Published on People Move

Leveraging remittances for microfinance

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One of the four important pillars of the international remittances agenda is leveraging remittances for imporoving access to finance for households. There are several angles from which this issue can be approached, some good, some not so great.

One hears of a few anecdotes and pilot programs to link remittances to financial inclusion for households, but the scale of such programs to date remains limited. Some early evidence (from 2004-2005) from the World Council of Credit Unions showed that when people enter a credit union branch to send or receive remittances, remittance senders and receivers both end up opening an account and leave some money behind for use later. I have heard of similar evidence, albeit anecdotally, from many other organizations involved in money transfer business. Kenya's MPesa also creates deposits to the extent there is a lag between a deposit by a remitter and withdrawal by the beneficiary. These deposits do not earn any interest rates, presumably because MPesa (and parent Safaricom) wants to avoid coming under Banking regulations (so the interest earnings are put in a trust fund). Universal Postal Union is also working with a remittance software platform to provide remittance services through member post offices, earn remittance fees and at the same time cross-sell postal saving products. World Saving Bank Institute is trying to do the same with member saving banks. Also several microfinance agencies are trying earn remittance fee income. An early scheme to link remittances to microsaving was by Cemex, the cement company from Mexico which was trying to encourage microsaving from migrants for building houses in installments. Later a Bancomer affiliate piloted a scheme in New York suburbs to provide housing finance to migrants who send remittances through its branches. I have heard of two other products linked to remittances were a pilot to provide (a) car loans to migrants in the US for purchasing cars in Mexico and in the Gulf for cars in the Philippines, and (b) life insurance to remitters to guarantee continuation of remittance flows for a 12 or more months in the event of remitter's death.

With the recent increased popularity of microfinance, a number of microfinance institutions are looking into provision of remittance services. Some microfinance institutions are beginning to use the history of remittances as a way to evaluate creditworthiness of their poor customers who often cannot provide proof of income. This is welcome.
While the goal of expanding remittance services to underserved poor customers is laudable, the idea of using remittance fees to cross-subsidize microfinance products is less appealing as this involves one set of poor people subsidizing another set of poor people. I think microfinance subsidies should be "donated" by rich foundations and governments, not poor remittance recipients or their migrant relatives. Also microfinance customers are not always remittance recipients, and vice versa, except in communities that have a large concentration of migrants or remittance-recipients.
I am a bit concerned that in the name of promoting saving, some remittance schemes have been designed to achieve other objectives. I wrote about "forced remittances" in the Global Economic Prospects 2006 : in this case, some guest worker programs insist on migrant workers creating saving accounts in a bank back home where a part of their salary is deposited. This is projected as a convenience service, but there is also a motive to require migrants to return home to be able to access their saving. Information on such schemes is not easy to come by, but I think this is happening in a fairly organized manner in some countries.


Dilip Ratha

Lead Economist and Economic Adviser to the Vice President of Operations, Multilateral Investment Guarantee Agency, World Bank

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