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Remittance – the big business of sending money home

Emeka Okafor, of Timbuktu Chronicles fame, highlights a paper about the Nigerian diaspora on his new blog, Africa Unchained. The paper, by Nigerian scholar Uche Nworah, is about the role of the Nigerian diaspora in nation building, and focuses in part on remittance – the money Nigerians living and working abroad send to family and friends at home.

It’s difficult to overstate the importance of remittance income to most African nations and many developing nations. Nworah cites a figure of $300 billion dollars sent from diasporas to developing nations via remittance. In Africa, the amount of money remitted by diaspora workers – $17 billion per year – is larger than the amount of foreign direct investment in Africa, and rivals official development assistance grants or loans ($25 billion per year). In some African nations, remittance represent as much as 27% of the gross domestic product of some nations. According to the UN’s Office of the Special Advisor on Africa, the average African migrant living in a developed nation is sending $200 per month home to his or her family.

While remittance income is incredibly important for the developing world, there are at least four major problems with the remittance system as it currently exists: cost, safety, potential for misuse, and scale issues.

Cost – It costs a lot of money to send money overseas. If you’re lucky enough to be sending money from your bank account to a bank account in another country, the process is somewhat complex, but not very costly – I routinely send money overseas for $5 per transfer. But use a service like Western Union and you’ll pay at least 6% of your money in fees – more, if you’re sending small amounts of money. (According to the calculator on Western Union’s site, sending $200 to Nigeria will cost you $12. Once past the $12 minimum, WU charges 6% of the amount you’re sending, up to $1000, their maximum amount allowed for a first transfer. Less than $200 also nets a $12 charge. Other countries are more expensive – $200 to Ghana or Mali costs $22, or 11%.) An article by Dilip Ratha, a senior World Bank Economist, reports that 13% of the average remittance is claimed by transaction fees.

Safety – If you send money to Aunt Akwe in Lagos and she goes to the Western Union to pick it up, she’s a target for a mugging, as it’s likely that she’ll be coming out of the shop with money in her hand.

Misuse – You may have been sending Aunt Akwe money to pay for your cousins’ school fees. But there’s no guarantee that Aunt Akwe isn’t going to spend it on lottery tickets, or beer for crazy Uncle Pat.

Scale – Sending money home will help Aunt Akwe repair the family homestead and send the kids to school, but it won’t pave the road the house is on, or build a new secondary school nearby. While $200 a month has a huge impact in the life of a family, collective action of many families is required to make major projects possible.

Hundreds of creative efforts are underway across the developing world to solve these problems with remittance. To address safety issues, MoneyGram is offering delivery services of money transfers in the Phillipines, bringing money to your door instead of forcing you to come and collect your funds from an office in town. Alternatively, if your recipient has an ATM card, they will transfer the deposit to her account.

A new remittance strategy – goods and service remittance – addresses the safety, cost and misuse issues simultaneously. Instead of sending money home, make a purchase from a store or website in the US or Europe, and powdered milk, cans of corned beef or a live goat is delivered to your relatives. Manuel Orozco, an economist with the IADB, estimates that as much as 10% of all remittance happens via goods and services.

Mama Mike’s – a pioneer in goods remittance – offers online shoppers the ability to buy supermarket vouchers and mobile phone airtime for relatives in Kenya and Uganda, as well as more conventional gifts like flowers and cards. SuperPlus, Jamaica’s largest supermarket chain, goes even further, allowing online shoppers to fill a shopping card for their relatives and arrange for them to pick up the order in one of the SuperPlus stores around the country. SuperPlus is a partner with both Western Union and MoneyGram and has been promoting its supermarket remittance service through Western Union and MoneyGram stores in New York City, home to a large Jamaican diaspora. Goods remittance services generally don’t charge a fee, making their profit off goods sales instead.

Harder to address than the first three problems is the scale issue – how can remittances have a positive impact beyond the immediate family receiving money from abroad? The Mexican state of Zacatecas has tried a financial incentive – for each dollar a worker sends home to support a local project (building schools, paving roads, digging wells), the state government matches with two dollars. Town governments have increased the match to three to one, and in 2003, $20 million was remitted to support 308 “tres por uno” projects in the state.

Would a three for one system work in Nigeria? It requires faith that money remitted would go towards community projects and not be diverted along the way. Unfortunately, in countries with long-standing government corruption problems, this sort of faith can be hard to build, especially in a diaspora that left, in part, to escape problems of poor governance.

