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Recorded remittances sent home by migrants from developing nations exceeded $301bn in 2006, according to new research published by the UN’s International Fund for Agricultural Development (IFAD). By comparison, the World Bank’s estimates were $276bn, up from $193bn in 2005 and more than double the level in 2001. However, both 2006 UN and World Bank data reflected only transfers through official channels. Therefore, the true value of remittances, including unrecorded flows via formal and informal channels, should be substantially higher.

They have grown faster than foreign direct investment (FDI) and official development aid (ODA) in the past decade, doubling in several countries and rising by 10-15% per annum over 2001-05.

Their main role in some poorer regions, notably sub-Saharan Africa and South Asia (India, Pakistan, Bangladesh and Sri Lanka), is to stimulate consumption and investment, as well as contribute to poverty alleviation. As Lennart Bage, the president of IFAD, put it: “Remittances represent a lifeline to struggling economies.”

Globalisation, spurred by economic liberalisation and rising cross-border migration (due to falling travel costs) has triggered a surge in remittance flows during the past two decades, with worldwide flows skyrocketing from a mere $18.4bn in 1980.

Also, the reduction in average transmission costs thanks to intense competition between banks and money transfer operators, such as Money Gram and Western Union, and the expansion of remittance networks have boosted migrants’ disposable incomes and their incentives to remit.

Whilst the sustained depreciation of the US dollar has increased the value of remittances from non-dollar regions (notably Western Europe and Japan), the appreciation of the euro vis-a-vis the greenback could account for some 7% of the increase in remittance flows to developing nations between 2001 and 2005.

Africa’s share
Recorded remittance receipts have risen in virtually every region, including sub-Saharan Africa (SSA), which received more than $20bn in 2006 based on the UN’s figures – more than double the $9.3bn estimated by the World Bank.
Remittances to non-oil Middle East and North Africa totalled $34.7bn. However, the recorded flows to SSA are grossly under-estimated. Caroline Freund and Nikola Spatafora, in their 2005 study, Remittances: Transaction Costs, Determinants and Informal Flows, calculated that informal remittances to SSA represented between 45% and 65% of official published statistics, compared with only 5-10% in South America.

Some private estimates indicate Africa (including the Maghreb region and Egypt) may be receiving as much as $93bn worth of money transfers annually from developed OECD and Arab Gulf countries. For SSA, even recorded remittances surpassed the Unctad’s 2006 estimate for FDI inflows of $15.76bn.

In 2006, the top five recipients of remittances in nominal dollar terms were Nigeria ($2,273m), Sudan ($1,403m), South Africa ($658m), Uganda ($642m) and Senegal ($511m), according to the World Bank.

Relative to GDP, however, the top recipients are smaller countries such as Lesotho, Cape Verde, Guinea-Bissau, and Togo, where remittances comprised 28%, 12%, 8% and 6%, respectively, of GDP.

Furthermore, for Cape Verde, Comoros, Lesotho and Uganda, remittances have, since 2000, amounted on average to more than a quarter of export earnings. Though the region as a whole receives more official aid than [recorded] remittances, in Lesotho, Mauritius, Nigeria, Swaziland and Togo, remittances are consistently greater than ODA and in some places, higher than FDI.

There is also intra-regional migration within SSA. South Africa and Botswana attract migrants (largely unskilled) from neighbouring countries in search of better-paid jobs. The strong socio-cultural ties in the Franc-zone and Anglophone West Africa, too, encourage labour mobility. In East Africa, past civil wars in Burundi, Rwanda and Congo (DR) have resulted in increased migration.

The impact on welfare
The beneficial effects of remittances are mostly felt at the micro levels because they comprise [private] intra-family or intra-community transfer of resources.

In SSA, remittances have multiplier effects through increased household consumption or investment in human capital, such as education, healthcare, and better nutrition. Peter Quartey and Theresa Blankson, in their 2004 study, Do Migrant Remittances Minimise the Impact of Macro-Volatility on the Poor in Ghana? found these flows provide a safety net to migrant families in times of hardship, especially for small farmers, who are typically the most disadvantaged socio-economic group.

Other studies have concluded that global remittances improve welfare and reduce abject poverty among the “poorest of poor households”.

At macroeconomic level, remittances to SSA are more stable than other private flows (FDI, official aid and export revenues), which tend to fluctuate considerably from year to year.

In many cases, higher remittances are reported during financial distress or natural disasters in home countries. Moreover, they are a cheap source of financing the current account deficit on balance of payments for some countries (notably Lesotho, Cape Verde, Guinea-Bissau, Senegal and Togo), when forex reserves are low or external debt is high.
Through the securitisation of future flows, remittance receipts can provide opportunities for developing economies to access global capital markets.

As with any form of capital inflows, remittances carry the risk of ‘Dutch disease’ effects upon a recipient country – in terms of steep currency appreciation (thus hurting export competitiveness) or ballooning money supply (ultimately higher interest rates) – especially in smaller economies.

