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Africa: The High Cost of Remittances
AfricaFocus Bulletin
April 24, 2014 (140424)
(Reposted from sources cited below)
Editor's Note
"Remittances from African migrants play a vital role in supporting
health, education, food security and productive investment in
agriculture. Yet many of the benefits of remittance transfers are
lost in intermediation as a result of high charges. Africa's diaspora
pays 12% to send $200 - almost double the global average." - Overseas
Development Institute
The positive impact of remittances on development has gained much
attention in recent years, both from international agencies and from
governments. But, argues a new report from the Overseas Development
Institute, the high cost of remittances in fees paid to
intermediaries, such as the dominant companies Western Union and
Moneygram, takes an enormous cut from the potential. Africans in the
diaspora sending money back to their families, both from outside the
continent and between countries in Africa, pay extraordinarily high
fees. Reducing these fees to the world average, by increasing
competition and better regulation, could provide an estimated $1.8
billion a year in additional resources to recipient countries and
families.
This AfricaFocus Bulletin contains excerpts from this report,
particularly the key messages and executive summary. For the full 36-
page report, with figures, tables, and documentation, visit
http://www.odi.org.uk/remittances-africa
For previous AfricaFocus Bulletins on migration, remittances, and
related questions, visit http://www.africafocus.org/migrexp.php
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Lost in intermediation: How excessive charges undermine the benefits
of remittances for Africa
Kevin Watkins and Maria Quattri
Report - April 2014
Overseas Development Institute
http://www.odi.org.uk/remittances-africa
Key messages
- Remittances from African migrants play a vital role in supporting
health, education, food security and productive investment in
agriculture. Yet many of the benefits of remittance transfers are
lost in intermediation as a result of high charges. Africa's diaspora
pays 12% to send $200 - almost double the global average.
- In effect, Africans are paying a remittance 'super tax'. Reducing
charges to world average levels and the 5% G8 target would increase
transfers by $1.8 billion annually. That figure is equivalent to the
sub-Saharan African cost of paying for the education of some 14
million primary school age children - half of the out-of-school
total; improved sanitation for 8 million people; or clean water for
21 million.
- Weak competition, concentration of market power and flawed
financial regulation all contribute to high remittance charges. Just
two money transfer operators (MTOs) - Western Union and MoneyGram -
account for two-thirds of remittance transfers. We conservatively
estimate that the two companies account for $586 million of the loss
associated with the remittance 'super tax', part of it through opaque
foreign currency charges. 'Exclusivity agreements' between MTOs,
their agents and banks restrict competition and drive up prices, as
do African financial regulations favouring banks over other
remittance payment options.
- Governments and regulatory authorities in sending countries should
do far more to promote competition and encourage innovation.
Financial regulators - such as the UK's Financial Conduct Authority -
and legislative bodies should actively review the practices of MTOs.
All regulators should demand higher standards of transparency for
foreign exchange charges, as envisaged in the Dodd-Frank legislation
adopted by the US. African governments should do more to secure a
better remittance deal for their citizens. Prohibiting exclusivity
agreements is one immediate priority, along with ending the
stranglehold of banks on remittance payments.
Executive summary
Remittances - the money sent home by migrant workers - play a vital
role in Africa. They help to pay for health, education and productive
investment in agriculture. During periods of crisis they provide a
financial lifeline. For many economies in the region, remittance
transfers now occupy an important position in the balance of
payments. Yet Africa is failing to secure all of their potential
benefits. No region faces higher charges for remittance transfers. In
effect, Africa's diaspora face a 'remittance super tax' that hurts
families and holds back development.
There is no justification for the high charges incurred by African
migrants. In an age of mobile banking, internet transfers and rapid
technological innovation, no region should be paying charges at the
levels reported for Africa. In this report we argue that market
concentration in the global money transfer industry, financial
regulation in Africa, and high levels of financial exclusion are
driving up costs.
Remittances to Africa are rising. In 2013, transfers to the region
were valued at $32 billion, or around 2% of GDP. Projections to 2016
suggest that remittances could rise to over $41 billion. With aid set
to stagnate, remittances are set to emerge as an increasingly
important source of external finance.
Charges on remittances to Africa are well above global average
levels. Migrants sending $200 home can expect to pay 12% in charges,
which is almost double the global average. While the governments of
the G8 and the G20 have pledged to reduce charges to 5%, there is no
evidence of any decline in the fees incurred by Africa's diaspora.
Remittance corridors within Africa have some of the highest charge
structures in the world. Migrant workers from Mozambique sending
money home from South Africa, or Ghanaians remitting money from
Nigeria can face charges well in excess of 20%.
Why does Africa face such high remittance charges? That question is
difficult to answer because of the highly opaque nature of remittance
markets and the complex range of products available. Much of the
relevant commercial information needed to establish detailed
structures is unavailable.
However, three factors combine to drive up charges. The first is
limited competition. Global markets are dominated by an oligopoly of
money transfer operators (MTOs) and regional markets by a duopoly:
Just two companies - Western Union and MoneyGram - account for an
estimated two-thirds of remittance pay-out locations in Africa. As in
any market, limited competition is a barrier to cost reduction and
efficiency gains. Second, there is evidence of 'exclusivity
agreements' between MTOs, agents and banks. These agreements restrict
competition in an already highly concentrated market.
