In 2006, 57 developing countries received more than US$1 billion in remittances.

Improved data collection Recording the volume of actual remittance flows is difficult because so many remittance senders and receivers remain outside the economic mainstream.

The worldwide remittance map constitutes a first effort to quantify total remittance flows through both formal and informal channels on a country-by-country basis. Remittance corridors to some countries in Latin America and the Caribbean (LAC) have been the subject of research and analysis for several years. Central banks in a number of these countries have made significant efforts to adjust their data-collection systems, improving the accuracy of recorded flows and increasing their knowledge of the characteristics of remittance markets. However, for many countries in Africa, Asia and the middle East, estimation of remittance flows remains a pending task. This is particularly true in rural areas where remittance flows are systematically undercounted and in a majority of cases unaccounted for. Accurate measurement of remittances is a challenge for most balance-of-payments systems, largely because they rely heavily on reporting from formal financial institutions. In many countries, however, informal channels are commonplace, accounting for almost half the remittances worldwide. In the Middle East, for example, many remittances are transferred through a well-developed network of informal brokers (hawaladars) and are not captured by the official reporting system. Remittances are also underestimated in particular in rural areas, where informal channels dominate remittance delivery patterns because of the relative absence of banks and other formal financial institutions.

Improvements in remittance recording systems to date have raised awareness of the staggering estimated volume of remittance flows, which in many cases exceed the combined volume of overseas development assistance and foreign direct investment in developing countries. A majority of the countries in most developing regions show annual remittance inflows of more than US$1 billion: Asia and Oceania (17 countries), LAC (13 countries), Europe (12 countries) and the Near East (9 countries), with a further 18 African countries receiving more than US$500 million. Greater knowledge of the volume of these flows, and of the millions of transnational families that send and receive remittances, can inform policymakers of the need to provide an enabling environment for migrant transfers. It can also attract more players to the remittance services market, encouraging competition and increasing downward pressure on the cost of these transfers, which represent a lifeline for hundreds of millions of individuals in poor rural areas and around the world.

Lower transaction costs Reducing the cost of remittance transfers is difficult because so many factors influence the cost of a transfer: informality, monopolies, regulations and volume, among others.

Across the globe, the cost of remittance transfers varies greatly depending on the region to which they are sent. While the higher-volume remittance corridors such as those to Latin America have seen drastic reductions in sending costs, remittance transfers in other corridors remain considerably more expensive. Lowering costs is crucial to both the maximization of the impact of remittances for recipient families and the competitiveness of formal remittance channels.

The lack of competition in rural and remote areas often leads to higher costs and the creation of informal networks. In many developing countries, remittance payment is restricted to banks; as a result, many rural areas are neglected, helping create the preconditions for informal channels. Legislation that allows non-banking financial institutions to pay remittances – for example, microfinance institutions, cooperatives and credit unions – will help reduce informality, increase competition and lower the cost per transfer.

In an era of technological progress, innovative business models are reshaping the remittance marketplace. New technologies, such as prepaid cards and the use of mobile phones, provide cheaper alternatives for transferring money, as well as lower account-to-account transaction costs. In many countries, 30 per cent of remittance recipients currently use debit or credit cards, and in some countries this figure is as high as 50 per cent. In India and the Philippines, mobile technology is already a widely accepted means of money transfer operations, and its use is growing exponentially. These new opportunities have radically changed the remittance market by increasing the spectrum of participating players. However, there is still room for improvement as new ideas and alliances arise.

One obstacle to lowering transaction costs is the increased focus on the regulatory environment since 11 September 2001. Money transfer companies and financial institutions have been encouraged to monitor their transactions strictly. The associated compliance costs have greatly impacted the remittance business, forcing some companies to close shop, leaving migrants no alternative but to use more expensive outlets or informal networks.

Despite these challenges, the cost of remitting has declined over the last decade. The savings generated have greatly increased the potential for remittances as a step towards financial self-sufficiency. However, this trend is not as visible in rural areas where competition is poor and access to innovative means of transferring remittances is still limited.

Leveraging of development impact
Leveraging of development impact is difficult because so many remittance senders and receivers remain outside the formal financial system.

For millions of families around the world, remittances are the lifeline that lifts them out of poverty. The vast majority of these flows are spent on basic needs of recipient families such as food, clothing and shelter. This consumption, combined with investment in health care and education, constitutes 80-90 per cent of remittance spending. The remaining 10-20 per cent includes a mix of formal and informal savings and investments. Financial access and financial literacy are two key factors in unlocking the development potential of remittance flows.

Throughout Latin America and the Caribbean, half of the licensed money transfers are handled by banks, whereas in Central Asia, Africa, the Southern Caucasus, Eastern Europe and parts of South-eastern Asia, the share rises to almost 100 per cent, because regulations only permit banks to make such transfers. Surprisingly, despite the fact that in many countries banks generate at least 10 per cent of their net income from remittance services and could benefit greatly from cross-selling, they have been slow to reach out to migrant workers and their families. As a result, remittance recipients cannot save, borrow or build up credit histories through these banking institutions.

Most remittance transfers are cash-to-cash transactions as opposed to account-to-account transfers, which would leverage these flows for remittance senders, receivers and their communities. Expanding financial access would have the effect of formalizing remittance flows, reducing costs and increasing the scope for local investment.

Alternative financial service providers are increasingly stepping into the vacuum and providing a full range of financial services. Even though these institutions still account for a low participation in the overall market, they have demonstrated willingness to play a crucial role in banking the traditionally ‘unbanked’ and in cross-selling financial services to remittance recipients. In rural areas in which bank presence is at its lowest, these institutions can provide key services to segments of the population that would otherwise be left without access to finance.

Source: IFAD


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