Remittances: Driving economic growth and financial inclusion

Global remittances are growing rapidly, with digital remittances lowering costs, increasing efficiency and, ultimately, helping to drive financial inclusion and sustainable development.

According to the World Bank, the total figure for global remittances in 2018, including flows to high- income countries, reached $689 billion — an increase on the $633 billion in 2017. Remittance flows to low- and middle-income countries (LMICs) grew by 9.6% last year (up from the 8.8% rise in 2017), to hit a record $529 billion.

Regionally, the growth in inflows ranged from 7% in East Asia and the Pacific to 12% in South Asia. The overall increase was attributed to a stronger economy and employment situation in the US, combined with a rebound in outward flows from Russia and some of the Gulf Cooperation Council (GCC) countries.

These flows are an essential source of income for millions of families, and they have been fuelled by an increase in global migration. Over 258 million people currently live outside their countries of birth, up from 173 million in 2000, and they are producing a rising stream of transactions.

Remittances are now the largest source of foreign exchange earnings in the LMICs, excluding China. They are more than three times the size of official development assistance (ODA).

2019 growth trends

The growth of advanced economies is slowing, largely due to weak exports. This deceleration is particularly notable in the Euro area: growth in Germany and France is subdued, and Italy’s recovery from recession is weak. Activity in the US is slowing but remains robust, with the unemployment rate below 4% (World Bank).

Growth in LMICs, meanwhile, remains stable in 2019, as deteriorating external demand and persistent policy uncertainty in high-income countries is offset by recent improvements in financing conditions.

Given these global trends, the World Bank expects remittances to LMICs to grow by about 4% in 2019, to $550 billion. Remittance growth in East Asia and the Pacific is projected at 4.2%, Europe and Central Asia at 3.9%, Latin America and the Caribbean at 3.9%, the Middle East and North Africa at 2.7%, South Asia at 4.3%, and Sub-Saharan Africa at 4.2%.

Migration patterns

In the GCC countries, the deployment of workers from South Asia has been declining. Japan has a new policy to admit 345,000 foreign workers over a period of five years from the following nine priority countries: Cambodia, China, Indonesia, Mongolia, Myanmar, Nepal, Philippines, Thailand and Vietnam.

Latin America is facing several migratory movements from Central America and Venezuela. Since 2015, around 2.7 million people have left Venezuela for other countries, especially in South America.

While the European migration crisis is past its peak, LMICs continue to bear the brunt of forced displacement. By mid-2018, the number of refugees worldwide (excluding Palestinian refugees) had reached 20.2 million, according to the United Nations High Commissioner for Refugees (UNHCR). There were more than 2.5 million internally displaced persons in the Lake Chad Basin. The top origin countries for refugees were Syria (6.5 million), Afghanistan (2.7 million), South Sudan (2.2 million), Myanmar (1.2 million) and Somalia (1 million).

In Europe, the stock of detected undocumented migrants rose from 1.4 million in 2011 to around 6 million in 2018, largely due to the rejection of numerous asylum applications. In the US, the stock of migrants detected to be undocumented increased from around 1.5 million in 2011 to 3.8 million in 2018.

A tide of innovation

Figures from the World Bank show that the incumbent banks are the costliest channels for sending remittances, with an average cost of 10.9% in the first quarter of 2019, while post offices are recorded at 7.6%.

Interestingly, the average cost of sending remittances to the East Asia and Pacific region was 7.3% in the final quarter of 2018, down from a quarterly average of almost 8% in 2017. This is due to technology reshaping the processes within the remittance landscape and powering new entrants, which is in turn helping to increase competition and lower remittance charges.

The complex relationship between fintech entrants and traditional financial institutions has evolved from disruption to collaboration. As such, some partners in the remittance chain may be fintechs while others are not. For example, digital money transfer services like TransferWise or WorldRemit rely on bank cards to first draw funds from people’s accounts.

Digital remittances can help people in all geographies by allowing them to do what they want with their money more efficiently. It is a big step towards democratising financial services. Disruptive fintechs, such as Safaricom’s M-PESA, are harnessing these trends to boost financial inclusion. Some remittance recipients, for example, may opt to take the cash out from their M-PESA Mobile Wallets when they receive the funds, but they also have the ability to stay cashless and use digital money in their personal and commercial transactions.

Blockchain technology is also beginning to exert more influence on the remittance market. One of the most prominent fintechs in this area is Ripple, which has built RippleNet, a proprietary network that connects banks, payment providers and other financial institutions.

In addition, most banks and other financial institutions have researched and tested blockchain technology. Possibilities are opening up as virtual currencies become more accepted, regulated and used across the world. Many commentators see the underlying blockchain technology as the future framework for all financial services, owing to the transparent and immutable nature of the transactions.

In its 2018 report ‘Sending Money Back Home’, Clovr revealed that, of the people surveyed in the US, 15.8% use cryptocurrency to send cash home. This makes it one of the more popular methods, ahead of using an online service or traditional wire transfer, with users citing cost efficiency as a key driver. It may take time, but this trend is likely to spread throughout the world.

Dilip Ratha, who heads up KNOMAD, a World Bank initiative that organises data and knowledge on migration, will be speaking further about the latest remittance data trends at the 2019 IAMTN Global Summit, which takes place in London on 2–3 October.

To find out more about the agenda and register, please visit the event website.