Remittances for financial inclusion

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Development Finance Impact Project Digital Artifact


<ul><li><p>Remittances for Financial Inclusion </p><p>Workers remittances have gained considerable attention over that last decade as an important tool for economic </p><p>development. It is undeniable that remittances have growth-enhancing </p><p>and poverty-reducing potential, yet a relevant question is how to insure </p><p>that these funds are used in the most effective way. </p><p>One of the most basic, yet important ways to unlock significant additional </p><p>value from these flows is to lower the transaction costs. According to as </p><p>stated in McKinneys article Innovative Development Financing each </p><p>percentage point of lowered remittance costs could unlock as much as </p><p>$3.3 billion per year for developing-country recipients. This goes also </p><p>hand in hand with the Sustainable Development Goal 10. Reduce </p><p>inequality within and among countries, which specifics that by 2030 </p><p>transaction costs shall be reduced to less than 3% and remittance </p><p>corridors with costs higher than 5% eliminated. However, despite the </p><p>obvious potential benefits to consumers of lower transaction costs, </p><p>international money transfers carry an average cost of 9% for remittance </p><p>transfers. Consequently, the numbers of successful mobile money </p><p>deployments for international remittances has not been as successful as </p><p>policy makers and donor agencies around the world originally predicted. </p><p>For example, the value of international remittances via mobile phones </p><p>exceeded $10 billion for the first time in 2013. This only accounts for </p><p>approximately 2% of a global remittance volume of $540 billion for that </p><p>year. The World Bank has estimated that the untapped diaspora bond </p><p>market could rise as much as $5 billion to $10 billion annually only to Sub </p><p>Saharan Africa, which furthermore highlights the slow development of </p><p>the mobile-money transfers. </p><p>From the private sectors point of view low value transfers and cash </p><p>deposits have traditionally not an attractive business since it requires </p><p>costly infrastructure of extensive reach. Banks and other financial service </p><p>providers have thus neglected lower income households and focused on </p><p>the already banked population. As a result, 2.5 billion people </p><p>worldwide, almost half of the worlds adult population, have difficulties in </p><p>accessing basic financial services. 2.2 billion of these live in developing </p><p>countries and are classified as financially excluded. </p><p>Financial exclusion worldwide </p></li><li><p>From this follows that large volumes of remittances are passing through </p><p>informal channels, thereby hampering its potential to foster economic </p><p>and social development. </p><p>In an attempt to learn more about development finance I started </p><p>exploring the potential for remittances to bring banking to the bankable </p><p>through mobile services a few years back. I wanted to know what had </p><p>made Kenya and the Philippines renowned mobile-money payment </p><p>systems M-Pesa and GCash so successful and if these two systems had </p><p>been or could be the access point to more advanced banking services </p><p>such as saving accounts, credit and insurances. </p><p>My results show that the critical element for the development of M-Pesa </p><p>and GCash seems to have been the alignment of interest amongst </p><p>participants in the mobile money ecosystem. Both countries had </p><p>established mobile money enabling environments by imposing </p><p>progressive and flexible regulatory frameworks. This allowed the mobile </p><p>operators to think outside of the box and develop new and innovative </p><p>ways to offer financial products. International development agencies had </p><p>also contributed, primarily by funding the early risk, and so creating the </p><p>necessary incentives for relevant stakeholders to commit and invest time, </p><p>money and other resources into these ecosystems. </p><p>When it comes to promoting financial inclusion, both systems have been </p><p>successful but only to a certain degree. My review of current data showed </p><p>that low-income households in remote areas still did not save their </p><p>remittances in interest-earning accounts, nor were they accessing credit </p><p>and insurances. High transfer charges may in fact have delayed the </p><p>uptake of these downstream actives. In order to maximise the impact of </p><p>remittances on financial inclusion it is thus important to secure that </p><p>remittance receivers are able to take advantage of bank-integrated </p><p>mobile-based services. </p><p>Some of the actions to unlock these potential benefits for low-income </p><p>groups and people living in remote areas include: </p><p>(i) to promote competition in the international remittance market in </p><p>order to offer efficient, accessible, and low-cost remittance transfer </p><p>services </p><p>(ii) to develop customised savings, credit, and insurance services, </p><p>accessible from mobile devices and/or non-bank agencies </p><p>(iii) to enhance the financial literacy by delivering more financial </p><p>education </p><p>(iv) to offer better access to product and price information </p></li></ul>