MICROCAPITAL PAPER WRAP-UP: Migrant Remittances: A Development Challenge, Published by the African Development Bank Group

“Migrant Remittances: A Development Challenge”, Published by the African Development Bank Group, 2009. Available at: http://collab2.cgap.org//gm/document-1.9.34957/Migrant%20Remittances,%20a%20Development%20Challenge.pdf

This 85 page report presents the results of the African Development Bank (AfDB)’s 2007 extensive study on migrant remittances. The study involved a survey of emigrants from Morocco, Senegal, Mali, and the Comoros as well as beneficiaries in the countries. The African countries, while very different from one another, all have a French colonial background while the emigrants surveyed lived in France, Italy, and Spain. The study examines the use of remittances and preferences for various transfer mechanisms to ultimately present various challenges in dealing with remittances as well as a number of suggestions for how to improve the method and use of remittances. Among the suggestions is the recommendation that microfinance institutions (MFIs) expand or mobile banking services be offered, so that beneficiaries of remittances might readily access the transferred money through a formal mechanism. Remittances constitute a great volume of cash inflow to the countries surveyed, totaling between 9 percent of GDP in Morocco and 24 percent in the Comoros, or between 80 and 750 percent of the countries’ official development assistance (ODA).

One transfer method is Money Transfer Companies (MTCs), which sprung up in Africa in the 1990s and are now growing at a rate of 15 percent annually. The two major companies, Western Union and MoneyGram, have also established linkages with various banks and microfinance institutions (MFIs) to distribute the money. The MTC network is most elaborate in Senegal and least so in Mali, where MTCs cover only 29 percent of the money transfer market. Western Union is universally more popular than MoneyGram, commanding 47 percent of the Moroccan money transfer market versus MoneyGram’s 17 percent, and 60 percent in the Comoros where MoneyGram does not have a presence. Transfer through MTCs can take as little as 10 minutes. However, the transfer charge of MTCs is rather high, at between 5 and 20 percent of the amount transferred. The share of MTCs ranges from 16 percent in Mali and the Comoros to 36 percent in Senegal.

Among other options for money transfer, banks, another formal transfer mechanism, have more competitive transfer rates. However, the beneficiaries are unbanked. The percentage of bank transfer across all remittances ranges from 10 percent in both Mali and Senegal to 41 percent in Morocco. In Morocco, 4 of 20 total commercial banks share 85 percent of the remittance market due to their wide presence in the host countries and the wide range of services, including transfer and investment mechanisms, offered to the remitters. In Mali and Senegal, banks can be inefficient, taking 1 to 3 weeks to complete the transfer. In the case of Senegal, only 5 percent of the population is banked and able to receive bank transfers.
Informal transfer mechanisms include the simple task of sending money by post. Another system, called “Fax”, involves the collection of the funds at one site and a telephone call to a partner at another site that releases funds to the beneficiary. According to the study’s survey, the criteria for choosing formal and informal transfer mechanism are generally speed and accessibility on the part of beneficiaries and cost, security, and accessibility on the part of remitters.

The countries themselves differ in the availability of transfer services. Morocco has a mature and highly developed banking system while the Comoros has a rather undeveloped banking sector with only one commercial bank. The neighboring countries of Senegal and Mali have a rapidly developing informal transfer market. The average annual amount received by transfer per household is USD 2 470 for Morocco, USD 2 925 for Senegal, USD 7,700 for Mali, and USD 2,460 for the Comoros. The amount of transfer ranges from 7 in the Comoros to 10 in Senegal. Percentage of informal transfer ranges from 27 percent in Morocco to 82 percent in the Comoros.

In countries with fewer banks, the authors suggest that microfinance institutions (MFIs) are preferable to informal means of transfer. However, transfers are less profitable than loans and may exhaust funds from which the MFI could make a greater profit. But in some countries, MFIs can reach people that banks can’t. In Senegal, formal transfers have increased 8 to 10 percent due to the growing presence of MFIs. MFIs in Mali and the Comoros will soon begin to offer direct transfer facilities.

The second major topic of the report is the use to which remittances are put. Remittances can either be invested or used for consumption of beneficiaries, a practice which does not directly yield financial returns. Migrants in lower income brackets send between 10 and 15 percent of their income solely for the consumption of beneficiary households while higher earners also invest their remittances in real estate or productive enterprises. About 30 percent of migrants surveyed have invested in an investment project including real estate or production. Because the typical profile of a remitter is a first generation migrant in his or her early forties, and low skilled workers constitute 66 percent of the migrant population, the study reflects that more could be done to yield benefits for the migrants.

As for beneficiary households, 80 percent of beneficiary households surveyed were on the poverty threshold of less than USD 1.3 per day. Remittances constitute 50 to 75 percent of household budgets. Therefore, household expenses and healthcare take precedence among uses for remittance money, with education coming in at third in terms of priority. Interestingly, in the Comoros, the practice of celebrating weddings in grand style are common and weddings can often exhaust lifetime savings; here, remittances also fund extravagant social events. In terms of the sources of beneficiaries’ incomes, 34 percent of beneficiaries in Morocco are unemployed while the lowest percentage of unemployed is found in Mali, at 5 percent. 31 percent of beneficiaries in the Comoros are insecurely employed and 28 percent unemployed. 39 percent of Senegalese beneficiaries are self-employed while 52 percent of Malinese beneficiaries are workers.

Before segueing into its own suggestions, the study identifies three approaches to governing remittances:
* The Anglophone Approach favors the free market guiding innovations and the popularity of transfer mechanisms
* The Hispanic Approach favors improving banking services for migrants and offering low cost transfers to attract the business of migrants
* The Francophone Approach encourages both migrants and beneficiaries to invest a portion of remittances in community or productive investments

The study itself recommends that measures be taken to encourage competition between transfer services, to drive down the cost of transfer. The study also favors both migrants and beneficiaries opening bank accounts with commercial banks or MFIs so that they receive a full range of financial services, including savings plans. Mobile banking is presented as a means of reaching beneficiaries in remote areas. To specifically benefit migrants who sacrifice their income to send money to family, the study advise banks to offer special savings plans and insurance along with transfer facilities. Banks are also encouraged to offer investment products in the African countries so that this portion of remittances can yield further income and also contribute to economic development. For the African countries themselves, the authors advise improvement in healthcare and education since these are areas that a great volume of remittances is directed towards.

By Goda Thangada, Research Assistant

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