Sending remittances
Tony Omwansa
Published: 19-JUL-07

Remittances are of great value to the households that receive them. It�s amazing that it accounts for as much as half of many households annual income. Studies show that low-income households spend remittances mostly on their basic needs such as clothing, education, food, and health. Also, since remittance receivers often have a higher propensity to own a bank account, remittances promote access to financial services for the sender and recipient. There are a number of money transfer products in the market. Some offer convenience, others low price and others speed or security. It is important to understand the characteristics for the various service providers before deciding to use any.

A recent study by the Department of International Development (DFID) indicates that charges for sending money globally ranges between 2,5 percent to 40 percent of the amount being sent. East African countries have their prices ranging between five percent and 35 percent. It has been proved that sending larger amounts is more economical than smaller ones.

Another factor to consider is the exchange rate. The service providers convert money sent in any local currency to a fairly uniform currency, like dollars or euros. The exchange rate is determined by the service providers such as banks and forex bureaus.

It�s worth noting that at the receiving end, there could be charges. As such the sending agency may not guarantee how much the receiver will actually get. Most of the remittances are sent through commercial banks or money transfer agents such as Western Union and MoneyGram. With the increasing relevance and reach of the Internet, online money transfer has picked momentum over the years. Several popular online global remittance providers include Remit2Home, Western Union, eMoneygram and Xoom.

The latest and most promising means is via mobile phones. With the current mobile subscription rates in African countries being the highest in the world and virtual currency technologies taking good shape, one would expect e-remittances to shift more to mobile technologies in the near future. This would provide cut throat competition to existing money transfer agents.

In most commercial banks, transfers take an average of five days, varying from two days to 10 days depending on factors such as the transfer mechanism used and the processes of the receiving bank. It should normally take about a day for a transfer through a Money Transfer Operator (MTO), with some transfers taking place within 10 minutes.

MTOs tend to offer lower rates compared to banks, for small remittances, as well as convenient services such as longer opening hours. And how do MTOs work? For any MTO to operate, it must be networked. It must have physical locations where money can be sent and received from. At one end, funds are collected from the sender or remitter and at the other end the funds are disbursed to the receiver. These access points may be banks, wire transfer offices, authorized agents, just to mention a few. Apart from the physical access points, most of the details involved in remittance remain invisible to the public.

The World Bank categorizes remittances into about three categories. Unilateral remittance networks involve only a single service provider. This occurs when a bank, credit union, or other financial institution maintains branches in both the sending country and the receiving country.

Though efficient, unilateral providers are generally rare. Another category is franchised service, where the provider creates the network for transfers without necessarily owning any of the physical access points. Wire-transfer services, such as Western Union, fall into this category.

A negotiated service involves a provider in one country that has negotiated and established a network with an institution or institutions in other countries. Agreements between the institutions can constitute negotiated services. In order to succeed as an MTO, trust, speed and cost should be considered. These factors can be traded off against each other depending on the priority of the customer in a particular situation. How well an MTO�s network is developed at the receiving country, for example ability to reach rural towns is another major determinant.

Security or trust is considered the principal factor in choosing an MTO. People often choose a provider based on the recommendation of someone else that has used them to send money. Independent MTOs are seen to offer a consistently better service to customers, perhaps because they are focused on money transfer only, rather than offering the wide range of financial services that banks do. Banks on the other hand are seen as more trustworthy and as such benefit from this customer preference. Besides, banks also offer a wider range of financial services that MTOs do not offer and customers could benefit from.

Just like any other convenience service, the faster one wants the money transferred, the more he would have to pay. However it has been observed that many people are willing to pay more to get a service done faster. A recent research by FinAccess in Kenya indicates that over 30 percent of Kenyans in the Diaspora send money using formal transfer services such as Western Union. The second most popular means is using a family member or friend. 42 percent send remittances using friends and family members.

Because of the great potential and impact of remittances, the G8 met in 2004 at the Sea Island Summit and considered taking action to significantly lower the charges for migrant workers who send money back to their home countries. This led to the concept of �Sending Money Home�, a free information service funded by the UK�s DFID. The program found at provides free, impartial, transparent information for migrant workers and those with origins in the developing world who wish to send money home to family and friends. Though very positive, remittances have some negative impacts on the receiving countries. There is a possibility that the receiving community could become dependent on remittances. An abrupt halt in the flow can be very devastating. The risk of such a stoppage is greater in countries where the amount of remittances represent a high percentage of that nation�s GDP, for instance in Haiti where remittances account for 54 percent of her GDP.

-Business in Africa Online

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