The Future of African Remittances

Did you know that the remittance service landscape in Africa is dominated by two international money transfer operators that control in excess of 60 percent of the remittance access points across Africa? In addition, because of exclusivity agreements between international money transfer operators and their mainly commercial bank partners, other types of institutions are largely excluded from the market due to regulations that limit non-financial institutions from playing a meaningful role in remittance services markets in most African countries.

International remittance flows to sub-Saharan Africa currently exceed 30 billion dollars annually, while on a global basis, remittances are estimated to have exceeded $315 billion in 2009. In SSA, they affect as many as 25 million recipient households, and have the potential to significantly reduce poverty and stimulate growth. Over the past decade, remittances have evolved from a miscellaneous trade accounting item into a widely recognized flow of foreign financing that often exceeds FDI and ODA to many African countries.

Recognizing the impact that remittances have on development, policy makers and development partners in many other regions have invested substantially in measures to leverage their potential. Worldwide, remittances are now better tracked, transaction costs have declined, and recipients are being integrated into the financial system, giving them more productive options to use their money, thereby leveraging development impact for the communities where they live.

Unfortunately, much of this progress in remittances has not yet reached Africa. However this is slowly changing especially in light of a useful World Bank initiative in collaboration with national central banks of Kenya, Ethiopia, Uganda- to address the Future of African Remittances (FAR).

For instance, the cost of sending remittances to Africa still exceeds 10-15 percent for many countries and reaches 20-25 percent for remittances sent within Africa, which are of growing importance given migration patterns. Reducing transaction costs by only 5 percentage points could increase total resources available to the recipient households by as much as US$ 1.5 billion per year.

In addition, only 20 percent of African households have access to formal financial services and remittances are often relegated to informal transmission channels, which are less secure and even more costly. Promoting product innovation and improving payment services tailored to the needs of the recipient households (especially in rural areas) offers a win-win solution. Households can use remittances as an asset to access formal financial services and benefit from safer and cheaper remittance transfers, while banks and other financial institutions can mobilize a higher share of the remittances to fund private sector investment.

The Future of African Remittances Program aims at strengthening the market for remittance transfers through the following efforts:

• • Technical assistance for regulatory reform targeting the remittance services market
• • Technology development incentives for products linking remittances to financial products (housing, insurance, savings and investments), with a focus on mobile software applications
• • Knowledge exchange with advanced remittance markets in Asia and Latin America
• • Training for regulators on best practices for regulating remittance markets and fostering innovation
• • Financial literacy and encouragement programs for first and last mile remittance product uptake

In combination with rapid innovations in mobile technology in Africa, remittances present a unique opportunity to expand access to finance and lift thousands of communities out of poverty.

More information on the African Remittances Program can be obtained here.