A migrant farm worker in central California wires 300 US dollars of his monthly wages back to his family in Mexico. Halfway around the world, a craftsman in the outskirts of London carries out a similar transfer - perhaps 200 British pounds - to his family in Poland.
 | Money transferred from abroad is a vital source of capital for poor households and a potential vehicle for community development. (Photo: Reuters) |
On the surface they may seem like small money transfers, but when one considers that such transactions take place millions of times around the world each week, the numbers start to add up.
According to the World Bank, the annual global market for remittances - money transferred home from migrant workers - is around 167 billion US dollars. The estimated total is closer to 230 billion dollars if one counts unregulated transactions. Remittances are also an important source of income for many developing countries, including India, China and Mexico, all of which receive over 20 billion dollars each year in remittances from abroad.
Remittances are an economic lifeline for millions of transnational families. Money transferred from abroad is a vital source of capital for poor households and a potential vehicle for community development. What the Los Angeles Times recently called "private aid from the poor to the poorer," remittances enable many families to afford health care, education, and sometimes even invest or start a business.
Many experts and governments agree that transaction costs and access to remittance services need to improve. Some estimates suggest that money transfer agents charge an average of 13 percent - and sometimes up to 20 percent - on each transaction, which naturally cuts into the amount that migrant works can send home.
Improving access, reducing costs
Gradually, the specialized money transfer companies that have long dominated the remittance market, such as Western Union, Vigo and Moneygram, have begun to offer more accessible and price-competitive services. According to Lenora Suki of the Earth Institute at Columbia University, this is partly due to increasing competition from banks, credit unions and microfinance institutions (MFIs), which have recognized a growing market and global need.
"Access has already expanded greatly through increased competition, more streamlined business models and increased use of technology," says Suki. "The leadership of certain banks and microfinance institutions in the United States, Europe and Asia has illustrated that remittances have great potential to lower costs and expand the range of services available on the sending and receiving sides."
Recent international bank involvement in the remittance market includes the "One World" money transfer services launched by HSBC, the flat-rate remittances from Citigroup's Mexican subsidiary, Banamex, and a partnership between the World Council of Credit Unions and Vigo in Kenya. Meanwhile, some microfinance providers, such as ACCION International, have teamed up with international banks and other MFIs, to expand microbanking services to low-income households.
Governments have also recognized the need to lower transaction costs for those who send or receive money from abroad. As part of its 2004 "Action Plan for Poverty," the Group of Eight (G8) industrialized nations set out to address longstanding barriers - such as high transaction costs and infrastructural problems - that obstruct the flow of money to low-income households in the developing world.
The issue of remittances, however, remains controversial. Some critics refer to remittances as a development "band-aid" - an inadequate treatment for the deep-seated economic problems that exist in many countries. Others argue that some countries have become overly reliant on remittances, and that remittances encourage migration and "brain drain" from developing countries.
Integrating money transfers with other banking services
But many of those who doubt that remittances can propel long-term economic growth at the national level still acknowledge that cheaper and improved remittance services could help many poor families emerge from poverty, particularly when these services can be combined with other basic financial and banking tools.
"When we talk about remittances going into countries, we should ask whether the people who receive them - some of whom are at the margins of society - also receive products they can use to save and build credit," says Arun Kashyap, policy adviser for at the United NationsDevelopment Program (UNDP).
Many of the barriers that prevent access to affordable remittances - such as regulatory hurdles, poor infrastructure, lack of financial literacy and confidence among potential clients - are the same problems that obstruct the expansion of microfinance, generally. But as more banks, MFIs and governments get involved, remittances could play an important role alongsidemicrofinance in promoting economic growth in many parts of the developing world.
publishing date: January 2, 2007
editor: Valdis Wish
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