Yves Bourdet and Hans Falck’s 2006 study Emigrants’ Remittances and Dutch Disease in Cape Verde, found evidence of negative impact on the competitiveness of the tradable sector.

Skilled migration (i.e., brain drain) can have a drastic effect on the domestic labour markets in vital public services. Bob Pond and Barbara McPake in The Health Migration Crisis: The Role of Four OECD Countries (2006), discuss brain drain problems in Africa’s health sector as professionals increasingly find jobs in the high-demand OECD regions.
They calculated that nearly 25% of the newly trained foreign physicians registered with the UK’s National Health Service in 2003 came from SSA.

On average, one-fifth of the SSA tertiary-educated population work in developed countries, compared with less than 10% of similar groups from South Asia. Angola, Burkina, Guinea-Bissau and Mozambique have, in fact, lost half of their educated workforce in recent years.

These migrant workers leave behind families and loved ones and see it as a duty to provide for them through remittances.

Market potential
There are windows of opportunity for financial institutions to tap into this lucrative and rapidly expanding market.
In the US, the strong demand for global remittance services has caught the interest of major groups such as Citizen’s Bank and Wells Fargo. These banks (among others) see remittance services as a long-term strategy to draw a significant unbanked population into their mainstream financial products, such as cheque or savings accounts, insurance, personal loans and home mortgages.

In a partnership with two Cape Verde-based banks, Citizen’s Bank offers Cape Verdean migrants a cheap remittance facility. This programme in the first three years of operation has turned over 1,000 formerly unbanked migrants into Citizen’s clients.

Many smaller banks and microfinance institutions have long catered for the migrant community. South Africa’s Theba Bank (a miners’ bank) facilitates low-cost transfers from South Africa to families holding bank accounts in Mozambique and Swaziland.

The International Remittance Network represents about 200 credit unions that provide low-cost services in 40 countries across Asia, Africa, Europe and South America. The network does not require the recipients to open an account with a credit union.

In few cases, remittance-receiving households were given bank loans (working capital) for business start-ups, which contribute to wealth creation and growth. An IMF Working Paper (2007), Impact of Remittances on Poverty and Financial Development in Sub-Saharan Africa, notes: “Given the paucity of assets that can serve as collateral in SSA, a steady future flow of migrant remittances could be used to secure entrepreneurial loans – though small retail businesses started entirely with remittance savings face expansion limits unless they can access additional long-term funding.”
Moreover, the construction of large housing schemes for migrant workers in West Africa has had positive spillovers on both real estate and financial sectors of the economy.

Recent advances in cellphone encryption technology have facilitated rapid, low-cost money transfers worldwide. For instance, Safaricom Kenya, a leading mobile phone operator with some 5m customers, has introduced a new service [The free account - M-Pesa], which enables subscribers to remit large volumes of money in an instant transaction. (See African Business, November and December 2007).

The service costs on average $1 to send or receive money. A SIM card is required to operate an M-Pesa account. This has a money transfer menu that allows account funds to be managed. To prevent fraud, security pin codes are provided and no one else can access the account.

Michael Joseph, chief executive of Safaricom, said: “Within two weeks of the launch, over 10,000 account holders were registered and more than $100,000 had been transferred.” The company has joined forces with other mobile providers in Tanzania and Uganda to expand its coverage across East Africa.

Transaction costs
Whilst remittances can facilitate the entry of un-banked households into the formal financial system, major commercial banks – which are uninterested in small volumes – channel only modest flows remitted by African migrant workers.
Fees are prohibitive for poor migrants who send home a few hundred dollars or even less. Thus, low-income migrants rely on informal channels like currency dealers, export-import operators and retail shops.

Money brokers known in the Middle East as ‘hawaladars’ also dominate the sub-Saharan market in several places. But these daily transactions go unrecorded. Informal providers offer convenient services, such as anonymity, minimal paperwork and speed.

SSA’s transaction costs are generally high. A survey of money transfer operators (Chequepoint, First Remit, Money Gram, Travelex Money Transfer and Western Union) in the UK found that the fee on money transfers was lower in high-volume corridors like Britain-India and considerably more for Britain-Africa. The cost of remitting $100 to Africa from the US can amount to 20% compared with just 4% (Britain to India) according to the survey.

In sum, the vast untapped market in money transfers offers an opportunity for African banks to bring a large, un-banked population into the formal financial system. That, in turn, will increase deposit mobilisation and provide more investable funds for projects, thereby benefiting the wider economy.

A 2005 UN Development Program report shows that the propensity to save from remittances among some households can be as much as 40%. The challenge for policymakers in receiving economies is to channel these private savings into productive uses rather than on expensive imports of consumer goods.

Workers’ remittances have played a vital role in the post-1945 development of European nations like Spain and Italy, where rural banks and credit unions were formed after the Second World War to receive much-needed foreign currency sent home by migrants working in the US and South America.

In essence, socio-economic development potential of this type of money flow is enormous and therefore, underlines the need for sophisticated personalised financial services within the African region to capture a large share of this expanding niche market.