MICROCAPITAL STORY: Remittances and Microfinance in 2008

Remittances, the portion of international migrant workers’ earnings sent back from the country of employment to the country of origin, play an important role in the economies of many developing countries. An annual statistical report done by the World Bank shows that remittances account for 5% of the GDP for low-income developing countries as of 2006. Although this figure might seem small, many countries in particular have a much higher percentage of their GDP based in Remittances; Guyana, Haiti and Honduras are all close to 25%. The Philippines, Nicaragua, Nepal, Guatemala and El Salvador are all in the 10-20% range. Jack Kimball of Reuters points out that “remittance cash may be as much as 50 percent higher than current estimates due to informal transfers.” Global remittances from foreign workers make up an estimated $300 billion a year, three times as much as the foreign aid paid out by governments in the developed world. The biggest share of this, over $42 billion, comes from immigrants working in the United States. But what these numbers really reflect is that millions of families and individuals in these countries have come to depend on remittances as a vital source of income.

The tie between microfinance and remittances has grown in recent years with a focus on linking the inflows of remittance money to other financial services. In some regions microfinance institutions (MFIs) have emerged as major actors in savings mobilization and credit disbursement at the grassroots level. MFIs are often better placed than banks to offer money transfer services to remittance recipients, especially for clients in rural areas. Jennifer Isern, Lead Microfinance Specialist for CGAP, noted that “what is important is how that money is used once it arrives so we hope that recipients will harness the full power of their remittances by saving, investing, and using the funds to fuel the engines of local prosperity.”

Manuel Orozco, director of remittances and development at the Inter-American Dialogue, a Washington think tank, explained several business models adopted by MFIs that offer remittance services at a recent remittances seminar hosted by the United States Agency for International Development (USAID):

proprietary model – an MFI opens a bank account in a remitting country to collect and transfer remittance payments to its clients
partnerships – An MFI partners with a single money transfer company such as Western Union
diversified partnership model – An MFI maintains simultaneous partnerships with a variety of money transfer companies;
the umbrella model – one money transfer company acts as a processor for many MFIs operating in its region
partnerships with banks – may be the only legal option in countries where non-bank financial institutions are not allowed to process foreign currency transactions.

According to Mr. Orozco the diversified partnership model has been the most successful option, because the ability to attract more clients by offering a variety of familiar remittance-transfer services generally outweighs the cost of fees charged by the money transfer companies.

The growing financial crisis is beginning to fuel concerns that countries who receive large inflows of capital in the form of remittances may take a hit. Aly Khan Satchu, a Kenyan financial analyst, assessed the impact on the African continent in saying “Remittances were keeping a very, very strong anchor under us, but I think we are going to have a dramatic slowdown because the second-round effects [of the crisis] are going to mean a lot of lay-offs.” In Latin America there is a similar tone; Mr. Orozco noted development agencies should double down on efforts to encourage saving and investments in small businesses. “If you don’t begin to build assets at the time when things are slowing down, then you won’t have anything when the flow of money is even less,” he said.

The impact that the financial crisis will have remains to be seen but is somewhat dependent on where the immigrants are immigrating to and what labor industries they are working in. Economist Walter Kemmsies says the decline in remittances from the United States to Mexico makes sense because more than 20 percent of Mexican migrants work in the construction industry.” Luis Alberto Moreno, President of the Inter-American Development Bank, an organization providing funding to development initiatives, noted “people who are already abroad will adapt, looking for new jobs or cutting back on consumption in order to keep sending money home and those thinking of migrating will probably opt for destinations where the economy is stronger and more jobs are available.” Interestingly he also pointed out that he expects to see an increase in remittances between developing countries, as more people move to places less affected by the global downturn.

By Scott Everett, Research Assistant

Resources:

WASINGTON POST: Home ,“Remittances to Latin America Decline as Global Economy Sours”, October 1, 2008

REUTERS: Home, “Will global crisis hurt remittances to Africa?”, October 10, 2008

VOICE OF AMERICA: Home, “ US Financial Crisis Slows Immigrant Workers’ Remittances”, October 9, 2008, 2007

INTERNATIONAL LABOUR ORGANIZATION: Home, “Migrant Worker Remittances,Micro-finance and the Informal Economy: Prospects and Issues”, July, 1999

RURAL FINANCE: Home, “Worker’s Remittances and Microfinance: the neglected nexus”, June, 2003