By Andy Jury, CEO of Mukuru
The numbers around the worldwide flow of formal remittances are remarkable. Stakeholders rely on these numbers to inform policies and decision making. Their aim; to create an environment for cross-border payments that is safe, stable and efficient. But to see the full face of remittances, we must look at the impact on the social welfare of diaspora receivers and givers.
Remittance is more than a good news story
The social impact on individuals who send and receive remittances is typically a good news story, but it is also becoming an increasingly important measurement as we navigate our way through the COVID-19 crisis.
Following 2019’s record $554 billion flow of formal remittance to low and middle-income countries (LMICs), the World Bank expects a 20 percent decline in 2020 as a result of the coronavirus pandemic. While a recovery of 5.6 percent is tentatively forecast for 2021, direct foreign investment to LMICs is expected to fall by as much as 35 percent.
This will likely affect the remittance market in three key ways:
- A significant fall in direct foreign investment will see cross-border remittances becoming an increasingly vital source of external funding for LMICs.
- Its impact on the social wellbeing of receivers will serve as an important real-picture indicator and measurement for the non-profit sector, as well as governments and regional regulators when setting policies and development goals.
- Demand for financial services that deliver convenience to customers while also reducing transfer time and lowering remittance costs, will see digital money transfer companies drawing on the latest Fintech developments, making increasing use of collaborations and instituting robust compliance frameworks.
Measuring the impact of remittance on social well-being
Researching the numbers around formal remittance payments is always going to be easier than measuring its social impact on receivers, especially in more fragile and humanitarian settings. So what do we know?
Remittances reduce poverty and improve household resilience
While studies tell us that formal remittance is about four times larger than official development assistance, we can only guess at the true effect of remittance on poverty alleviation while informal remittances remain unmeasured. If formal remittance impacts the lives of about one billion people, and informal remittance is estimated to be anywhere between 35 and 250 percent of formal remittances, the real-world impact of remittance on poverty reduction is most likely staggering.
As the world reels from the effects of the coronavirus pandemic, and foreign investment in LMICs plummet along with workers wages, it’s hoped that stakeholders will set up a collaborative framework to ensure that those who rely on remittances are protected against its impact.
In the meantime, remittance service providers can capture data that indicates how customers are impacted by the pandemic, and develop targeted responses. This could include bringing new products to market that allow customers to send remittances to money accounts or e-wallets instead of cash pick-ups, or building an e-KYC app to help digitally onboard customers.
Create household and local economy overflow
Current research suggests that remittance sent from migrant workers to families back home plays an important role in supporting local economies.
Although the UN partnership collaboration, The Transfer Project, researches the social effects of cash transfer programmes, it’s interesting to note that far from creating dependency on cash payments, receivers tend to invest money in projects that benefit their local economies.
For instance, the impact of just two years of transfers in Zambia, resulted in an impressive 34 percent increase in land dedicated to crop production. This yielded an increase in household consumption that was 25 percent greater than the cash transfer itself. Similar results have been seen in Lesotho, Kenya and Malawi. A 2016 estimate puts the total of formal and informal remittances flowing from South Africa to Malawi at R477.4 million. Based on the exchange rate at the time, this translated to around MK23.9 billion. Now consider the real-world impact on local economies of a yield that is 25 percent larger than the remittance itself.
At Mukuru, we’ve observed that many remittances sent intra-Africa by our customers, align with crop planting season, building cycles and times when school fees are typically due.
A comment from lead economist at the Global Knowledge Partnership on Migration and Development (KNOMAD) – Dilip Ratha – helps to explain the phenomena. “Remittances, unlike private investment money, do not flow back at the first sign of trouble in the country.
When the family is in trouble, facing hard times, migrants send more money then. Unlike development aid money, that must go through official agencies, through governments, remittances directly reach the poor, reach the family, and often with business advice.”
Improve mental health and life satisfaction
The first global study on the wellbeing of the families of emigrants showed that receiving remittances had a positive and significant effect on perceived factors like stress, depression and quality of life. A two percent increase in life evaluations was noted despite the pain of separation from loved ones.
Not only is this the result of an increase in material living standards and expanded capabilities, it also alludes to the different social status remittance-receiving families can have in the community.
Money transfer companies can offer greater peace of mind for those who send remittances as well as their families back home, by creating value added services in the form of money cards and insurance products with lower price points and improved accessibility. Building customer education and protection into value added services is a crucial element of gaining trust and essential for the successful uptake of these products.
Promote gender-sensitive remittance services
Between 2014 and 2017, men’s ownership of a bank account increased from 60 to 67 percent, while women’s ownership went from 51 to 59 percent. Undoubtedly, the financial exclusion of women from institutional banking slows overall social progress, but this also presents an opportunity for remittance operators that are willing to create gender-sensitive products and services.
Would it be worth the extra effort for private remittance companies? We think so. Women represent 50 percent of remittance senders, they’re more likely to send a higher portion of their income on a regular basis even though they typically earn less than men, and women are often the main receivers of remittances, especially in rural areas
So what would gender-sensitive remittance products include? They would have a largely educational interface, taking into account higher levels of illiteracy and digital illiteracy among women. They would meet them where they’re most comfortable and in a way that does not require them to travel far distances. They would be accessible and flexible and take into account that even the issue of formal identification can be a barrier for many receivers. They would also need to establish a regulatory framework and partnership network between financial institutions and other stakeholders that lead to innovative products, expanded distribution of services and agent training, with a focus on trust.