Making the most of informal remittances

The importance of money transfers by migrants to their country of origin has long been recognised. Since the events of September 11, 2001 in the United States of America, such remittances have come under scrutiny. Although some governments are trying to regulate remittances to reduce potential funding for terrorism, it would be better for policymakers to focus on directing remittances towards development.

Remittances to developing countries are significantly larger than aid transfers. Funds that are sent through formal channels represent only a fraction of total remittances. However, much remains unknown about the amount of money sent to migrants’ families through informal channels.

A report from the University of Oxford’s Centre on Migration, Policy and Society (COMPAS), UK assesses informal remittance systems in African, Caribbean and Pacific countries. It shows they are modern, adaptive responses to the constraints and opportunities presented by migration. There are legitimate security concerns about financial flows, but informal systems should only be lightly monitored and care should be taken not to restrict their ability to provide services valued by poor people.

The distinction often made between ‘formal’ and ‘informal’ remittances is a false one. Remittances and remittance systems routinely move from formal to informal procedures, often in the course of a single transaction that may involve hand couriers, banks, specialised remittance businesses and many other means of moving money or value. Banking and financial infrastructure are often weak in remote areas, so it makes sense to use cheaper and more efficient local, informal systems.

Key research findings include:

• In conflict-affected states where there are no other options even international non-governmental organisations use the services of informal remittance companies.
• There is no evidence that informal remittances have a developmental impact different from that of formal transfers.
• The difference between official and black market exchange rates encourages informal remittance systems.
• Liberalised foreign exchange systems reduce the incentive to operate and remit through informal channels.
• Informal remittance systems drive informal economic activity not reflected by official economic performance indicators – for example, Somalia’s remittance-fuelled economy is not in the terrible state it would appear to be from official figures.

The more regulations in place to restrict the free movement of money, the wider the use of informal remittance systems. Some new requirements being imposed on money transfer businesses risk excluding smaller and more specialised money transfer operators (for example, for an ethnic group) or driving them into illegality, where they cannot be monitored.

Where ‘formalisation’ of the remittance sector is pursued, it should try to incorporate rather than suppress informal operators, and aim to make use of their better attributes – low cost, speed, accessibility and reliability. Policymakers are advised to:

• recognise the uncertain and shifting boundaries between formal and informal transfers
• realise it is counterproductive – in terms of humanitarian, poverty reduction and development objectives – to undermine the informal systems that currently work efficiently and reliably, particularly for small transfers and in remote, underdeveloped or conflict-ridden areas
• explore the potential for greater involvement by credit unions, microfinance institutions and migrant associations in bringing in remittances for development
• encourage transfers in kind (non-monetary) and transfers of services as well as transfers of money – for example, a scheme by which Ghanaians abroad can finance healthcare back home could be replicated in such areas as education and pension provision.

Source(s):
‘Synthesis study: a part of the report on informal remittance systems in Africa, Caribbean and Pacific (ACP) countries’, Centre on Migration, Policy and Society, University of Oxford, by Frank N. Pieke, Nicholas Van Hear and Anna Lindley, January 2005 (PDF) Full document.
Further details about this research project 'Informal Remittances System' Full document.

Funded by: Deloitte & Touche

id21 Research Highlight: 22 December 2005

Further Information:
Frank N. Pieke, Nicholas Van Hear and Anna Lindley
ESRC Centre on Migration, Policy and Society (COMPAS)
University of Oxford
58 Banbury Road
Oxford OX2 6QS
UK

Tel: +44 (0) 865 274711
Fax: +44 (0) 1865 274718
Contact the contributor: frank.pieke@chinese.ox.ac.uk; nicholas.vanhear@compas.ox.ac.uk;

Centre on Migration, Policy and Society (COMPAS), University of Oxford

Other related links:
'Refugees as remitters: the Dinka of Sudan'

'Exploiting remittances: good for Mexico’s development?'

'Remittances and development: providing funds for the poor'

'Linking microcredit and remittances – new business opportunity for MFIs?'

Livelihoods Connect resources on Remittances

International Organization for Migration