Third, financial exclusion and poor regulation in Africa escalate
costs. Few Africans have access to formal accounts (which limits
access to pay-out providers) and most governments require payments to
take place through banks, most of which combine high costs with
limited reach and low efficiency.
No measure would do more to strengthen the development impact of
remittances than a deep cut in charges. Cutting the 'remittance super
tax' would enable Africa's diaspora to make a bigger contribution the
region's development. It would also strengthen self-reliance. Unlike
aid, remittances put money directly into people's pockets, providing
a source of investment and support for consumption.
In this report we estimate the additional finance that would be
generated under a range of charge-reduction scenarios. We build these
scenarios by comparing current charges in Africa with two benchmarks:
the current global average charge of 7.8% and the 5% target charge
set by governments. We treat the gap between current charges and
these benchmarks as indicative of the lower-and upper-bound estimates
for the 'remittance super tax'. Converting that gap into financial
terms, we estimate that Africa is losing between $1.4 billion and
$2.3 billion annually as a result of high remittance charges.
Tracing this implicit loss through the remittance system is a
hazardous enterprise. Africa's diaspora is linked to families,
friends and communities through a complex web of intermediaries. The
commercial terms on which MTOs interact with African banks are not
widely available. Similarly, the real costs associated with
regulatory compliance, foreign currency trade, agent fees and other
dealings are largely unknown.
Despite these limitations it is possible to derive some indicative
figures. Using market share (as defined by share of payment outlets)
as a proxy for indicative shares in the 'remittance super tax',
operations involving MTOs would account for between $807 million and
$1.3 billion of our estimated global loss. As market leaders, Western
Union and MoneyGram would account for $586 million of the revenue
loss associated with the gap between African and world average
charges.
...
The potential for development gains through lower remittance charges
can be illustrated by reference to current aid flows. For comparative
purposes we use a mid-range figure between our upper-bound and lowerbound
estimates of $1.8 billion. This is equivalent to half of the
aid provided to Africa by the UK, the region's third largest
bilateral donor, or some 40% of transfers to Africa through the World
Bank's International Development Association (IDA) - the largest
source of multilateral aid for Africa.
Viewed from a different perspective, a diversion of revenues
associated with the remittance super-tax into education would
provide, at current financing levels, sufficient resources to put
around 14 million primary school-aged children into school - almost
half of the out-of-school population for the region. Alternatively,
it could finance access to improved sanitation for 8 million people,
or the provision of safe water for 21 million people.
This report calls for a number of measures to lower Africa's
'remittance super tax', including:
- Investigation of global MTOs by anti-trust bodies in the EU and the
US to identify areas in which market concentration and commercial
practices are artificially inflating charges.
- Greater transparency in the provision of information on foreignexchange
conversion charges, drawing on the example of Dodd-Frank
legislation in the United States. * Regulatory reform in Africa to
revoke 'exclusivity agreements' between MTOs on the one side, and
banks and agents on the other, and promote the use of micro-finance
institutions and post offices as remittance pay-out agencies.
Governments and MTOs should work to promote mobile banking as a
strategy to support the development of more inclusive financial
systems.
- Engagement by Africa's diaspora and wider civil-society groups to
put remittances at the centre of the development agenda. The public
interests represented by Africa's diaspora and remittance receivers
should be placed above the commercial interests of MTOs and banks in
the regulation of remittance systems.
Introduction
Economic remittances from migrants are an important and growing
source of finance for Africa. These remittances represent a source of
opportunity and, for many, a financial lifeline during periods of
hardship. Yet Africa is failing to realise the full potential of
remittances.
Migrants from Africa, the world's poorest region, face the highest
charges on remittances. At an average of just over 12%, these charges
are almost double the global average (excluding Africa). If
remittance charges were reduced, there would be a double benefit: the
overall flow of transfers would increase and a greater share of the
transfer would reach the intended beneficiaries.
The excessive charges levied on African remittances raise wider
questions. Migrant workers make enormous sacrifices to secure the
higher income that comes with changed location. They bring farreaching
benefits to destination countries, generating economic
growth, meeting demand in labour markets and creating more diverse
societies. Many take considerable risks in moving to higher-income
countries. Yet the international community and Africa's own
governments are failing to support their efforts to improve their
lives, support their families, and promote self-reliant development.
This paper makes the case for putting remittances at the centre of
international cooperation on development. ...
While highlighting a wide range of potentially innovative options [to
increase the development impact of remittances] - including diaspora
bond issues and partnerships between diaspora and local governments -
it offers a simple message: namely, no measure would have a greater
impact than deep cuts in the costs of intermediation.
1. Africa in the global remittance economy
Remittance flows to developing countries have increased rapidly over
the past decade. They reached $414 billion in 2013 - some four times
the level in 2000 (World Bank, 2013a). To put these transfers in
context, they represent around three times the level of aid. In
addition, remittance transfers - unlike aid - are on an upward
trajectory and are projected to reach $540 billion by 2016 (World
Bank, 2013a).
