Published on People Move

Would investing in financial literacy help reduce the use of informal channels?

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Reducing remittance costs are recognized as a vital element of the financing for development strategy and is one of the targets in the Sustainable Development Goals and the Addis Ababa Action Agenda. However, studies show that remittances remain to be a private affair operating mostly at household level.

It is also expected that reduced costs would encourage use of formal channels such as banks and money transfer operators. There are increasingly more money transfer operators in the market offering lower costs among the mainstream MTOs and digital ones. Mobile phone companies and many small operators are also competing on costs. Dilip Ratha clearly puts the argument for reduced costs in his TED talk.

However, it is also a fact that costs are much lower now than a decade ago. In some corridors it is very close to the 3% target although the global average remains to be about 8%. Surely lighter touch approach in regulations will lower the costs further and likely to draw remitters to formal channels.

Why informal channels are still very popular? For instance in India, it is estimated that 70% of domestic remittances are sent through informal channels such as hawala system. Informal systems are not always the cheapest, but overall they cost less than formal channels. Taxes and high transaction costs fuel the informal systems. However, convenience and perceived risk of tax charges seemingly play a role luring them towards informal channels.

We have interviewed ‘irregular’ immigrants in London and collected stories to understand their attitudes towards formal channels. One would assume, irregular movers would prefer informal systems. Since they do not have access to formal channels due to their ambiguous resident status. Nevertheless, we found that many irregular movers do use formal channels. Many regular movers use informal channels too. Hence the two types of irregularity needs to be divorced.

Irrespective of resident status, people are concerned about overall tax levels and not just the taxes on remittances and cost of sending it. Many people at the low end of pay scale are concerned about tax and therefore prefer other means to remit home the indispensable small amounts on a regular basis. Among formal migrants on low pay, there is also a great deal of misinformation about finance and taxes. ‘Tax scare’ is often unfounded for these groups. For example, somebody earning under $15,000 in the UK would not pay tax and yet would have access to additional financial benefits and credit opportunities. However, many believe they will be targeted by the taxman.

These low paid migrant workers are unlikely to save and send more than a few hundred dollars a month. These are vital for families left behind and unlikely to be money laundering. A lighter touch approach for small amounts is urgently needed along with reducing entry barriers by removing exclusivity contracts to allow more competitive pricing. May be it is about time to shift the focus from tax and regulation to trust and security for remitters.


Ibrahim Sirkeci

Professor of Transnational Studies and Marketing, Regent's College, United Kingdom

Fethiye Tilbe

Visiting Researcher, Regent's University London

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