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Why are Africans getting ripped off on remittances?

April 22, 2014
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Whatever your views of migration, a consensus ought to be possible on one thing: if migrants do send money home, as much as possible of the hard-Migrationearned dollars that they send should actually get there, to be spent on putting feeding the kids, putting them through school or even having a bit of fun (that’s allowed too).

But according to some excellent new research by the ODI, one in eight dollars remitted to Africa is creamed off by intermediaries – a much higher level than for other regions. They launched the report at a meeting in London last week, and the high preponderance of Africans at the launch bore witness to the anger this level of rent-seeking arouses.

Some highlights from the exec sum:

‘Remittances to Africa are rising. In 2013, transfers to the region were valued at $32 billion, or around 2% of GDP. Charges on remittances to Africa are well above global average levels. Migrants sending $200 home can expect to pay 12% in charges, which is almost double the global average (see graph). While the governments of the G8 and the G20 have pledged to reduce charges to 5%, there is no evidence of any decline in the fees incurred by Africa’s diaspora.

Four factors combine to drive up charges. The first is limited competition. Global markets are dominated by an oligopoly of money transfer operators (MTOs) and regional sub-Saharan African markets by a duopoly. Just two companies – Western Union and MoneyGram – account for an estimated two-thirds of remittance pay-out locations in Africa. As in any market, limited competition is a barrier to cost reduction and efficiency gains.

Second, there is evidence of ‘exclusivity agreements’ between money transfer operators, agents and banks. These agreements restrict competition in an already highly concentrated market.

cost of remittances by regionThird, financial market regulation, the high costs of intermediation and limited access to financial institutions in Africa represent additional cost-escalators.

Fourth, financial exclusion and poor regulation in Africa escalate costs. Few Africans have access to formal accounts (which limits their choice of pay-out providers) and most governments require payments to take place through banks, most of which combine high costs with limited reach and low efficiency.’

The panel and Q&A generated some interesting additional thoughts:

The Rwandan High Commissioner, Williams Nkurunziza:I thought capitalism was about fairness and effort, not squeezing money out of Rwanda through some kind of cartel. This is absolutely distressing. We need to advocate for fair trade in goods and services, including money transfers.  Western Union controls the vast majority of the outlets in Rwanda, and charges are closer to 18-19%, not 12% as ODI says.’

Mr Nkurunziza pointed to Western regulations as a barrier to entry for new players (the massive cost of jumping through the ever-increasing hoops of due diligence on money laundering and counter-terrorism). ‘Your regulations are taking food from our widows and children. We need to open the market here; tone down the level of oversight that means only the big guys can play.’

Then he got really interesting (and earned a round of applause), pointing out the double standards inherent in the West’s rules on capital and labour. ‘The West exports capital, we export people. Double taxation treaties protect Western transnational corporations in Africa, allowing them to avoid the higher levels of taxation. How can we find a way to ensure our migrants are sheltered from your high taxation – surely the same arguments should apply?’

From the audience, Onyekachi Wambu of AffordUK pointed out that his organization has worked on this, with its Remitaid proposal, arguing for tax rebates on money remitted by migrants in themigration paddington 590 UK, but progress ground to a halt with the 2008 crash. Maybe time to pick it up again?

Another African speaker cautioned against presenting the remittance question as ‘baddie white transnationals v victimised Africans’, pointing out that African governments are often some of the worst offenders.

In fairness, ODI picked this up in its report:

‘Remittance corridors within Africa have some of the highest charge structures in the world. Migrant workers from Mozambique sending money home from South Africa, or Ghanaians remitting money from Nigeria, can face charges well in excess of 20%.’

What I liked about this migration discussion, compared to the ideologized, polarized mud-slinging that usually takes place, was its emphasis on making existing migration work better for poor people, and its sensible recommendations:

‘This report calls for a number of measures to lower Africa’s ‘remittance super tax’, including:

  • Investigation of global MTOs by anti-trust bodies in the EU and the US to identify areas in which market concentration and commercial practices are artificially inflating charges.
  • Greater transparency in the provision of information on foreign-exchange conversion charges, drawing on the example of Dodd-Frank legislation in the United States.
  • Regulatory reform in Africa to revoke ‘exclusivity agreements’ between MTOs on the one side, and banks and agents on the other, and promote the use of micro-finance institutions and post offices as remittance pay-out agencies. Governments and MTOs should work to promote mobile banking as a strategy to support the development of more inclusive financial systems.
  • Engagement by Africa’s diaspora and wider civilsociety groups to put remittances at the centre of the development agenda. The public interests represented by Africa’s diaspora and remittance receivers should be placed above the commercial interests of MTOs and banks.’

And here’s report co-author Kevin Watkins doing a 4m summary

5 comments

  1. It is an excellent report and a good illustration how technology advance does not of itself create new opportunities. We need better regulation, greater transparency, and an end to ‘duopoly’ practice!

  2. I also attended the meeting and thought it an interesting and positive discussion with a great campaigning focus against monopolistic (well duopolistic) practices in this sector. On the mudslinging though…one of the speakers, Abdirashid Duale (the Chief Executive of Dahabshiil, the Somali money transfer organisation currently in a dispute with Barclays about retail banking services) pointed out that Vodaphone – the dominant global player in mobile phone money transfer – had had a grant from DFID to cover some of the start-up costs of setting up M-Pesa in Tanzania. In contrast the SME founded by his father has never had any development assistance despite operating primarily in Somalia where remittances are such a crucial element of managing domestic crises and having to deal with the burden of additional regulatory costs after 2001. Is it true that Vodaphone received DFID support to expand mobile money services? If so, isn’t there a danger that UK development policy risks replacing the duopoly of Western Union/Moneygram with a monopoly of Vodaphone as remittances shift to mobile phones?

  3. As a small UK charity sending money to Guinea Conakry we too face massive charges and struggle to find pays to get money to the school we support within a reasonable time frame and at a decent rate.

  4. Felix Salmon believes that lower remittances costs may actually lead to lower remittances. This is because the banks (and western union and moneygram) have a lower incentive to push remittances when their margins are too low. The hassle of money laundering restrictions and investigations is a serious business cost. So the net effect of more competition and lower fees is less remittance promotion by services and lower remittances.

    See: http://blogs.reuters.com/felix-salmon/2014/03/04/the-unintended-consequences-of-cheaper-remittances/

    I’m not endorsing this view, but worth putting it out there. It might argue for some sort of cooperative arrangement with the market powers if the goal is to maintain and/or increase remittances. Rather than try to radically open the field to competition and eliminate their tasty fees.

    What says Duncan and Kevin?

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