Harnessing the remittance market for development in the Central African sub-region by Asanji Burnley Nguh, 19 June 2015

Remittances have been identified as the third pillar of development as their volume is second to Foreign Direct Investment and three times higher than Overseas Development Assistance and are steadier than both private debt and portfolio equity flows. Analytical studies have shown that remittances contribute to poverty reduction in home countries. Remittances are an essential source of external funds for developing countries.

Since 2001, the transfer of funds by Cameroonians abroad to their home country has considerably increased, as testified by the multiplicity of financial companies specialised in the transfer of funds in Cameroon. The multitude of these canals renders impossible the evaluation of the exact amount of these transfers. All the same, going by the 2009 World Bank report, we note an increase of the approximate amount transferred from abroad each year by Cameroonians for the period 2001 – 2008. These amounts, are estimated at US $ 11 million in 2000, to US $ 103 million in 2004 and US $ 167 million in 2008, representing 0,8% of the GDP in 2008.

According to a 2010 World Bank report, in the eight countries belonging to the Central African sub region, remittances do not exceed Official Development Aid (ODA) and are low compared to the other African sub regions. This is partly due to a lack of data reported for half of the countries the sub region. Out of the recorded remittances going to the remaining four countries (125.3 million Euros), Cameroun receives by far the biggest share (86%).

Recognising that remittances are, above all, private funds, but which also offer development possibilities for entire communities and countries, how then, do remittances impact development in Sub Saharan Africa especially in the Central African Sub region and how can remittance flow be enhanced?  This write-up also outlines barriers to remittance markets in the Central African sub-region as well as possible recommendations.

According to the World Bank 2011 Remittance Markets for Africa report, remittances can affect economic growth in a positive manner by raising consumption and investment expenditures. Remittances also increase expenditures on health, education, and nutrition that contribute to long-term productivity; and by improving the stability of consumption and output at both the household and macroeconomic level. These benefits in turn increase the supply of investment from both domestic and foreign sources by increasing financial intermediation, which can ultimately contribute to higher growth.

The 2011 report also brings out the fact that economies in which the financial system is underdeveloped such as those of the Central African Sub-region, remittances may alleviate liquidity and credit constraints and help finance small-business investments, thereby effectively acting as a substitute for financial development.

Consequently, remittances are also of great importance to countries for maintaining external-sector balance and macroeconomic stability. These are some of the reasons why remittances have been receiving increasingly the attention of politicians and analysts.

It is worth noting that despite the development implications, remittance markets in the Central African sub region remain plagued with many challenges.

The remittance market in the Central African sub region is plagued by regulatory bottle necks. Existing policies in a number of countries in the sub region create barriers for deployment of these flows for national gain. Regulations that restrict, limit or authorize institutions to carry out foreign currency transfers include those regulating foreign currency management and authorizing institutions to perform foreign currency transactions.

The decision to allow a particular institution to perform international money transfers is instrumental to expanding financial access for remittance senders and recipients. Countries with more restrictions on outbound payments often belong to monetary unions, such as the Central African Monetary Union (UMAC) or have legislation dating from
before 1998.

Whereof, these policies are there to increase remittances flows in the sub region they rather hamper its development and thus needs to be improved upon for better results, they are either not being implemented or improved upon due to some factors such as;

• The non-implementation of a regulatory framework to reduce transfer cost in the different corridors;
• Lack of inclusive finance;
• Lack of support to investment motivations of the Diaspora amongst others.

The Central African sub region remittance market exhibits a low level of competition and has limited payout presence in rural areas. Going by an IFAD report (Sending money Home to Africa, 2009), 50 per cent of the banks in the Central African Sub-region countries pay remittances, but the percentage jumps to 100 per cent in countries like Angola where only banks are allowed to pay. This situation strongly discourages other actors from entering the remittance market.

