Written by Jens Ischebeck
Remittances are a
major source of foreign cash inflows for most developing countries. The year
2018 has seen tremendous growth with some countries reporting an increase of
4.24% in remittances.
The World Investment Report for 2018 showed that global remittances stood at $466 billion in 2017, which is beyond the other sources of external finance like Overseas Development Assistance, long-term and short-term loans, as well as portfolio investments.
Africa alone had remittance inflows of $65 billion with countries like Kenya, Nigeria, Ghana, Ethiopia and Egypt taking up the largest share. E.g. Malawi received in 2017 12 million USD from South African senders and 10 million USD from senders in Zimbabwe.
This growth is attributed to the notable recovery of the global economy and the increasing need for immigrants to make significant investments in their homes of origin.
A rising number of these countries adapt new financial technologies to support the money flows, e.g. allowing international money transfer apps.
What is a Remittance?
These are funds sent by an expatriate or immigrant to his country of origin. He can use mail, online or wire transfer to send the cash. Remittances promote economic development, and in some countries, they act as essential disaster relief aid that exceeds the ODA.
The money also helps less developed countries to open bank accounts. The process of remitting cash to these countries is entrusted to specific money transfer companies though users can do it using their phones, credit cards and other channels.
It is crucial for the sender to use channels that reduce the waiting time for the recipient, which is also referred to as the remittance float. It is the time taken for the recipient to receive the cash.
For example, if an immigrant is sending a cheque to his parent, child or significant other via mail, the time taken to send, present it to the bank and deposit the money to the beneficiary’s account is the remittance float.
Senders can reduce the remittance float as much as possible by using the fastest means of making the transfer. Mobile money remittances have made this process easier as the recipient receives the cash instantly.
Choosing a Money Transfer Channel
Before the emergence of mobile money transfers for cross-border transactions (see also my popular article “Clever Money on Mobile Solutions for Africa”), Moneygram and Western Union were the most popular companies that were used to move money online. A sender had to visit a money transfer office and provide the recipient’s details and the money.
The recipient would then allow the money to be deposited in their accounts or collect it in cash at a location near them. Based on the countries involved, the sender has the option of using Western Union and Moneygram or PayPal or money transfer operators (MTO).
The methods differ based on your location, transfer fees and your bank, among other factors. The most common methods include:
International Wire Transfer
This method is used by
senders who want to move cash from one bank account to another using the SWIFT
network. The sender calls the local bank branch or uses the bank’s online app
to initiate the transaction.
The networks comprise other banks across the world that work together to ensure the money is sent to the right individual. It is relatively expensive compared to other transfer methods because the sending and receiving bank attract transfer fees.
Paypal is the most prominent online transfer channel though other media like Skrill have been developed. Successful transfers require the sender and the recipient to create an account with the respective money transfer company.
This transfer method is ideal for those looking for convenient transfer methods especially if you are converting between different currencies. However, the transfer costs can range between 3-13%.
Using a Cheque or Sending Cash
In this case, you need to write a check and send it via mail to the recipient. It is a rather slow method, and there is a high chance of the cheque getting lost or getting stolen or damaged.
Additionally, countries like Belgium, Germany, Scandinavian, Austria and Netherlands prohibit the use of cheques. To overcome these problems, visit a Western Union or Moneygram office as they offer online transfers too.
Bitcoin based transfers
A chapter for its own are money transfers based on using cryptocurrencies as medium. South Africa is leading the bitcoin adaption in Africa and the country shows the feasibility of the cryptocurrency application for many users each day. E.g. the numbers of bitcoin to rand sales climbed up remarkably.
Cost of Remittance in Africa
Studies reveal that it costs more to send money to Africa compared to other continents. This implies that fees charged for online money transfers in the continent consume a majority of the cash sent in the first place, meaning communities, families and individuals end up receiving less money than the intended amount.
According to World Bank figures, remittances cost almost 10% of the payment amount while the global rate is slightly over 7%. This setback is attributed to various factors such as inefficiencies in processes, online money transfer companies charging exorbitantly and excessive bank regulations just to mention a few.
Reasons for High Remittance Charges in Africa
Excessive bank regulations are implemented to make sure that online money transfer companies do not help in money laundering practices. The checks have a positive influence in discouraging and deterring terrorist funded activities, however, they throw the cost of remittance through the roof, adversely affecting innocent people that are receiving money legally. Reducing the number of regulations for transactions on small amounts will be advantageous to recipients.
Secondly, in most African countries, natives do not have a choice on which online money transfer company to use. This is usually the case since government owned post office possesses exclusive rights to partner with a particular money transfer company. Since most individuals have access to the post office, they are by default the exclusive remittance points especially for those living in rural areas. The effects of monopoly in business are well known since they have the free will to charge higher transaction fees.
Banking networks that form a correspondence attribute to the high remittance overhead charges. Transferring money from one country to another forms a rigorous process that involves various sister or partner banks. In such a scenario, each bank claims a fee in processing payment, a feature that has a domino effect on the final cost of the transaction which is paid for by the sender.
Jens Ischebeck is an Africa focused website publisher. The main sites are apps-for-money-transfer.com and Bitcoin-Guide-Africa.com (both cover the international money transfer tools for inward and outward remittances) and fast-bachelor-degree.com (accelerated bachelor degree by online studying).