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Why are remittances to Africa still expensive?

Jens Ischebeck
July 29, 2019

Remittances
are a major source of foreign cash inflows for most developing countries. The
year 2018 has seen tremendous growth with some countries reporting an increase
of 4.24% in remittances.

The World Investment Report for 2018 showed that global remittances stood at
$466 billion in 2017, which is beyond the other sources of external finance
like Overseas Development Assistance, long-term and short-term loans, as well
as portfolio investments.

Africa alone had remittance inflows of $65 billion with countries like Kenya,
Nigeria, Ghana, Ethiopia and Egypt taking up the largest share. This growth is
attributed to the notable recovery of the global economy and the increasing
need for immigrants to make significant investments in their homes of origin.

A rising
number of these countries adapt new financial technologies to support the money
flows, e.g. the mobile money transfer to Ghana and Kenya (MPesa) are well-known
examples.

What is Remittance?


These are funds sent by an expatriate or immigrant to his country of origin. He can use mail, online or wire transfer to send the cash. Remittances promote economic development, and in some countries, they act as essential disaster relief aid that exceeds the ODA.

The money also helps less developed countries to open bank accounts. The process of remitting cash to these countries is entrusted to specific money transfer companies though users can do it using their phones, credit cards and other channels.

It is crucial for the sender to use channels that reduce the waiting time for the recipient, which is also referred to as the remittance float. It is the time taken for the recipient to receive the cash.

For example, if an immigrant is sending a cheque to his parent, child or significant other via mail, the time taken to send, present it to the bank and deposit the money to the beneficiary’s account is the remittance float.

Senders can reduce the remittance float as much as possible by using the fastest means of making the transfer. Mobile money remittances have made this process easier as the recipient receives the cash instantly. Then it’s just a matter of choice of the most suitable international money transfer apps.

Choosing a Money Transfer Channel

Before the emergence of mobile money transfers for cross-border transactions (see also my popular article “Clever Money on Mobile Solutions for Africa”), Moneygram and Western Union were the most popular companies that were used to move money online. A sender had to visit a money transfer office and provide the recipient’s details and the money.

The recipient would then allow the money to be deposited in their accounts or collect it in cash at a location near them. Based on the countries involved, the sender has the option of using Western Union and Moneygram or PayPal or money transfer operators (MTO).

The methods differ based on your location, transfer fees and your bank, among other factors. The most common methods include:

International Wire Transfer

This method
is used by senders who want to move cash from one bank account to another using
the SWIFT network. The sender calls the local bank branch or uses the bank’s
online app to initiate the transaction.

The networks comprise other banks across the world that work together to ensure
the money is sent to the right individual. It is relatively expensive compared
to other transfer methods because the sending and receiving bank attract
transfer fees.

Online Transfers

Paypal is the most prominent online transfer channel though other media like
Skrill have been developed. Successful transfers require the sender and the
recipient to create an account with the respective money transfer company.

This transfer method is ideal for those looking for convenient transfer methods
especially if you are converting between different currencies. However, the
transfer costs can range between 3-13%.

Using a Cheque or Sending Cash

In this case, you need to write a check and send it via mail to the recipient.
It is a rather slow method, and there is a high chance of the cheque getting
lost or getting stolen or damaged.

Additionally, countries like Belgium, Germany, Scandinavian, Austria and
Netherlands prohibit the use of cheques. To overcome these problems, visit a
Western Union or Moneygram office as they offer online transfers too.

Cost of Remittance in Africa

Studies
reveal that it costs more to send money to Africa compared to other continents.
This implies that fees charged for online money transfers in the continent
consume a majority of the cash sent in the first place, meaning communities,
families and individuals end up receiving less money than the intended amount.

According
to World Bank figures, remittances cost almost 10% of the payment amount while
the global rate is slightly over 7%. This setback is attributed to various
factors such as inefficiencies in processes, online money transfer companies
charging exorbitantly and excessive bank regulations just to mention a few.

Reasons
for High Remittance Charges in Africa

Excessive
bank regulations are implemented to make sure that online money transfer
companies do not help in money laundering practices. The checks have a positive
influence in discouraging and deterring terrorist funded activities, however,
they throw the cost of remittance through the roof, adversely affecting
innocent people that are receiving money legally. Reducing the number of
regulations for transactions on small amounts will be advantageous to
recipients.

Secondly,
in most African countries, natives do not have a choice on which online money
transfer company to use. This is usually the case since government owned post
office possesses exclusive rights to partner with a particular money transfer
company. Since most individuals have access to the post office, they are by
default the exclusive remittance points especially for those living in rural
areas. The effects of monopoly in business are well known since they have the
free will to charge higher transaction fees.

Banking
networks that form a correspondence attribute to the high remittance overhead
charges. Transferring money from one country to another forms a rigorous
process that involves various sister or partner banks. In such a scenario, each
bank claims a fee in processing payment, a feature that has a domino effect on
the final cost of the transaction which is paid for by the sender.

About the Author

Jens Ischebeck

Jens Ischebeck is an Africa focused website publisher. The main sites are apps-for-money-transfer.com and Bitcoin-Guide-Africa.com (both cover the international money transfer tools for inward and outward remittances) and fast-bachelor-degree.com (accelerated bachelor degree by online studying).

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