Exclusivity arrangements severely limit competition and create barriers to entry. Most regulations in the Central African Sub-region permit only banks to pay remittances. In half of the countries of the Sub-region, they constitute over 50 percent of the businesses paying money transfers. About 41 percent of payments and 65 percent of all payout locations are serviced by banks in partnerships with Western Union and Money Gram.

More than 20 percent of the people within the reach of Microfinance Institutions (MFIs) receive remittances. Yet MFIs currently represent less than 3 per cent of remittance payers. In countries where MFIs do pay remittances they often operate as subagents of banks. This can be seen in the Central Africa Republic where they have an impregnation rate of about 20 percent.

High remittance costs represent an unnecessary burden on Central African migrants. In a 2011 World Bank report based on IMF survey, almost 70 percent of central banks in the Central African Sub-region cited high costs as the most important factor inhibiting the use of formal remittance channels.

According to data from the recently released World Bank Migration and Development Brief 23 Report of 2015, the cost of remitting to the Central African Sub-region remains above global levels (11.3 percent of sending the equivalent of US $200, versus the global average of 7.9 percent).

The lack of readily available data on the remittances markets in the Central African sub-region is another major difficulty. Most  states do not report data on remittance outflows or inflows to the IMF Balance of Payments Statistics, which is the main source for the internationally comparable dataset of the Migration and Remittances Factbook produced by the World Bank.

Also, most of the money sent home by migrants is unrecorded, and therefore does not enter many countries’ national statistics. Development planners increasingly stress the importance of tracking this money. That will help governments try to increase remittances as a source of development finance and better channel them into productive sectors. This makes it difficult to compute the impact of remittances on the development of the sub region.

In the light of these obstacles, the following can be advanced as possible recommendations that can enhance financial access in the Central African Sub-region.

Firstly, regulatory reform is central to leveraging the impact of remittances. There are a range of businesses that have the operational and financial capacity to conduct transfers, but that are not permitted to do so. When banks can perform transfers and MFIs can only act as sub-agents, both institutions suffer as they encounter barriers or lack incentives to enter the market.

Allowing more actors to perform money transfers will expand the reach beyond banks and foreign exchange bureaus, allowing greater competition among Remittances Service Providers (RSPs).

While there are eight banks on average in each Central African Sub-region country, the MFIs impregnation in these countries is about 6.5%, half of which are regulated, and at least three or four of which could compete as payers.

The Central African Sub-region countries have a very low number of payout locations less than 34%. Bringing MFIs and post offices into the market would double the number of payout locations.

According to the IFAD 2009 report cited above, 4 (Cameroon, Congo, Gabon, and Equatorial Guinea) out of the 8 countries of the Central African Sub-region do make use of the Post offices for Remittances payment. Gabon has a Post Office impregnation rate of 50 percent, while Congo has 28 percent.

It is also important that governments provide to MFIs equal market access. This may be done by ensuring basic benchmarks regarding their capacity to comply with the standard regulations on financial crime prevention, cash flow and liquidity to cover payments, technological innovation, trained staff, market presence and financial service cross-sale.

Policies should be designed to increase financial sector development. This may be done by encouraging greater competition among banks and by promoting alternative providers such as microfinance institutions, credit cooperatives, and postal savings. In this way banks are likely to have a beneficial impact on the market for remittances.

Improving competition is germane. In order to improve on limited competition, there is need to phase-out exclusivity agreements and contracts that prevent agents from forming partnerships with other providers or that block competitors from entering the market.

Governments in the sub region should encourage competition through foreign currency market promotion. Competition is enhanced through the dissemination of information and networking tools.

Increasing the role of post offices in remittances can be facilitated by several policy measures. Post offices can partner with destination-country post offices, banks, and money-transfer companies to extend existing domestic money-order facilities to international remittances. Better coordination among the various regulating entities should be promoted to ensure better consumer protection.

High remittance costs represent an unnecessary burden on the Central African migrants. Reducing remittance costs can lead to increases in the remittances sent by migrants, in turn increasing the resources available to recipient households.

