Remittances for Development: How Far Have We Come?

Last month, over 350 participants from the public and private sectors and the civil society gathered at the United Nations headquarters to share lessons on remittances for development. The Global Forum on Remittances, Investment and Development, was hosted by the International Fund for Agricultural Development (IFAD) in partnership with the Finance and Markets Global Practice of the World Bank and the UN Department of Economic and Social Affairs (UN-DESA). Several private sector organizations were also key partners in the event including the International Association of Money Transfer Networks (IAMTN), GSMA, International Money Transfer Conferences (IMTC), and the World Savings and Retail Banking Institution.

For those who couldn’t make it, here are six key insights from the event:

1. Remittances are more than three times larger than the official development assistance (ODA) and exceed foreign direct investment (FDI).An estimated 445 billion USD in remittances was formally transferred to 144 receiving countries in 2016. The true size of remittances, however, is believed to be much larger when considering funds transferred through informal channels. The contribution of migrants to their host countries and the global GDP is substantial. While migrants make up only 3.4% of the global population, their earnings amount to 9.4% of the global GDP. The majority of them perform difficult and dangerous jobs in the global economy, noted Gilbert F. Houngbo, IFAD’s President. Quoting IFAD’s “Sending Money Home” report launched at the conference, Houngbo added that 84% of migrants’ earnings are spent in the host economies and the remaining 15% is a lifeline for their families.   
    
2. The cost of remittance transfers is decreasing, but more needs to be done to reach the 3% SDG target by 2030. Sending and receiving remittances has become less expensive over the last decade. The cost fell from 10% in 2008 to 7.32% in 2017. Lowering the cost down to 3%, which is a target of the Sustainable Development Goals (SDGs), would save families USD 20 billion annually. Dilip Ratha, senior economist at the World Bank, argued that the cost of remittance transfers can be lowered to almost 0% given recent advances in technology, however, he also recognized that limited competition, lack of price transparency, and regulatory environment remain strong barriers to lowering the costs. One example of how technology has helped lower the costs is mobile money transfers, which have had a positive effect in recent years. According to GSMA, there are now 53 mobile money providers that have partnered across national borders, making it possible for customers to send money across 46 corridors in 21 countries.

   ​Lowering the cost of remittances to 3% would save families USD 20 billion annually.

   Gilbert F. Houngbo, President, IFAD

3. Not all remittance money is used for consumption. At least 10% of international remittances is saved. It is estimated that at least USD 45 billion in remittances is saved each year. By 2030 migrants will send home USD 6.5 trillion resulting in additional future savings. Much of the savings today is kept informally, which opens up the opportunity for private sector to invest in products and services that enable people to save through formal channels.


4. In some regions, remittances have been falling. The Middle East and North Africa (MENA) and Eastern Europe and Central Asia (ECA) are among the regions where remittances have been slowing down or falling. Dilip Ratha, senior economist at the World Bank, highlighted three reasons for this decline. First, economic slowdown in Europe, Russia, and the Gulf Cooperation Council (GCC) has affected the ability of migrants to send mney home. Second, one of the biggest roadblocks to mobilization of remittances continues to be "de-risking" whereby international banks avoid the risk of being associated with money launderers. This places an extra burden on smaller and newer players making it difficult to operate. One easy way to address this issue, Ratha suggested, is to consider all small remittances safe. The third reason why remittances have been falling in certain regions has to do with the recent trends to nationalize labor markets which has pressured employers to hire local workers. Ratha also talked about an existing threat to tax outward remittances in the US and other countries. If this happens, there is a high risk of diverting remittances from formal to informal channels. A remittance tax would also mean double taxation of migrant workers’ incomes and it goes against the SDGs as it would likely increase the overall cost of remittance transfers.


5. There is no fully integrated remittances market. The remittances industry is relatively young and dominated by few global companies, noted Leon Isaacs, chief executive officer of Developing Markets Associates. In recent years, other service providers have emerged. They are mostly small businesses that operate domestically and a small number of regional companies. The well-established remittances companies are facing an increasing pressure to adapt to the future. A panel consisting of representatives of MoneyGram, Wells Fargo, Western Union, and UAE Exchange discussed the challenges of complying with anti-money laundering and combating-the-financing-of-terrorism laws which hinder the cross-border transfers and lead to increased costs for these companies. On the other hand, for fintech firms such as WorldRemit, the entry barriers for smaller and newer remittance service providers was a key concern. Panelists representing Orange Mobile Money, WorldRemit, MasterCard, and SalPost discussed challenges and opportunities to achieving scale in an evolving remittance market. The discussion underscored the need to bring competition to the marketplace by eliminating barriers, especially the current exclusivity agreements that exists between well-established companies and many governments.


6. The lag between new policy and regulation contributes to financial exclusion of refugees. Micol Pistelli, a credit guarantee facility expert at UNHCR highlighted the opportunities to serve forcibly displaced persons, which are currently estimated to be 65 million, 21 million of which are registered by the UN as refugees. There is a strong need to serve refugees, but very few financial institutions are willing to do so, despite evidence of positive results. Pistelli highlighted the case of Al Majmoua which serves refugees in Lebanon and has seen high repayment rates. Pistelli also recognized that it takes time for financial institutions to catch up with new policies. She mentioned EU countries, where refugees are allowed to open bank accounts, but are unable to do so (with the exception of Germany) because banks still do not accept UNHCR identification cards. To enable refugees to gain access, host countries must make sure their regulations are in sync with polices towards refugees, so that financial institutions can start implementing them.

What next? Mobilizing remittances for development will require greater focus on several key areas including legal and regulatory reform, lowering costs, strengthening consumer protection laws, and leveraging payments infrastructure. Also, great potential gains can come from formalizing savings, both in terms of individual return form interest, but also to provide the much-needed capital to finance roads, infrastructure and other large investment projects. In addition, an important message for public sector participants was that properly accounting for remittances presents an opportunity to increase countries’ credit ratings significantly. One idea was to build a global remittances platform that would help increase transparency, allow consumers to compare prices, and drive the cost down.

Related reading:

• Remittances Prices Worldwide (World Bank)
• People On The Move: Global Migration’s Impact And Opportunity (McKinsey Global Institute, Dec 2016)
• Migration And Remittances Factbook 2016 Third Edition (World Bank, 2016)
• Serving Refugee Populations in Lebanon - Lessons Learned from a New Frontier A Case Study of Al Majmoua in Lebanon (Social Performance Taskforce, Dec. 2015)