21 thoughts on “Remittance – the big business of sending money home”

  1. These are some brilliant ideas, to help the “remittance men” (and women). I wonder how the new communications technologies might be welded to money and goods transfers? Say, shops that allowed these innovating transfers as well as, say, talking to your loved ones back home via VOIP, posting to message boards, etc. Here’s something I wrote on remittances, just a query really, but with some slightly different figures (it’s a little old): http://morphemetales.blogspot.com/2004/12/remittance-men.html

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  3. Ethan,
    You forget another problem with remittances, namely the build up of inflationary pressures within a local economy. I grew up in an Indian state (Kerala) whose economy was built on the back of the migrant worker. Trouble is that it also exarcebated inflation (for everyday commodities too), making life even more difficult for those locals who didn’t have a source of remittances to fall back upon. Now, I don;t know if this would apply to countries less dependant on remittances than Kerala was, but certainly a point to keep in mind.

  4. Ireland has changed in the last twenty years from being a remitted to being a remitting economy. It’s an amazing thing to see.

    My mother (who has seen both sides of the thing, living in Ireland since the thirties and seeing immigrants here in this decades) thinks that remittance money is often misspent. It’s never really appreciated. There is a lot of pressure on emigrants to send money back. I have heard about the problems in Kerala, and there were somewhat similar problems here – a lot of construction going on, but very little sustainable long-term economic activity. At the same time, life would definitely have been very tough if it hadn’t been for the remittances.

    I don’t know if making remittances cashless would really help anything. I think it would introduce a whole bunch of new problems, particularly around taxation.

  5. Antoin,
    In the Kerala experience, I’d say a very large part of the remittances were invested in large mansions and gold, which in itself is a sure sign that there’s not much else within the economy to invest in. There are cities in Kerala where real estate is pricier than in Bangalore or Madras. That said, you’re right, life without remittances may have been tougher. On other hand, maybe remittances allow over-dependant economies to remain on life support when in fact, everyone would be better off if the economy just crashed instead and the right structural adjustments could then be made.

    But yes, the Irish experience is an amazing example how things can turn around in less than a generation.

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  8. Wondering what is the best way to send money to a friend in Uganda, if I can only send ten dollars at a time? Cash? Money order?

  9. Millie – if you’re sending only ten dollars, folding it into an envelope with a letter probably isn’t a terrible idea. There’s the real possibility that it will be stolen, but the amount of money is so small that you’re going to discover that Western Union isn’t a reasonable option. You also might look at MamaMikes.com and see if it makes sense to send your friend cellphone minutes or food vouchers instead. Good luck!

  10. Packabarrel Stores has developed an online grocery shopping service and delivery in 9 caribbean markets that enable Caribbean nationals living abroad may purchase items from these grocery stores via the Internet, which are then delivered to their relatives and friends in these 9 Caribbean locations within 48 hours.

  11. It is really amaizing and exciting article.You see how We African can develope our nation with in ourselves.We know that clearlly those African who live outside how we get the money to send to back home.Unfortunetlly,it doesn’t matter the expense of our labour rather when we successed or achieve our goal.This kind of development is advantagious in different parrameter .Perhaps,we can reduce the dependancy from developed countries.

  12. Trying to find a source for per-unit sales data for remittances sent and received by large supermakets in various countries around thw world on a daily, weekly, monthly or yearly basis.

    Thank you.

    Ted Holmes

  13. The Packabarrel Stores idea is fabulous. You are undermining the unscrupulous relative. You know the one who is supposed to feed your old grandmother while you are away. I wonder if electricity, water land tax can be paid this way too. That might be another way to undercut the desperate relatives and help financially at the same time. And how does “check free” and other banking instruments like that play into this

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  15. BEWARE! Don’t use this service. I used it to send my family food, the food never arrived. They kept giving me the run around. The food was suppose to be delivered in 2 days, now it’s one month later and the food was never delivered. My family needs the food so bad and now I can’t afford to send them any money to buy food. DON’T USE http://WWW.PACKABARREL.COM! It’s a ripoff SCAM!!! :( GOD IS GOING TO GET YOU GLENN FOR DOING THIS TO POOR PEOPLE!!!!

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  18. On tackling the scale problem, I think Globalgiving is making some progress:

    “While $200 a month has a huge impact in the life of a family, collective action of many families is required to make major projects possible.”

    If small communities can post what they collectively want, and then send the diaspora to give, GlobalGiving gets the money to the ground for less than Western Union plus a fiscal NGO-agent to oversee that community project.

    (Nice to see another reCatcha using blog here!)

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