How can we improve the development impact of migrant remittances?

BERLIN — Remittances are already a lifeline for many people in developing countries — but with reforms to the system, leaders across Europe and Africa believe they could become a key driver of global development.

In 2016, foreign workers sent $429 billion in remittances to developing countries through formal channels, according to the World Bank. That is more than three times higher than official development assistance allocated in the same year — and the true figure is higher still. Since most transfers are done through informal channels, officials say it is difficult to estimate the actual total.

But the system is plagued by problems, including issues surrounding access, transparency, bureaucratic hurdles, and — most seriously — significant fees and charges attached to even the smallest transaction. The World Bank reports that the average worker sending $200 back to his family in the first quarter of 2017 had to spend 7.45 percent — about $15 — on fees and charges. And that figure does not take into account the time or expense that the person receiving the money spends on traveling to an institution and recovering it.

At a household level, those costs are significant. But extrapolated to a global level, they are staggering — an estimated $32 billion a year.

There is now an international movement to improve the system, headlined by Sustainable Development Goal 10, which calls for the cost of migrant remittances to be slashed to 3 percent by 2030.

But the effort is not just about saving money. The African and European leaders who participated in the November 2015 Valletta Summit want to better position the vast value of remittances within the global development architecture.

Participants in the Valletta Summit saw what the drafters of the SDGs and others had earlier identified: charges to individuals that, if removed, could help pay for education and clean water and advance development at the community or national level. Working with recipients, officials could help guide money from remittances toward broader development priorities. Not just individual education, but better schools. Not just one latrine, but a neighborhood water and sanitation system.

"It's not only important from the perspective of people who deserve it and need it," said Mathieu Jacques, program manager for the ACP-EU Migration Action. Implemented by the International Organization for Migration, the Action, which is funded by the EU, works with governments and civil society organizations in Africa, the Caribbean, and the Pacific to improve policies on a variety of migration-related issues, including remittances. "It could be a substantially larger investment into the context where the money is being sent. It can be used to build communities up, promote equality and the diversification of economies," he said.

The interest of European leaders is not purely altruistic. Since 2015, development cooperation has been a key tool for officials desperate to stem the tide of migrants arriving in Europe. Learning more about how remittances are sent and spent, and re-directing the fees involved, are obvious steps toward improving financial security for individual families and living conditions for entire communities.

To that end, the Valletta Summit Action Plan promised to “promote cheaper, safer, legally-compliant and faster transfers of remittances” and to “facilitate productive domestic investments.” That would include programs to “increase the volume of transfers through formal remittance channels;” to “support financial education” of migrants and their families; and to “explore, identify and promote innovative financial instruments to channel remittances for development purposes.”

Two years out from the Valletta Summit, however, the cost of sending remittances has barely changed and informal systems still dominate, demonstrating the complexity of improving the situation. The effort will require more than the recognition of African and European leaders, experts told Devex, but also the participation of global financial institutions, the redrafting of policies and a better integration of emerging technology.

The value of remittances

Remittances are the lifeblood of many of Mali's rural communities, according to Oumar Sidibe, president of the Migration and Development Initiative, an NGO based in the country's capital, Bamako.

"There are not jobs in these regions," he told Devex — and few entities interested in helping create them. "There are a lot of people who live just because of remittances." With work so scarce in rural Mali, community members travel abroad, hoping to find a position and send money back. Their role becomes even more critical when a problem emerges back in Mali — someone falls ill or a student needs money for school fees. Then an emergency request for funds might go out. If they do not come or they are too little, Sidibe said, it can be ruinous.

The situation is a strain on the worker abroad, often in a low-paid position and scrambling both to make ends meet and find a way to help people back home. He must then factor in the cost of sending the money. Sub-Saharan Africa currently has the highest remittance costs of any region at 9.8 percent, according to the World Bank. Covering those fees may mean there is simply not enough left over for the surgery or the school term.

The more popular informal channels, including money transferred through friends and family members, can be cheaper than formal ones, and also skirt bureaucratic hurdles such as registering for a bank account. On the other hand, it can take longer for the money to arrive, by which time it might be too late.

There are also longer term consequences to the inefficiencies of the remittance system, because the money is not only spent on meeting immediate needs. Kenneth Coates, a development economist and professor at Rockefeller College, said that roughly 10 percent of remittances are typically saved by recipient communities, or else invested into microenterprises, which can help to sustain families and might eventually wean communities off their dependence on remittances.

"This impact can be leveraged by providing beneficiaries with financial literacy support at the community level, enabling them to make more informed decisions," he told Devex.

IMIGRAD, in collaboration with ACP-EU Migration Action and the Malian government, took the initial step of fostering microenterprises in five rural villages over six months last year. Sidibe said they worked with 30 villagers receiving remittances to use some of the funds to develop livestock businesses, and that 90 percent of the businesses were deemed a success. He hopes that will eventually translate into growth and future job creation. There should also be opportunities to layer financial literacy work onto the program.

