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
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