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 byresearchers at the UK's Department for International Development exploresthe role for development agencies and governments in improving the poverty alleviationimpact of remittances and promoting access for poor people.

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

The entry of largeinternational banks, credit card providers and money transfer companies is reducingtransfer fees to remittance customers and improving customer service andtransparency. New technology offers potential for greater efficiency, lowercosts and extended outreach. In the competitive US-to-Mexico remittances market the cost of sending moneyhas more than halved since 1999.

The researchersnote that:

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

In the aftermathof September 11, 2001 attacks on the World Trade Centre in the US, hawala-typesystems have been viewed as suspected channels for funds for terroristorganisations. The Financial Transactions Task Force (FATF) - setup by the G8 (the group of eight leading developed countries) - encourages remittanceservice providers to familiarisethemselves about their customers, licensing of informal agents and closerscrutiny of financial institutions. This iscreating great difficulties for millions of poor clients without a registered address ornational identity cards.

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

• ensurethat licensing is done without force and without pushing money transferoperators – such as by smaller companies or banks – to close down (or operateillegally) as these offer flexible options to poor people
• encourageresearch to develop a better understanding of how remittances are used and to identifyunder-served markets
• promotepartnerships between registered banks and non-bank financial institutions(credit unions, microfinance organisations and postal networks) to reach peoplein rural areas
• assistcentral banks and remittance providers to meet the cost of conforming with FATFguidelines
• facilitateregulatory systems so that microfinance institutions are able to offer savings depositservices.

Remittances offerhuge potential to banks and other financial institutions to add poorcommunities to their customer base. The private sector needs to be made awareof such market opportunities and given incentives to extend operations.