Africa has been part of a global remittance boom. In 2013, African
migrants remitted around $32 billion - equivalent to around 2% of
regional GDP (World Bank, 2014). Although sub-Saharan Africa (SSA)
currently receives around 8% of reported global remittances,
transfers grew by some 6% between 2012 and 2013. World Bank
projections suggest that remittances to the region will grow at
around 8.6% over the next few years, reaching $41 billion by 2016
(Figure 1). While official development assistance (ODA) still exceeds
remittance transfers, the gap will narrow if these projections are
correct.
Despite the projected growth estimates, remittance transfers to
Africa have been increasing far more slowly than those to other
regions. From 2009 to 2012, remittances to SSA were growing at an
average rate of just 2% a year (World Bank, 2013a). This is less than
half of the average for all developing regions and just one-fifth of
the increase reported for South Asia. Only Latin America has reported
a lower rate of increase, reflecting the impact of the US recession.
The high charges incurred by African migrants, the focus of this
paper, have almost certainly limited SSA's rate of growth.
Levels of dependence on remittances vary across Africa (Table 1).
Nigeria accounts for 68% of total transfers to the region - some $20
billion in 2012 - and is the world's fifth largest recipient in
absolute terms (World Bank, 2013a). Four countries report remittance
transfers in excess of $1 billion: Nigeria, Senegal, Kenya and Sudan.
Measuring remittances as a share of GDP provides a different
perspective. There are nine SSA countries in the region for which
remittances constitute more than 5% of GDP, rising to over 20% for
Lesotho and Liberia.
...
3.The high cost of remittances to Africa
The high charges associated with remittance transfer to Africa have
long been recognised as a constraint on development. Yet
international efforts to reduce those charges have achieved limited
results - in fact, recent evidence suggests that remittance charges
may be rising (World Bank, 2013a).
At one level, the persistence of high charges in remittance markets
is something of an enigma. New business models and new technologies
are transforming financial services across the world. The extension
of mobile phone ownership and rise of mobile banking is reducing
dependence on fixed location access points and mobile transfers have
been associated with increased financial inclusion and reduced costs.
One of the most striking examples comes from Africa. The M-PESA
network in Kenya is now one of the world's largest mobile money
operators. Launched in 2007 by Safaricom, the country's largest
mobile-network operator, M-PESA is now used by
over 17 million Kenyans - some two-thirds of the adult population.
Yet despite the pervasive coverage of such mobile networks across
Africa, technological innovation has yet to drive down costs in
remittance markets. The barriers to cost-reduction include an
oligopolistic international market reinforced by financial regulation
in favour of a small number of banks.
...
When Africa's migrants send remittances home, they enter markets
characterised by a concentration of market power. The 'big four' MTOs
are Western Union, MoneyGram, Ria Financial services and Sigue.
Western Union alone accounts for an estimated one-fifth of
international remittance transfers - some $80 billion in 2011.
MoneyGram, the second largest company, transfers around $20 billion
annually. In the case of Africa, the two companies exercise what
amounts to a duopoly in most countries (see below).
Remittance trade generates large revenues. In 2012, Western Union
reported an operating income margin of 28% on $3.5 billion in
transaction fees and $988 million in foreign exchange revenues
(Western Union, 2012). MoneyGram reported margins of 20% on revenues
of $1.4 billion (MoneyGram, 2014). Both companies have registered
strong growth in revenues, reflecting a wider increase in crossborder
remittances. The Middle East and Africa have been Western
Union's fastest growing market, with 7% growth in 2012. Revenues on
foreign exchange transaction have grown at a prolific rate, with
Western Union achieving 16% growth in 2012 (Western Union, 2012).
...
Africa's high charge remittance corridors
It is not just on international remittances that African migrants
face excessive charges. People crossing borders within the region as
seasonal workers or traders face charges far higher than those for
OECD-Africa corridors.
All of the world's top ten remittance-charging corridors are to be
found in SSA, with South Africa and Tanzania figuring in all but one
of these corridors. Workers from Malawi, Mozambique and Zimbabwe
employed in South Africa, and Ugandans remitting money home from
Kenya face charges well in excess of 20% if they conduct the transfer
through banks. MTOs have lower charge structures, but these are still
well above OECD- Africa levels. ...
Conclusion
Remittances already play a significant role in Africa's development.
They could, however, play a far greater role. No measure would do
more to unlock the full potential of remittances than a cut in
charges. Achieving this goal will require some significant changes -
in banking regulations, in the practices of money transfer operators,
and in approaches to new technology. The introduction of more
competitive markets with appropriate safeguards for financial
integrity is long overdue. Yet despite a number of high-level
initiatives, there is little evidence of charges coming down. This
picture is unlikely to change until the reform of remittances is
taken up as a development priority by governments in Africa, the G20
and civil-society groups, including African diaspora organisations.
AfricaFocus Bulletin is an independent electronic publication
providing reposted commentary and analysis on African issues, with a
particular focus on U.S. and international policies. AfricaFocus
Bulletin is edited by William Minter.
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