• by Paul Virgo (rome)
• Friday, November 06, 2009
• Inter Press Service

Of the many proposals on how to combat poverty in Africa, the United Nations' International Fund for Agricultural Development (IFAD) is championing what must be one of the simplest - make it cheaper and easier for migrants to send money home.

Remittances already play a huge role in supporting the continent's most vulnerable, especially in today's tough economic climate, with rural poverty agency IFAD estimating in a report released last month that they bring 40 billion dollars into the region each year.

'That's a lot of money. It's more than all foreign aid and direct foreign investment combined, but the main difference is that these flows go directly into the hands of those who need them most,' Pedro de Vasconcelos, coordinator of IFAD's remittances programme, tells IPS.

'Remittances are funds that go from people who are poor by western standards to people who are even poorer still. They are a vital lifeline for rural families.'

But the money sent home by the 30 million Africans who live outside their homelands could be a much more powerful engine for development with stronger market forces and better regulation. Lack of competition in the remittance market means that on average it costs twice as much to wire funds to Africa than to other parts of the world, the Rome-based IFAD says.

'There is too little competition. Two players, Western Union and MoneyGram, have 65 percent of the market alone at the moment. So you pay a high premium to get your remittances into the hands of your loved ones,' de Vasconcelos explains.

'On average the cost of a remittance to Africa is 10 percent (of the amount sent) but the worldwide average in countries where the market is developed is five percent. By bringing the cost down from 10 percent to five percent, you would have another 2 billion dollars going into the hands of the poor, just by promoting more competition.'

IFAD says scrapping the regulations that in many countries stop non-bank organisations, including retail stores and microfinance institutions (MFIs) such as village savings banks and credit cooperatives, from handling remittances would be a massive step forward. At the moment 80 percent of African countries restrict the type of institutions able to offer remittance services to banks and foreign exchange bureaus or banks only.

Just letting MFIs into the market would double the number of remittance collection locations, a much needed measure in a continent that currently has as many payout points as Mexico boasts with one-tenth its population.

Making remittances tax-free would be a big boost too, and so would providing post offices with the resources needed to offer remittance services, especially given their distribution in rural areas, which are estimated to receive 30-40 percent of the money sent into the continent.

Expanding the number of payout points would also cut the long journeys the rural poor frequently have to go on to collect their remittances, which means the costs of transport and lost working time have to be added to the already high service charges.

The hazards of trips that frequently take more than a day are also a factor.

'Often it is women who travel from rural areas to the cities to collect the money,' Fatumo Farah, executive director of the Amsterdam-based HIRDA Foundation that helps the Somali diaspora contribute to the fight on poverty in its homeland, tells IPS.

'They can have problems with robberies, rape and attacks. You might come back without any money and with problems you didn't have before.

'Even if the trip is successful, there is the extra cost of the travel. So they will always get less. We have to do something about this problem and bring the money to people's villages.'

Farah says HIRDA is working on a joint project with IFAD that, when it is up and running, will enable people in rural areas to collect remittances from grocery shops.

She says migrants' home-bound money is especially important in Somalia, which has been mired in chaos since the fall of Siad Barre's military regime in 1991.

'With no central government and few employment opportunities, many people in Somalia depend on remittances to survive. We believe that around 40 percent in urban areas rely on them and that around 80 percent of start- up capital for businesses comes from them.'

The G8 acknowledged the importance of remittances for development at July's summit in L'Aquila, Italy and pledged to reduce their costs by 50 percent in the next five years; a commitment de Vasconcelos said IFAD will not let the world's most powerful nations forget.

The good news is that Latin America has shown progress is possible, and authorities in African countries are starting to recognise the need to create a healthy environment for senders and recipients.

'Look at the situation in Latin America five to 10 years ago and you'll find a lot of similarities with Africa today,' de Vasconcelos explains. 'Competition was low and costs were much higher. This is still the case in Africa, in part because of exclusivity agreements that certain remittance companies agree with banks.

'Some countries, like Nigeria, are addressing this (by banning exclusivity agreements), and many should follow. What is good for Nigeria is good for all of Africa. Central banks are starting to follow up on this issue now, whereas previously they didn't, simply because they didn't know the volume of remittances.'

IFAD says only MFIs that prove their capacity to comply with standards on financial crime prevention, possess the liquidity to cover payments, and maintain the necessary levels of technology and trained staff should be allowed to offer remittance services.

Having the MFIs on board would make it possible to link remittances to other financial services, and this could be a lever out of poverty that is just as important as the money coming in.

Because remittance recipients tend to be poor, they spend 80-90 percent of the incoming money, IFAD estimates, with most of it going on basic necessities such as energy and food. At the moment many people's only option is to spend the rest too, or shove it 'under the mattress' because they do not have access to basic financial services. Having money safely put aside at an MFI and the ability to take out insurance policies, on the other hand, would help them survive hard times. And access to microcredit loans of relatively small amounts could create opportunities to climb out of poverty by, for example, borrowing the money for seeds to plant an extra field and make a profit when food prices rise.

Indeed, remittance savings could act as a spur for local development because giving people the chance to put money into accounts at MFIs would in turn increase deposits useable for loans to smallholder farmers and enterprises. 'Our study shows that in Africa the potential is enormous,' de Vasconcelos says. 'People could go to microfinance institutions, microcredit cooperatives and rural financial institutions that are close to them and we could by extension promote other types of services.

'This would be completely world changing for many people, who would have the possibility of having savings for the first time in their lives. 'What's more, by linking remittances to microcredit, there would be a multiplier effect that would not happen if you just had cash-to-cash transfers. If you have a financial institution as the reception point, the effect will be multiplied two, three or even five times.

'What migrants and their families need are more options. This is the opportunity remittances represent and it is not imaginary. It's already happening where the conditions allow. I think with more information, better educated decisions will be taken by governments to benefit recipients and their economies.'

© Inter Press Service (2009) — All Rights Reserved. Original source: Inter Press Service

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