The extended geographical coverage of domestic mobile money services and the growing number of customers with access to mobile money accounts may be encouraged in the Central African region. This may entail the need to extend money access points to include ATMs and mobile wallets as well as agents in many countries. The adoption of these innovative technologies is still nascent and will vastly improve access to both remittances and broader financial services, including low-cost savings and credit products, for the Central African migrants and remittance recipients.

Measures that would encourage the expansion of mobile phones to cross-border remittances include (a) harmonizing banking and telecommunications regulations to enable mainstream banks to participate in mobile money transfers and for telecommunications firms to offer micro deposit and savings accounts; (b) ensuring that mobile distribution networks are open to multiple international RSPs instead of becoming exclusive partnerships between an international money transfer operator (MTO) and country-based mobile money services.

Furthermore, Technological development will benefit financial access, including the adoption of new hardware, the development of software platforms, and the adaptation and integration of existing technologies. In the case of remittances, the key to technological development lies in strengthening payment networks.

Finally, as yet, relatively little is known about remittances to Central African Sub-region. The key to both informed policy decisions and private-sector interest is the availability of timely, accurate information.

As more information becomes available on a regular basis, governments, the private sector and the donor community are each better able to play their roles in maximizing the impact of remittances.

Conclusively, good governance and sound economic policy initiatives are also essential if the potential of remittances are to be enhanced in the Central African sub region.

Asanji Burnley is a diplomat by training from the International Relations Institute of Cameroon (IRIC). He is President and co-founder of the Cameroon based Central African Centre for Libertarian Thought and Action (CACLiTA).

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Western worries about money-laundering are threatening an economic lifeline for millions of Africans Jul 20th 2013 | NAIROBI |From the print edition of the Economist

FOR Mohamed Abdulle, sending money to his family in Somalia means a trip to a high street in Stratford, East London, home to a large expatriate community. Once there he hands over cash, a telephone number and a name, usually that of his grandmother who lives in Somalia’s capital, Mogadishu, to an agent. A few minutes later Mr Abdulle, who works as a shop assistant, gets a text message letting him know the cash has arrived on the other side. This fast and reliable system, developed during decades of war in Somalia, is used by hundreds of thousands in the global diaspora, as well as by some UN offices and aid agencies to pay staff.

Perhaps not for much longer. Barclays, a big retail bank, has served notice that it will close the accounts of some 250 money-transfer businesses. The bank said the decision followed a routine legal review. Some money remitters “don’t have the proper checks in place to spot criminal activity,” the bank says, or could “unwittingly” be financing terrorists.

Barclays was among the last British banks willing to deal with agents who cheaply transfer money to poor countries. Many European banks have become nervous about such cash transfers after the American government last year forced HSBC, another big British bank, into a $1.9 billion settlement over allegedly shoddy money-laundering controls.

The impact of Barclays’ decision will be felt across east Africa. Without accounts, the transfer agents cannot operate and their businesses in Somalia’s neighbours, Kenya and Ethiopia, may be hindered, too. The agents, who need a bank account to get a licence, insist they have no problems with law enforcement or regulators. Cash going to extremists in Somalia is sent in sacks by plane, not from a London suburb a few hundred dollars at a time.

The agents are asking what extra measures banks want them to take. Abdirashid Duale, who runs Dahabshiil, the largest Somali money-transfer agency and a customer of Barclays for the past 15 years, says he is willing to comply with any transparency checks the bank requires. He estimates that $500m is sent to Somalia from Britain each year and thinks much of this money will switch to underground agents if legal operators are put out of business.

Dominic Thorncroft, who heads the British money-transfer trade association, says as many as 50 of his 170 members face closure. Under pressure from British MPs, some of whom are elected in constituencies with large migrant populations, the bank has agreed to a 30-day stay which ends in mid-August.

