Reducing Remittance Costs to Africa: A Path to Resilient Financing for Development

parth.kukadiya — Fri, 23 Jun 2023 15:19:00 +0000

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By Kavazeua Katjomuise and Liwaaddine Fliss

Sending money back home can be a daunting task for African migrants. What should be a straightforward process often becomes a laborious, stressful situation. Take the case of a friend’s relative, for example. While he needed to support the healthcare of a loved one in Africa and wanted to wire money through existing commercial channels, he faced high transfer fees. He did not want to lose a substantial amount of the funds he planned to transfer, so he sent the money through informal channels, exposing himself to the security challenges such a method carries, including fraud and theft. Sadly, this scenario is too common for Africans living abroad who want to wire money home to family and loved ones but face exorbitant transfer fees and inordinate risks that dampen the impact of their support.

The strategic importance of remittances to Africa

Remittances are a critical source of external finance for Africa, with over 200 million African family members leveraging their availability. For many households, they are the difference between survival and destitution, between going to bed on an empty stomach and having a meal. Over the last decade, remittance flows to Africa doubled, reaching $100 billion in 2022, surpassing the funds received through Official Development Assistance (ODA) and Foreign Direct Investment (FDI). In some African countries, remittances represent over 20 percent of Gross Domestic Product (GDP), highlighting their importance to the economy. A recent study by the United Nations Office of the Special Adviser on Africa (OSAA) established that remittances have important income-equalizing effects, and lower transfer costs are usually associated with higher remittance flows. Remittances are also resilient during crises, such as the COVID-19 pandemic, remaining stable and providing a lifeline to millions of African families while other external sources of finance decline sharply. On the continent, Egypt is among the top five remittance recipients globally, and together with Nigeria and Morocco, accounted for 65 percent of the total remittances flowing into Africa in 2022.

Excessive transfer costs and the challenges facing remittances

Reducing the high transfer cost of remittances is key to harnessing their potential and mobilise increased financial flows to Africa. This cost is the highest globally, hampering initiatives to leverage remittances as a source of development finance for the continent. According to the World Bank, the average cost of sending $200 to Africa was 8.5 per cent of the amount transferred compared to less than 6 per cent globally in 2022. Sending money to some African countries, such as Angola, Botswana and Namibia, can sometimes cost as high as 20 per cent of the amount transferred. The international community's commitment to reduce the cost of remittances to less than 3 percent by 2030, as part of the Sustainable Development Goals (Goal 10, Target 10.c), also remains unfulfilled, including the objective of reducing the transfer cost in certain corridors to below 5 percent by 2030. Several factors contribute to this situation, including the low degree of competition in these corridors, the lack of information on the different cost service options, the limited number of migrants in the sender’s country of residence, the instability of the exchange rate in the recipient country, the low level of financial development and the utilization of high-cost transfer instruments such as cash and bank transfers.

Exploring solutions to maximize the potential of remittances

A Global Forum to mobilize, engage and act

The Global Forum on Remittances, Investment and Development (GFRID), which the International Fund for Agricultural Development (IFAD), OSAA, and the World Bank convened from 14 to 16 June in Nairobi, Kenya, provided an opportunity to shed light on the challenges facing remittances, discussed ways to reduce transfer cost, explore the potential of disruptive technologies, consider innovative financial business models, and scale up successful financial vehicles to fully harness the potential of remittances as an effective source of development finance for Africa. GFRID brought more than 500 key stakeholders active in the remittance market from the public and private sectors, including civil society entities involved in the African and global remittance and diaspora investment ecosystems.

Strengthening competition in hight-cost corridors

Enhancing competition in the remittance industry, especially in high-cost corridors, can help reduce remittance transfer costs, increase legitimate funding flows, and promote the use of formal, regulated transfer channels— maximizing the impact of remittances while leading to deeper financial inclusion. This enhancement can be achieved by removing exclusivity arrangements in the money transfer industry, facilitating the entrance of new players into the market, harmonizing competition regulatory frameworks, reducing bond and capital requirements, promoting new technologies, and developing the payment systems infrastructure.

Boosting the creation of national remittances ecosystems

Developing remittance ecosystems around basic social services like education and health can also help lower remittance transfer costs, with service providers able to offer bundled services at lower costs. For instance, remittance operators can work with local providers to propose an education and healthcare combo that includes tuition coverage, school supplies fees and health insurance subscription. While reducing remittance costs, this strategy also increases financial inclusion, facilitating access to education and health services in the recipient countries. Similarly, financial institutions could incentivize the diaspora to invest their savings home by facilitating access to credit and diversifying investment options.

Promoting financial inclusion through mobile money transfer

Mobile money has transformed how remittance services are provided in Africa, offering an effective platform to reduce remittance transfer costs. By its accessibility, mobile money also promotes financial inclusion, providing underserved communities access to formal financial services. This is significant for Africa, where these communities drive a cash-based, sizeable portion of the economy. African governments and international organizations must work together to enable an environment with regulatory frameworks that maximize the impact of mobile money transfers, promote public-private partnerships in the sector, and support the development of innovative technologies to lower the cost of remittances. Expanding the network of financial institutions in underserved areas, including those providing microfinance services, is also critical.

Promoting more efficient and cost-effective remittance instruments could reduce high money transfer costs and increase the flow of remittances to Africa. This will ensure migrant families from the continent can maximize the impact of their contribution in boosting the livelihoods of their loved ones back home and accelerating the development of Africa, including through the establishment of robust regulatory frameworks that reduce risky money transfers and the creation of competitive small businesses.

This Op-ed was written by Kavazeua Katjomuise (Policy Analysis and Coordination Team Leader) and Liwaaddine Fliss (Senior Program Management Officer)United Nations Office of Special Adviser on Africa (OSAA)

Front Page Article:

Office of the Special Adviser on Africa - Remittances

Reducing Remittance Costs to Africa: A Path to Resilient Financing for Development

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By Kavazeua Katjomuise and Liwaaddine Fliss