standards, and also expects financial authorities to more
closely scrutinise formal financial institutions. Informal networks that hitherto have
escaped much regulation and supervision are increasingly subject to tighter
monitoring and control. It is important in this context that licensing should be done
with a relatively light touch, and should not be restricted only to larger formal entities,
as this would close off (or push underground) more flexible options (often linked to
certain regions in receiving countries) offered to poor people from smaller companies
or banks.
It has been observed however that financial regulators and institutions have tended
to interpret any ambiguity in the FATF recommendations strictly. This can result in
the exclusion of clients who do not posses full documentation (and also those
perceived as being risky) from more protected official remittance channels. This
disproportionately impacts on poor migrant workers, and those from countries
considered as terrorist threats. Whilst there are completely legitimate concerns to
safeguard international security and to fight organised crime, a long-term clampdown
on remittance systems as a whole would have damaging consequences on the
availability and cost of both formal and informal services. A careful balance needs to
be struck.
The FATF's "Know Your Customer" principles have created difficulties for millions of
clients who, possessing no registered address or national identity cards, depend on
anonymous informal transfers. These are particularly challenging for financial
institutions and money transfer companies that serve poor and rural clients, as they
may need to upgrade their client record systems, or deal with clients with inadequate
documentation.
One-off donor or government support could help remittance
providers (primarily those operating in receiving countries) meet the cost of
conforming with these guidelines.
The financial gains from remittances are such that several developing country
governments, for example the Philippines, Sri Lanka, and Mexico, actively encourage
emigration (notwithstanding its cultural and social costs). The Mexican government
has been one of the most active in this regard, and one particularly effective strategy
has been to introduce an identity card in the US delinked from migrant status, that
facilitates access for migrants to bank accounts and remittance services offered by
banks. The matricula consular is a proof of identity, but not necessarily of legal
migrant status, provided by Mexican consulates to Mexicans in the US. US banks are
increasingly accepting this as proof of identity, rather than requiring green cards.
Over the past 20 years the Philippines government has promulgated legislation
granting incentives and privileges for remitters in terms of investment options,
purchases of land, and tax breaks. Colombia reformed its tax laws to encourage
remittances, ordering the removal of the tax in order to encourage Colombians living
outside of the country to send more of their earnings back to relatives in Colombia.
Also, new banking regulations passed in late 2003 allow Colombians living abroad to
open savings accounts with banks, rather than having to rely on money transfer
companies. Bancolombia, a Colombian bank, has already removed a 3% tax charged
on money orders and remittances sent from abroad (Bancolombia handles about
$100 million in remittances each year at present). (Dow Jones Newswires, January
2004)
Specialist donor assistance to central banks and government ministries to introduce
legislation promoting rather than restricting remittance flows, and improving
transparency may be effective. The World Bank and DFID are helping to build
capacity of developing country regulators to improve the accountability and
transparency of formal and informal remittance service systems. Through Its South
African partner, Fin Mark TRUST, DFID is working with the Reserve Bank in South
Africa to streamline regulations on money transfers.
iii) Making better data available
In order to encourage the private sector to expand into viable but poorer market
segments, and to design its products to meet the needs of low income as well as
mainstream clients, better market and client data is needed. The private sector will
research what appear to be the most attractive market segments, but may neglect
poorer client groups, even though the latter might represent equally profitable
markets. Using development or public money to provide data on underserved market
segments and clients, could have high impact in the long run.
A better understanding of how remittances are used would inform public and
development policy towards not just migration and financial services, but potentially
also enterprise development, health, education, and other areas on which remittance
monies are spent. The Philippine government has researched incoming remittances
from the Gulf States, successfully collaborating with commercial banks to reduce
transfer costs. Following the ILa workshop "Making the Best of Globalisation: Migrant
Worker Remittances and Microfinance" in 2002, various regional and national
information networks and dialogues have consolidated information, data and analysis
of the remittance sector and its impact.
ivY Extending
access
to rural populations
Much attention is paid to international money transfers, but less to how that money
reaches rural areas. Many rural people face higher costs and weaker access to
remittance monies. There is a lack of branch networks amongst banks or money
transfer companies, owing to the additional cost of operating in rural areas. Access to
domestic remittances, originating in towns or in richer agricultural areas, is a key
issue, and also requires accessible and low cost internal money transfer
mechanisms. A study in Vietnam indicated that as many as 7 out of 8 transfers are
domestic, although they only constitute half of the value of international remittances.
(from Sanders, 2003) Given that out-migration rates are disproportionately large
among more educated people (Carrington and Detragiache, 1998, quoted in Faini,
2003) and that financial resources are required to meet the costs of international
migration, domestic remittances are of particular relevance to poorer sections of
society.
Partnerships between registered banks and non-bank financial institutions (credit
unions, microfinance organisations, and postal networks) that reach large, unbanked
populations in rural areas can be effective in extending access. For example, a bank
could receive remittance payments through inter-account transfers, and provide
access to rural cli~nts through an arrangement with a post office that has rural
branches. Alternatively, an international money transfer company could link to a
national credit union network. The latter, where they include rural areas, can be ideal
mechanisms to bring the rural poor into the financial system.
IRNet has been
introduced by the World Council of Credit Unions (WOCCU), linked to partner money
transfer companies such as Vigo. Costs to clients ($10 per transaction up to $1,000)
are lower than the estimated average cost of 13% for remittances to Central and
South America ($26 for a an average $200 transaction). (Ratha, 2003) Financial
sector regulations should not prevent this type of partnership, nor should they be
unnecessarily strict about the type of registration needed for entities to provide
remittance transfers.
v) Treat remittances as a financial service, not just as a migration issue
Remittances offer huge potential to banks and other financial institutions to add poor
communities to their customer base. The private sector needs to be made aware of
such market opportunities, and financial support to extend operations downmarket
may be justified. Remittances are much more useful to poor people if they have a
safe place to store them, and can withdraw them in the amounts needed, as and
when needed. Yet many poor people are unbanked, and lack flexible deposit
accounts. Non-bank microfinance institutions may be more accessible to the poor,
but are often faced with regulatory and capacity constraints in offering deposit
services.
