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Time to rethink ‘predatory’ remittance charges

by Evan Pickworth, 05 December 2012, 09:10
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Picture: THINKSTOCK
Picture: THINKSTOCK

EMOTIONS boil over easily on the topic of high remittance charges, but the full story is more complicated.

Remittances are critical in Africa as they surpass direct investment in a number of countries.

One online campaign calls the practices of one company in this business “predatory”, however, and while there are enough personal anecdotes to raise hackles, the problem relates largely to a lack of competition and too much red tape in Africa — familiar challenges that affect so many areas of business on the continent.

The call is to see fees drop to a more justifiable 5%, and the aim is to raise a bigger public outcry online. One example used is of a poor Kenyan student in the Netherlands who paid 20% of the money meant for his family in fees. If exchange fees are added, the position is even worse.

In one respect it is strange that since 2010, only 383,874 petitioners have signed one of the pledges I saw — the target is 500,000. This is not a high number considering how much money is being transferred, but the first target, of 250,000 petitioners, was reached comfortably. It may not be significant enough to encourage big money-transfer companies to think twice about paying their CEOs exorbitant bonuses off the money of poor people, but there are certainly many concerned people around the world demanding change.

The United Nations Conference on Trade and Development, in its recently released Least Developed Countries Report 2012, is a little more nuanced on the impact of high charges. But it does make the point that annual remittances sent to sub-Saharan Africa could have generated an additional $6bn for recipients if the cost of remitting money had matched the global average — it is 30% higher in sub-Saharan Africa.

It is concerning that South Africa, the most developed African country, is the most costly corridor globally from which to send money. To repatriate $500 to Malawi, the charge, including exchange rate margins, is as much as $65.18, according to an online remittance calculator. To Zambia it is $60.65, to Botswana $59.44 and to Mozambique $57.05, making South Africa the most costly corridor by far, ahead of fifth-placed Singapore to Pakistan at $56.96. The least costly corridor, by contrast, is Saudi Arabia to Yemen at just $6.82.

According to the World Bank’s Migration and Development Brief, new estimates show that the top recipients of remittances among developing countries last year were India ($58bn), followed by China ($57bn), Mexico ($24bn) and the Philippines ($23bn). Other large recipients in dollar terms are Pakistan, Bangladesh, Nigeria, Vietnam, Egypt and Lebanon. However, small and low-income countries such as Tajikistan, Lesotho, Nepal, Samoa and Tonga tend to receive high proportions of remittances as a share of their gross domestic product.

Dilip Ratha, senior economist and manager of the migration and remittances unit at the World Bank, spoke to financial daily Livemint recently about the fact that remittance flows remained strong in the financial crisis against widely held expectations they could drop badly as especially European countries cut back.

Many reasons had not been anticipated for the lack of decline during the global recession and crisis, Ratha said. Migrants simply refused to return to their home countries, preferring to cut back themselves by sharing accommodation and cutting consumption, meagre as it is. Another was stricter immigration rules raising fears that once they left a more prosperous country, they would not get back in again.

The UN says the value of remittances doubled between 1990 and 2000, and tripled in the following decade to a staggering $489bn in 2011.

There is no question the remittance market needs to be closely regulated — especially if laundered money is being transferred. But closing the door to competition is not the answer, and an overreliance on remittances is not good either — it prevents diversification and growth locally.

Growth of “branchless banking” channels will soon change the landscape more dramatically, but there is still some resistance and more traditional forms of remittance provision continue to dominate.

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