Are Money Transfer Monopolies Keeping African Families in Poverty?

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Written by D.A. Barber

Sub-Saharan Africans living abroad for employment or other reasons, sent $32 million home in 2013 to struggling family members. But their families pay exorbitant remittance transaction fees approaching an estimated $1.8 billion annually – sometimes as much as 20 percent of the value of the money transfers.

“The average cost of remittances to Sub-Saharan Africa has remained stubbornly high at around 12 percent of the transaction value,” according to the World Bank’s April 2014 Migration and Development Brief.

When compared with other regions, money transfers to Africa have among the highest fees, mainly due to regulations that favors monopolies.

The result is the poorest people in the world are paying the highest money transfer remittance fees.

“After remaining broadly unchanged in 2012, remittances to Sub-Saharan Africa grew by 3.5 percent in 2013 to reach $32 billion. Flows are forecast to rise to $41 billion in 2016,” according to the World Bank brief. In fact, remittances account for 5 percent of the entire continent’s GDP.

The money transfer fees are also high on the sending end.

An April 2014 report from the British economic development organization,Overseas Development Institute, found Sub-Saharan African expatriates in the U.S. and Europe pay twice as much to wire money home than their Southeast Asian or Latin American counterparts.

According to the report, Lost in Intermediation,“Whereas remittance fees have gone down for people sending money to Latin America and Southeast Asia — in keeping with G8 and G20 targets to reduce transaction costs — the cost of sending money home to Africa has remained the same.”

“Progress has yet to be seen; unfortunately, regulatory reforms take time,” Maria Quattri, the author of the Overseas Development Institute report told AFKInsider in an interview.

On average, the fee amounts to12 percent of every $200 sent home, compared with a global average of 7.8 percent with Western Union and MoneyGram accounting for two-thirds of remittance transfers.

But the loss associated with this “super tax” amounts to about $586 million, according to the report.

According to the UN’s International Fund for Agricultural Development, remittance-receiving households are usually benefit from “reductions in poverty, increased household consumption, greater investment in human and physical capital, and less vulnerability from economic and natural shocks.” But because “regulatory environments often prevent other nonbanking financial institutions from making transfers, or restrict outbound transfers, financial access is also a casualty.”

The World Bank’s new Global Knowledge Partnership on Migration and Development (KNOMAD) program, which acts as a hub of policy information on migration, says remittances are making “an important and growing contribution to poverty reduction, growth and welfare in developing countries.

“At the household level, remittances have reduced poverty in many developing countries, and have raised expenditures on investment, health services, and schooling, while also enabling households to diversify their sources of income and reduce their vulnerability to risks such as drought, famines and natural disasters,” notes KNOMAD’s website.

The Overseas Development Institute says reducing Africa’s remittance fees to the global average would generate $1.8 billion – enough funds to put 14 million children through primary school, or provide clean water to 21 million people.

Following the Money

According to the UN’s International Fund for Agricultural Development, the African continent has over 30 million people in the diaspora, with migration mostly to former European colonial powers such as France, the United Kingdom, the Netherlands and Italy, among other countries.

“This year’s remittance flows to developing countries will be an increase of 7.8 percent over the 2013 volume of $404 billion,” according to the World Bank’s Migration and Development Brief, which notes that during 2013, Nigeria ranked number 5 globally at $21 billion, and ranked number one for sub-Saharan Africa, followed by Kenya.

But in Nigeria, nearly 80 per cent of transfers are handled by one money transfer operator, which “expects exclusivity and prevents other money transfer operators from contracting agreements with those banks that are the sole remittance payers in the country,” according to the International Fund for Agricultural Development.

“In all of Western Africa, for example, 70 per cent of official payments are handled by one money transfer operator, which demands exclusivity in money transfers of the banks,” notes the Fund.

Eastern African countries also depend heavily on this inflow of cash, where remittances “continued to grow robustly last year, by 10 percent to Kenya and 15 percent to Uganda,” according to the World Bank brief. And its conflict areas like Somalia that are particularly remittance dependent. According to the World Bank, “the closure of bank accounts of money transfer operators serving Somalia and other fragile countries is also worrying.” The Bank notes that remittances provide a lifeline to “fragile and conflict-affected situations” where remittances are more than 5 times larger than foreign aid, foreign direct investment and other sources of international finance.

For the entire eastern region, annual average remittances per migrant reach almost $1,200 and on a country-by-country average represent 5 per cent of GDP and 27 per cent of exports.

Of all the world’s regions, however, Africa’s predominant migration is mostly intraregional. And it can be even more expensive to transfer money within Africa, with migrant workers from Mozambique paying fees as high as 20 percent to send savings home from South Africa, according to the Regional Economic Outlook: Sub-Saharan Africa, released in April 2014 by the International Monetary Fund.

According to the World Bank, South-South remittances, which are on the rise, are in many cases either not permitted or very expensive due to outward monetary exchange controls in many countries, including Gambia and Ghana.

Call to Action

The World Bank’s May 2014 Remittances Progress Report found that: “While the total average cost of making remittances is falling, ‘lifting fees’ are an increasing concern.”