Remittances and development: providing funds for the poor

Remittances sent home by migrant workers are second only to foreign direct investment (FDI) as a money flow into developing countries. The value of remittances substantially exceeds development aid. According to official statistics, these remittances to developing countries reached an estimated US$ 88 billion in 2002 but the real figure is probably at least twice as high. But the war on terrorism has meant that the cheaper informal channels used primarily by the poor are being examined and often shut down. What can be done to reduce the cost of transferring remittances which the poor now have to face?

An article by researchers at the UK's Department for International Development explores the role for development agencies and governments in improving the poverty alleviation impact of remittances and promoting access for poor people.

The countries from where most remittances come are USA, Saudi Arabia and Germany. India, Mexico and the Philippines are the major recipients. Remittance transfers are made through banks, money transfer companies, credit cards and a range of other means – often with an uncertain legal status – such as bus companies, taxi drivers, furniture removal firms, travel agents and convenience stores. The average amount sent per transaction is around $200.

The entry of large international banks, credit card providers and money transfer companies is reducing transfer fees to remittance customers and improving customer service and transparency. New technology offers potential for greater efficiency, lower costs and extended outreach. In the competitive US-to-Mexico remittances market the cost of sending money has more than halved since 1999.

The researchers note that:

• Remittances are a more stable form of finance than FDI and other investments as they remain steady, or even increase, during times of crisis.
• Since a standard rate for transfer charges is common, the poor – who send smaller amounts – pay proportionately higher charges.
• In countries where governments have a control over a postal service or bank, investment in improving money transfer systems improves access and stimulates competition: most official remittances to Morocco go through a majority state-owned bank which allows Moroccans in Europe to remit funds at a low cost.
• One of the lowest reported costs (2 to 3 %) for transferring money is via the informal systems (hawala) for migrant workers found in most bazaars in South Asia.

In the aftermath of September 11, 2001 attacks on the World Trade Centre in the US, hawala-type systems have been viewed as suspected channels for funds for terrorist organisations. The Financial Transactions Task Force (FATF) - set up by the G8 (the group of eight leading developed countries) - encourages remittance service providers to familiarise themselves about their customers, licensing of informal agents and closer scrutiny of financial institutions. This is creating great difficulties for millions of poor clients without a registered address or national identity cards.

An international task force has been given the responsibility of helping governments to monitor the remittance business, promote transparency, lower costs, extend access for poor clients and apply FATF principles sensitively. The authors suggest the need to:

• ensure that licensing is done without force and without pushing money transfer operators – such as by smaller companies or banks – to close down (or operate illegally) as these offer flexible options to poor people
• encourage research to develop a better understanding of how remittances are used and to identify under-served markets
• promote partnerships between registered banks and non-bank financial institutions (credit unions, microfinance organisations and postal networks) to reach people in rural areas
• assist central banks and remittance providers to meet the cost of conforming with FATF guidelines
• facilitate regulatory systems so that microfinance institutions are able to offer savings deposit services.

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 given incentives to extend operations.

Source(s):
‘Remittances: the new development finance?’ Small Enterprise Development, Vol 15, no 1, pp12-19, by Jan Wimaladharma, Douglas Pearce and David Stanton, 2004 Full document.

Funded by: Department for International Development, UK

id21 Research Highlight: 26 November 2004

Further Information:
Douglas Pearce
Team Leader, Financial Sector Team, Policy Division
Department for International Development (DFID)
1 Palace Street
London SW1E 5HE
UK

Tel: +44 (0) 20 7023 0263
Fax: +44 (0) 20 7023 0797
Contact the contributor: D-Pearce@dfid.gov.uk

Department for International Development (DFID), UK

Other related links:
'Linking microcredit and remittances – new business opportunity for MFIs?'

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

'The importance of remittances for Somali refugees'

'Remittances: fuelling consumerism or aiding development?'

'Don't fence them in. Quest for sustainable livelihoods keeps millions on the move'

'Myths and realities: the economic impact of international labour migration in rural El Salvador' from York University, Canada

'Migrant Worker Remittances,Micro-finance and the Informal Economy: Prospects and Issues' from the International Labour Organisation (ILO)