Remittances from the diaspora are a crucial source of private financing, promoting financial inclusion and sustainable growth. However, the cost of sending money to the continent remains among the highest in the world, despite innovations introduced by FinTech.
Trends in migrant fund flows
In 2023, remittances to developing countries totaled 669 billion USD, with a projected increase of 3.1 % for the following year. This modest growth stems from a global economic slowdown and stagnant labor markets in several high-income nations. Fluctuations in oil prices, exchange rate instability, and potential recessions in advanced economies could alter these forecasts.
Remittances to Sub-Saharan Africa increased by 1.9 % in 2023, reaching 54 billion USD. Transfers to Mozambique, Rwanda, and Ethiopia showed strong growth, while remittances to Nigeria accounted for 38 % of the regional total. Flows to Ghana and Kenya grew by 5.6 % and 3.8 %, respectively. Forecasts for 2024 indicate a 2.5 % increase in remittances to this region.
Economic contribution of remittances
The contributions of the African diaspora’s remittances are significant, both socially and economically. These funds often cover essential needs of their relatives, such as healthcare, education, and community obligations. According to the World Bank, these remittances are one of the few sources of private external financing, with the potential for continued growth in the next decade.
Economist Dilip Ratha highlights in a report that remittances to developing countries frequently exceed foreign direct investment (FDI) and official development assistance. The gap between these funding sources continues to widen, underscoring the importance of remittances for the economy and society of many African countries.
Comparison of money transfer fees
International money transfer fees remain high due to transfer, withdrawal, and exchange rate costs. For example, sending 200 USD costs an average of 6.2 % of that amount in the second quarter of 2023. Traditional institutions are the most expensive, while mobile applications offer a less costly alternative. Here is an overview of costs by different providers :
- Traditional banks : median cost of 12.1 %
- Post offices : average fees of 7 %
- Money transfer operators : commission of 5.3 %
- Mobile applications : 4.1 %
The preference for digital transfers stems from their accessibility, reduced costs, and simplified procedures. Cryptocurrencies also promise smoother transfers and lower currency conversion fees than traditional banks. However, volatility, regulation, and lack of knowledge still limit the adoption of digital currencies for remittances in Africa.
Objectives for reducing transfer fees
Reducing transfer fees promotes increased remittances. However, business management costs make the goal of near-zero fees difficult. In the event of disasters, some companies temporarily reduce or waive transaction fees, as observed after the 2023 earthquake in Morocco.
Major target of sustainable development
One of the United Nations’ Sustainable Development Goals (SDGs) aims to reduce remittance fees to less than 3 % by 2030. Total sending and receiving fees between two countries should not exceed 5 %. Some experts suggest that this goal should be even lower for better accessibility. The International Monetary Fund estimates that achieving this goal would save 32 billion USD.
Potential of diaspora bonds
Some nations seek to attract diaspora savings into non-resident deposit accounts despite their volatility, influenced by exchange rate regimes. In his report, Dilip Ratha emphasizes the importance of restoring diaspora bonds to directly tap into migrant savings held abroad.
Additionally, reducing migrant transfer fees can also lower the cost of international loans for developing countries. Their countercyclical nature offers additional stability. Their indirect contribution to public finances strengthens the economy. Consequently, migrant remittances improve a country’s sovereign rating and its debt repayment capacity.
Obstacles to reducing money transfer fees
Inconsistent regulations
High remittance fees are partly due to inconsistent regulations. According to a leader from Onafriq Group, a company cannot use a single license to operate in multiple countries. Even for transfers between neighboring countries, regulations vary. For example, transfers between Togo and Benin are simplified thanks to a common currency.
However, transfers to Ghana, though neighboring, remain complicated. Additionally, requirements vary depending on the amount to be sent. Small transfers may still be subject to complex regulations aimed at combating money laundering.
Limited competition and transparency
Stringent rules for money transfer providers require extensive technical, financial, and legal knowledge, limiting the number of players in this sector. With little competition, rates are set by an oligopoly. This situation also reduces fee transparency. Companies do not need to disclose such information, which can include misleading claims about transactions.
Limited technological accessibility
Infrastructure deficits limit access to digital innovations, particularly in rural areas of Africa. Basic technologies, the Internet, and mobile telephony remain inaccessible to those sending and receiving funds. Additionally, providing tax identification numbers and other documents is challenging for people on the move or without official identification. In Uganda, refugee identity cards are not centralized, complicating their use in some money transfer agencies.
