Linking microcredit and remittances – new business opportunity for MFIs?

Money transfers by migrant workers are a significant and dependable financial flow for developing countries. Remittances provide substantial shares of household incomes and constitute the second largest capital flow to developing countries – less than money invested directly by private companies but more than official donor aid. Many of those who receive loans from microfinance institutions (MFIs) also receive such remittances. Is there scope for MFIs to offer money transfer services?

A researcher at Bannock Consulting explores whether money transfer could be an attractive business for MFIs and a valuable additional financial service for many current and potential microfinance clients in sub-Saharan Africa. It considers whether this could open up an avenue to better integrate remittance receivers as microfinance clients and build their financial assets.

In the year 2002, globally, migrants sent US$80 billion in remittances to developing countries. Compared to $33.1 billion in 1991, remittances have more than doubled over the past decade and overtaken annual migration growth rates of 2-3 %. Latin and Central Americas’ migration and remittance links with the USA have received more attention than other parts of the developing world. Africa’s remittance flows are under- recorded and under-researched. Officially recorded remittances to sub-Saharan Africa represent 1.3 % of the region’s Gross Domestic Product (GDP). Unofficial remittances probably are much more than recorded flows – for instance, it is estimated that 85 % of money remitted to Sudan is not officially recorded.

The research shows that:

• Nigeria is the largest receiver in sub-Saharan Africa, followed by Lesotho, Sudan, Senegal, and Mauritius.
• Remittance recipients are typically the parents or spouses of the migrant: most remitted money is used for consumption, school fees or medical expenses, thus much of it is for developing people’s abilities (human capital).
• Investment in land, livestock and building or improving a home is relatively common but is secondary to daily needs.
• Migrants send remittances often despite the substantial cost of the transfer: on an average the transaction costs (fees) are equivalent to thirteen % of the remittance value.
• Money transfer operators such as Western Union have higher average transaction costs compared to bank transfers between accounts, but are user-friendly –transaction times are shorter and users do not need to have an account.
• Many of the MFIs currently offering a transfer service do so as a sub-agent to a money transfer operator.

MFIs are not a panacea to the problem of how to deliver cheaper and more accessible transfer services. However, remittances are concentrated in specific areas of operation (or markets) - some of which are serviced by MFIs and opportunities are available for those combining bold thinking with prudent preparation.

As communication technologies and infrastructure improve, money transfer could be an attractive business for MFIs and a valuable additional financial service for current and potential microfinance clients. Unlike conventional commercial finance providers MFIs provide services to low-income people in urban and rural areas. The existing set-up of MFIs could lend itself to incorporating money transfer as a new service – either in alliance with existing service providers, such as Western Union, or independently.

In much of sub-Saharan Africa, MFIs that are not licensed financial institutions are not currently able to meet the regulatory requirements to engage in money transfer service and lack permission from central banks. MFIs could get round such regulatory obstacles to international financial transfers by:

• collaborating with an intermediary authorised in foreign exchange (forex) trade so that the transaction at the MFI is limited to local currency only
• limiting the service to the domestic market for transfers, for such purposes as school fees, payments or trading.

On the whole, MFIs interested in exploring money transfer as a service option should take a careful look at their regulatory context, the market opportunity and their capacity to deliver such a product.

Source(s):
‘Capturing a market share? Migrant remittances and money transfers as a microfinance service in Sub-Saharan Africa’, Small Enterprise Development, vol. 15, No 1, pp 20-34 by Cerstin Sander, March 2004
‘Migrant remittances to developing Countries: a scoping study’, Bannock Consulting by Cerstin Sander,  June, 2003 Full document.
‘Capturing a market share? Migrant remittance transfers & commercialisation of microfinance in Africa’, paper prepared for the Conference on Current Issues in Microfinance Johannesburg by Cerstin Sander, 12-14 August 2003 Full document.

Funded by: Department for International Development (DfID),International Labour Organization (ILO), Micro-Save Africa, World Bank

id21 Research Highlight: 3 November 2004

Further Information:
Cerstin Sander
Bannock Consulting Limited
47 Marylebone Lane
London W1U 2LD
UK

Tel: +44 (0) 20 7535 0240
Fax: +44 (0) 20 7535 0201
Contact the contributor: cerstin_sander@bannock.co.uk

Contact the contributor: cs_sander@yahoo.de

Bannock Consulting Limited, UK

Other related links:
'Microfinance: a weapon of mass empowerment for the unbankable?'

'Innovations in microfinance: new product development in Bangladesh'

'Fine tuning microfinance: better financial systems for the poor'

'Remittances: fuelling consumerism or aiding development?'

'Harnessing the investment potential of migrants’ remittances: the importance of family ties'

'Backstopping Mandate Finance' from Intercooperation

'Microfinance, agricultural banks, commercial banks : what potential partnerships could finance family agriculture?' from CIRAD