Efforts like this demonstrate how remittances can be used to spur development. But that process could be accelerated by cutting down on remittance costs and moving more people into the formal system, which can help inform officials as they attempt to channel more of the hard-won funds into the communities they are intended for, and to track the effectiveness of the policies they create. Remittances could also be a first step in connecting people in rural Mali and across the developing world to the formal banking sector, opening up access to savings accounts and loan opportunities.

The challenge

"This is a more complex area than it should be," Leon Isaacs, a remittances expert and CEO of Developing Markets Associates, told Devex. "There are often two or three jurisdictions and a number of different parties involved." Isaacs recently documented some of the major hurdles, including opacity around exchange rates and fees — problems that are exacerbated by a lack of financial knowledge among both senders and recipients.

Most of the world’s major remittance corridors originate out of the United States or from the Middle East, with money going to countries including India, China, and Mexico. For countries in Africa, the majority of remittances are coming from Europe and the U.S. While not as large as some of those routes, Jacques said transfers within Africa are also a popular and important component of the remittance system.

On the sending side, some participants are blocked from formal channels because they do not have the necessary documentation to open a bank account — a particular issue for undocumented migrants. Isaacs also highlighted the issue of de-risking, where financial institutions refuse to open accounts, or can close existing ones, over perceived regulatory risks. This issue is especially pertinent for senders to parts of the world where there are concerns about money laundering or that funds might be filtered into terrorist organizations.

But most problems lie in recipient countries, where there are issues around exclusivity, with some money transfer companies pushing governments to introduce or maintain regulations that crowd other players out of the market. In some instances, these regulations force any new actors to coordinate with existing providers. In others, it restricts remittance services to financial institutions, which already have partnerships in place. There are also structural problems, including a scarcity of financial institutions where recipients can pick up their money.

By pushing participants into informal channels, these challenges reduce global understanding of the remittance system and stymie efforts to align spending with larger development goals.

What are the next steps?

Part of the problem is that there is only so much that European leaders alone can do. One of the few specific commitments to emerge from the Valletta Summit was a pledge to operationalize the African Institute for Remittances (AIR), which was originally created in 2015. The European Union is funding AIR to the tune of $5 million over five years, according to its executive director, Amadou Cisse. With that support, he said, AIR is working to remove some of the main roadblocks on the continent.

The institute launched with three goals: to reduce the costs of remittances; to improve statistical knowledge around the services; and to better leverage the money being sent.

"If you don't work on the costs, you won't be able to channel through formal channels," Cisse told Devex. "Then it will be difficult to implement any kind of policy. And without accurate data, you won't be able to monitor or evaluate policies."

On the ground, he said, the main challenges have been addressing the regulatory environments in countries that crowd out competition and help keep prices high. AIR is currently working with six African countries — Madagascar, the Democratic Republic of Congo, Mauritania, Ghana, Malawi, and Zimbabwe — to craft new policies that will open the remittance market and help bring fees down.

EU leaders are also funding other initiatives that could improve the conditions for sending and receiving remittances. In a bid to bring more transparency into the process, Germany runs a website comparing the different costs of foreign money transfers.

And individual member states — particularly Germany — have begun showing an interest in pioneering additional efforts. For example, German leaders organized a conference last month to open discussions about the remittance corridor from their country to Ghana — an important channel, but one that Cisse said is plagued by a lack of competition.

Opportunities for innovation are not limited to governments and institutions. Private sector and civil society organizations also have a role to play. For example, WorldRemit, a company launched in 2010, is using emerging technology to move away from traditional cash-based remittances and toward a cheaper, more efficient digital system. It has been particularly active in collaborating with mobile money networks — payment systems that are linked to mobile accounts and are hugely popular in many developing countries, particularly large swathes of Africa. Alix Murphy, WorldRemit's director of mobile partnerships, told Devex that 50 percent of the company's transactions in Africa are received in mobile money accounts.

While cheaper than most cash-based systems, "it's also the instantaneousness of it," Murphy said. "For people who live their whole life in cash, they're going to have to take time off work, go stand in line. Now they can get the money straight to their phones."

Some challenges have proven more complicated to address. That is particularly true of areas that involve multiple institutions and governments, such as creating policies that give people access to formal banking sectors, and de-risking.

Nevertheless, experts are confident that the range of advances happening in other areas mean remittance costs should soon start dropping. That, in turn, should encourage more people to enter formal channels and make it easier to fold remittances into larger development strategies.

"Quite frankly, it's fair," Jacques said. "Remittances can easily be leveraged toward doing good in communities they're going to. Reducing the cost of sending them is something everyone can get behind."

Update, Nov. 28: This story was amended to clarify that the ACP-EU Migration Action is fully funded by the EU

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