hands of a child holding a dollar bill

For centuries, people have crossed borders seeking better opportunities for themselves and their families.  However, over the past thirty years, economic migration has accelerated, driven by the rapidly growing gap between developed and developing countries, and made easier by improved transportation and communication technologies.

As a result, remittances --- the cross border money transfers sent to family members of migrant workers living abroad – have recently become the subject of great attention because of their growing scale and potential impact. 

Today’s African Diaspora consists of approximately 30 million adults, sending about USD 40 billion annually to their families and local communities back home.  For the region as a whole, this represents 50 percent more than net official development assistance (ODA) from all sources, and, for most countries, the amount also exceeds foreign direct investment (FDI). In several fragile states, remittances are estimated to exceed 50 percent of GDP. As such, remittances constitute a vital lifeline of support for tens of millions of African households, and a potential source of local economic development for the communities where they live.  Although most remittances are used for daily necessities, up to 20/25 percent (USD 8 – 10 billion) are available for other than immediate consumption.

For all of their size and importance, less is known about remittances to Africa than in any other developing region of the world. Nevertheless, the outlines of an African remittance market is beginning to emerge, marked by limited competition, high costs, and difficulty in reaching rural areas, which receive up to 40 percent of all remittances. As for the families who pay high fees to receive money, and who are often forced to travel significant distances, these are generally outside of the financial system, without access to savings, credit, or other means to leverage their remittances.

Most African countries restrict the payment of remittances to banks, which in turn, typically enter into exclusive arrangements with large money transfer companies, like Western Union or Money Gram, to operate on their behalf.  This results in limited competition and limited access for consumers, which is graphically illustrated by the fact that one country with a very competitive remittance market – Mexico – has as many pay-out locations as the entire continent of Africa, which has ten times the population.

Improving legal and regulatory frameworks by opening up remittance markets to non-bank financial institutions, while phasing out the use of exclusive agreements and promoting technological innovation, could have a dramatic positive impact on increasing competition, lowering costs, and improving convenience. 

However, the most lasting way to leverage the impact of remittances for both the individual families and their communities is to expand access to the financial system, thereby providing recipients with more options to save, invest, and use their remittances productively.