Remittances: the Private Sector's Still Ahead

Today, The Hindu reports that the ICICI Bank, India’s second largest bank, will be launching a number of innovative products in its remittances business before the end of this fiscal year. The Hongkong Shanghai Banking Corporation (HSBC) recently launched an initiative to provide free money transfers to India for Non-Resident Indians living in the United Arab Emirates. Once again, then, it’s the private sector that is steaming ahead of governments and international organisations to mobilise remittances, what many have called “the new development finance.”

Development economists have long argued that remittances (money transfers made by foreign workers back to their home countries) are a more cost-effective form of development finance because they are not subject to the costs of administration or corruption. In a 2004 research paper, Jan Wimaladharma, Douglas Pearce and David Stanton said: “[remittances] reach the poor directly, and the poor decide how the money is spent.” Many families in developing countries, are heavily dependent on money sent home by migrants, which can make up as much as 40% of the household income. Unlike other forms of investment, remittances are relatively stable, often remaining steady or even increasing during a crisis. And on aggregate, the figures for these global financial flows are not insignificant.

In 2003, a research paper by Dilip Ratha ("Worker’s Remittances: An important and stable source of external Finance") estimated official remittance flows to developing countries for 2002 at $88 billion. Unofficial flows have been estimated to be anything from twice to ten times the official figure. Whatever the total amount, what is already clear is that for at least four years (and probably more) remittance flows have exceeded the flow of development aid and, in some cases, even that of foreign direct investment. So, what have international development organisations and governments done over the years to optimise this major inflow of money into some of the poorest countries in the world? Very little.

Despite having acknowledged the already significant presence of remittances in developing economies in 1978, it was not until 2003 that the World Bank, in its Global Development Finance Report, finally took official notice of remittances as an important source of external development finance. Before then, little attention was given to these flows as factors contributing to the reduction of poverty, and even less attention was given to their potential or real contribution to the expenditure components of gross domestic product, such as investment or capital formation. As a result, it is only in the past three years that the international community has "discovered" this "new" form of development finance. Only recently have significant efforts have been made by the G8, World Bank and IMF to run initiatives reducing the costs of money transfers and introducing standards for remittance services.

Decades ago, however, large international banks as well as savings and postal banks recognised the significance, and notably the commercial potential, of remittances. It is because of this business that Western Union is one of the best performing and most well known financial institutions in the world. Its also because of this business, that the World Bank has estimated that in 2005, more than $167 billion was officially sent back to developing countries, a two-fold increase on the previous five years.

As an increasing number of companies have wanted a piece of the remittance pie, the remittance business has grown rapidly, with the powers of competition (from official and unofficial competitors) causing falls in transfer fees and improvements in customer services and transparency. In the remittance market between the U.S. and Mexico, for example, the cost of sending money has more than halved in the past five years. And don’t be kidded into thinking that HSBC’s recent announcement is innovative. The ICICI already allows non-resident Indians in the U.K. to hold an account with them in both the U.K. and in India with no cost of transferring between accounts as long as a minimum balance is maintained.

What we see happening between HSBC and ICICI is an example of how the competitive market of the private sector is helping maximise the financial flow to developing contries, improving the remittance service more significantly than has been achieved by the belated efforts of the international community.

The World Bank may have devoted a few conferences and a website to remittances, but private sector competition is still the stronger driving force in maximising the largest form of development finance.