Banco Solidario in Ecuador offers three additional products to low income remittance
clients, within their 'Programa de apoyo al emigrante' that is also linked to Spanish
savings banks. These are: short term credit to cover urgent needs in Spain;
mortgage loans; and a dollar savings account for the migrant's family in Ecuador or
for their return ('Mi familia, mi pais, mi regreso). Partner Spanish savings banks also
offer migrants access to' bank accounts, and to debit and credit cards, based on good
performance. The use of these remittance-related financial services has increased
with the volume of remittances. Banco Solidario estimated that it would receive $75m
in remittances in 2003, 20% of these transfers passing into savings accounts.
(Sanders, 2003; Quesada 2003; Banco Solidario 2003)
Next Steps from the London Conference
Participants at the London conference agreed three principal actions: i) to develop a
set of core principles guiding future involvement of stakeholders in remittances, ii) to
spread global knowledge, and disseminate outcomes from London and other
conferences or activities through publications and a new website, and iii) to develop
more accurate public data on remittances and migration.
An inter-agency task force is being established to coordinate and contribute to work
in these three areas. As many as 15 agencies expressed interest in being involved,
and The World Bank and DFID agreed to provide support and leadership to help take
this forward. This task force will also be able to liaise closely with other public and
private sector agencies active in remittances, including the WSBI, the Consultative
Group to Assist the Poor (CGAP), and the Inter-American Dialogue Task Force. The
EU high-level policy group on migration includes a focus on remittances, and a
Global Commission on International Migration has also been set up by the UN, the
World Bank, and the International Organisation for Migration.
The development of core principles for international migrant remittances can offer a
reference point and guidelines for regulators seeking to apply FATF principles in a
sensitive way. It can also help governments to monitor the remittance industry and
promote transparency, improving customer service, lowering cost, and extending
access for poor clients. Data gathering internationally proceeds apace to fill the gaps
identified (e.g. on intra-regional remittance flows, and informal transfers), and the
private sector is an increasingly important data source. The Task Force can make
data more widely available, help avoid duplication, and more strategically address
data gaps.
References:
BancoSolidario
presentation: 'Mi Familia Mi Pais, Mi Regreso: Crear Riqueza, May 2003
DFID, 2003, Workshop Report, 'An International Conference on Migrant Remittances:
Development Impact: Opportunities for the Financial Sector and Future Prospects', London,
9-10 October 2003.
FATF, 2003, 'The Forty Recommendations',
Financial Action Task Force on Money
Laundering, 20 June 2003, and 'Special Recommendations on Terrorist Financing', 31
October, 2001.
Faini R, 2003, 'The brain drain: an unmitigated blessing?', Development
Paper No. 173, Centro Studi Luca D'Agliano, September 2003.
Studies Working
ILa, 2000, Workshop Report\ 'Making the best of Globalisation: Migrant Worker Remittances
and Micro-Finance', Sociaf Finance Unit, ILa, Geneva, 20-21 November 2000.
IMP, 2003, Paper tabled at the 'International Conference on Migrant Remittances:
Developmental Impac:t, Opportunities for the Financial Sector and Future Prospects', London,
9-10 October 2003.
Maimbo S, 2003, 'ThE~Money Exchange Dealers of Kabul. A Study of the Hawala System in
Afghanistan', World Bank Working Paper No. 13, Washington DC.
Mellyn, K, 2003, 'W'orkers Remittances as a Development Tool, Opportunities
Philippines', report prE~paredfor the Asian Development Bank, June 2003.
for the
Orozco M, 2003a, 'Remittances, the Rural Sector, and Policy Options in Latin America', paper
prepared for the USAIID Rural Finance Conference in Washington DC June 2-4 2003
Orozco M, 2003b, "Worker Remittances:
commissioned by the lOB, February 2003.
An International
Comparison',
Working
Paper
Quesada C, 2003, 'Flrofitable solidarity. An Ecuadorian bank with social aims and healthy
profits', lOB America, July 2003
Ratha D, 2003, 'Workers' Remittances: An Importance and Stable Source
Development Financei', Ch. 7, Global Development Finance 2003, World Bank.
of External
Sanders C, 2003, 'Migrant Remittances to Developing Countries. A Scoping Study: Overview
and Introduction to Issues for Pro-Poor Financial Services', report prepared for DFID, June
2003
Seddon D, Gurung G, and Adhikari J, 2003, 'Bridging Research and Policy: a case study of
action-research, on Foreign Labour Migration & The Remittance Economy of Nepal', Case
Study for the Bridging Research & Policy (BR&P) Project of the Global Development Network.
Siddiqui T & Abrar C :2003, 'Migrant Worker remittances and Microfinance in Bangladesh',
ILa Working Paper N,o. 38, September 2003.
Torres Islas A, 20013, Bansefi presentation,
Conference, December 11, 2003.
World
Savings
Bank
Institute
Remittance
Wise R & Ramirez H, 2001, 'EI migrante colectivo frente a IDs desafios del desarrollo local y
regional en Mexico', Seminario Internacional sabre la Transferencia y Usa de las Remesas:
Proyectos Productivos y de Ahorro, Mexico, 3-5 October, 2001.