Transcript
Page 1: Remittances for financial inclusion

Remittances for Financial Inclusion

Workers’ remittances have gained considerable

attention over that last decade as an important tool for economic

development. It is undeniable that remittances have growth-enhancing

and poverty-reducing potential, yet a relevant question is how to insure

that these funds are used in the most effective way.

One of the most basic, yet important ways to unlock significant additional

value from these flows is to lower the transaction costs. According to as

stated in McKinney’s article Innovative Development Financing each

percentage point of lowered remittance costs could unlock as much as

$3.3 billion per year for developing-country recipients. This goes also

hand in hand with the Sustainable Development Goal 10. Reduce

inequality within and among countries, which specifics that by 2030

transaction costs shall be reduced to less than 3% and remittance

corridors with costs higher than 5% eliminated. However, despite the

obvious potential benefits to consumers of lower transaction costs,

international money transfers carry an average cost of 9% for remittance

transfers. Consequently, the numbers of successful mobile money

deployments for international remittances has not been as successful as

policy makers and donor agencies around the world originally predicted.

For example, the value of international remittances via mobile phones

exceeded $10 billion for the first time in 2013. This only accounts for

approximately 2% of a global remittance volume of $540 billion for that

year. The World Bank has estimated that the untapped diaspora bond

market could rise as much as $5 billion to $10 billion annually only to Sub

Saharan Africa, which furthermore highlights the slow development of

the mobile-money transfers.

From the private sector’s point of view low value transfers and cash

deposits have traditionally not an attractive business since it requires

costly infrastructure of extensive reach. Banks and other financial service

providers have thus neglected lower income households and focused on

the already “banked” population. As a result, 2.5 billion people

worldwide, almost half of the world’s adult population, have difficulties in

accessing basic financial services. 2.2 billion of these live in developing

countries and are classified as financially excluded.

Financial exclusion worldwide

Page 2: Remittances for financial inclusion

From this follows that large volumes of remittances are passing through

informal channels, thereby hampering its potential to foster economic

and social development.

In an attempt to learn more about development finance I started

exploring the potential for remittances to bring banking to the ‘bankable’

through mobile services a few years back. I wanted to know what had

made Kenya and the Philippines renowned mobile-money payment

systems M-Pesa and GCash so successful and if these two systems had

been or could be the access point to more advanced banking services

such as saving accounts, credit and insurances.

My results show that the critical element for the development of M-Pesa

and GCash seems to have been the alignment of interest amongst

participants in the mobile money ecosystem. Both countries had

established mobile money enabling environments by imposing

progressive and flexible regulatory frameworks. This allowed the mobile

operators to think outside of the box and develop new and innovative

ways to offer financial products. International development agencies had

also contributed, primarily by funding the early risk, and so creating the

necessary incentives for relevant stakeholders to commit and invest time,

money and other resources into these ecosystems.

When it comes to promoting financial inclusion, both systems have been

successful but only to a certain degree. My review of current data showed

that low-income households in remote areas still did not save their

remittances in interest-earning accounts, nor were they accessing credit

and insurances. High transfer charges may in fact have delayed the

uptake of these downstream actives. In order to maximise the impact of

remittances on financial inclusion it is thus important to secure that

remittance receivers are able to take advantage of bank-integrated

mobile-based services.

Some of the actions to unlock these potential benefits for low-income

groups and people living in remote areas include:

(i) to promote competition in the international remittance market in

order to offer efficient, accessible, and low-cost remittance transfer

services

(ii) to develop customised savings, credit, and insurance services,

accessible from mobile devices and/or non-bank agencies

(iii) to enhance the financial literacy by delivering more financial

education

(iv) to offer better access to product and price information


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