Syndicate content

How can we cut the high costs of remittances to Africa?

Massimo Cirasino's picture

Read it in French, Spanish or Mandarin.

Migrant workers, earning money in jobs far from home, sent more than $400 billion to their families back home in 2012. Such remittances remain a vital source of income for millions of people in developing countries: Food, housing, education, health care and more are paid for every day by workers who earn money abroad. Through a simple and repetitive transaction – sending money home – those workers are really sending heart-warming feelings like hope for a better future and love of family.

Unfortunately, a large portion of these remittances is absorbed by the transaction costs of sending money internationally. Given the low incomes that migrants tend to earn, and given the small amount of each transaction, too much money is spent on these transactions – reducing the amount of money that reaches their families.

Globally, remittance services cost an average of 8.96 percent of the amount being transferred. When they send $200 home, for example, migrants spend an average of almost $18.

These costs should be lower – and, in some regions of the world, these charges are indeed lower. Sending money from the United Arab Emirates costs, on average, about 4 percent. However, there are also regions where charges amount to about 12 percent – and there are even some countries where a migrant might pay more than 20 percent.

The problem has long been most intense in Africa. But in 2011, thanks to the contribution of the African Institute for Remittances (AIR) Project, the World Bank launched the “Send Money Africa” remittance-price database, aiming to monitor the cost of sending money to Africa.

Send Money Africa allows users to compare the costs charged by several providers to send money from 16 major remittance-sending countries (across Europe, the Middle East, North America and within Africa itself) to 28 African remittance-receiving countries, tracking the costs along 54 "country corridors."
The cost of sending money to Africa is too high, according to the Send Money Africa database. The cost was recorded at 11.89 in December 2012 – and the cost has been going up, not down: The cost has risen by almost 1 percentage point, from an average cost of 10.90 percent in July 2011, when the database was first published, to today’s 11.89 percent.

The excessive cost of sending remittances drains money from the world’s poorest. About $60 billion was sent to the African continent in remittances in 2012. An average cost per transaction of 11.89 percent means that more than $7 billion is “lost” in processing the service.

The World Bank is leading international efforts on “the 5x5 Objective,” which has been endorsed by the G8 and G20. That objective aims to bring global remittance prices down to 5 percent by 2014. Achieving that goal could save African migrants $4 billion annually.

In 2007, I had the privilege of co-chairing the global task force that helped set the internationally recognized standard for cross-border, small-sum transactions: the World Bank/CPSS-BIS General Principles for International Remittance Services. Our experience from our work on payment systems has confirmed the importance of addressing, in a holistic way, the issues identified in the General Principles.

Concrete measures can be implemented that would bring down the cost of transactions through comprehensive reforms that address transparency; competition; the removal of legal barriers; the development of a better payment-system infrastructure; and the improvement of the governance and risk management of remittance-service providers. Reducing costs does not necessarily mean squeezing the profits of the remittance-service providers, because the cost of providing those services often depends on external factors. Lower costs, moreover, would lead to more frequent transactions by remitters, offering increased volume to the service providers.

Implementing such measures could save millions of dollars for families that depend on remittances, increasing the amount that remains in the pockets of migrant workers and their families. It’s as simple as that!
 

Comments

Submitted by Evan on

What is the breakdown of costs associated with remittances? Of the ~10% it costs to send money, how much of that is driven by regulatory compliance and anti money laundering checks, currency exchange costs, financial institution transaction fees, and remittance company profit?

Has anyone studied this to try to figure out which pieces of the puzzle would have the greatest impact on reducing the cost of remittances?

Add new comment