Meanwhile, a group of 100 academics and other notables has written to the British government asking it to avert a humanitarian crisis in the Horn of Africa. An estimated 40% of Somalia’s population depends on money sent from abroad. A recent study showed that three-quarters of recipients need the money to buy essentials, such as food and medicine.

“This will mean children being pulled out of school, people going hungry or not getting medicines they need,” said Laura Hammond, a lecturer at the University of London. The Somali Money Services Association, another British trade body, warned that the consequences of the closure of the accounts would be “worse than the drought” that ravaged Somalia two years ago and killed tens of thousands.

So far attention has focused on Somalia, where years of conflict have destroyed the banks and left no real alternatives to cheap money transfers. But the 250 firms put on notice by Barclays also include some serving Ghana and Nigeria, as well as India and Bangladesh. More sophisticated and expensive competitors such as Western Union may now benefit. A reduction in competition in the African remittance market will drive up prices.

Africans already pay more than any other migrant group to send money home. The cost of remitting to sub-Saharan Africa, typically around 12%, is three percentage points higher than the global average, according to the World Bank. If African rates could be brought in line with those of South Asia, African migrant families would save more than $4 billion a year. Instead rates are likely to rise further.

Some observers are calling for the creation of new institutions that could replace private banks. One suggestion is a “remittance bank” hosted by the UN or a multilateral agency. Another is a code of conduct worked out by remitters, banks and regulators. “This needs to be driven by government,” says Leon Isaacs of the International Association of Money Transfer Networks. “Or the banks won’t get the comfort they want.”

From the print edition: Middle East and Africa

 

Diaspora Bonds in an African Context, African Development Bank, 12/02/2013 reposted 22/02/2013

The Chief Economist Complex of the African Development Bank Group has released an Economic Brief on the application of diaspora bonds in an African context. Drawing lessons from diaspora bond issuances in Israel, Ethiopia and India, the paper, entitled “Diaspora Bonds: Some Lessons for African Countries”, argues that tapping migration wealth could be an effective means of funding development on the continent.

With an estimated 140 million Africans living outside the continent, saving up to an estimated $53 billion in those destination countries each year, the potential for diaspora bonds is enormous. Studies have indicated that migrant remittances to African countries are second only to foreign direct investment (FDI), and surpass even official development aid (ODA).

Bonds are a debt security instrument with a maturity of more than one year, tradable on the financial markets. Diaspora bonds are issued by the country to its own diaspora to tap into their assets in the destination country, as an alternative to borrowing from the international capital market, multilateral finance institutions or bilaterally from governments. The practice goes back to 1930s China and Japan and was later followed by Israel and India in the 1950s.

Diaspora bonds are typically used to finance large-scale infrastructure development projects in the private sector and are generally used by a country to implement its development strategy. Moreover proceeds of diaspora bonds could be earmarked to projects with appeal to the diaspora, such as infrastructure projects, housing and social amenities.

African countries rely heavily on external funding to finance their development. However, FDI and ODA have declined in recent years. Traditional donor aid is likely to wane in the future as donor countries focus their resources internally. Remittance flows have also been affected by the economic crisis and consequently developing institutions are seeking new sources of resource mobilization.

According to earlier Bank research, Africa could potentially raise $17 billion annually by using future flows of exports or remittances as collateral. Securitization of remittances could be used to raise short- to medium-term financing by African banks.

In Africa, Ethiopia is the first country to issue a diaspora bond to date, although several countries are considering following suit, including Cape Verde, Kenya and Ghana. Regular bond issuances in African countries have been available on the international market, such as the Morocco issuance (2010), and Senegalese, Nambian, Nigerian and Zambian issuances in 2011 and 2012. In this case, the shift from international bond to diaspora bond is simply a case of marketing, the paper’s authors argue.

The structure and management of the diaspora bonds are further discussed in the paper, which suggests the African Development Bank’s expertise and its financial instruments, as well as its interest in co-financing projects, could help leverage African migrant resources for development.