Don’t get caught in the remitance trap
New payment apps can save diaspora hundreds of pounds in sending money home.
Remittances sent by diaspora workers play a crucial role in providing essential income to millions in developing economies. The widening income gap between nations, demographic shifts, and global changes ensure that migration in pursuit of economic opportunities will persist, sustaining the flow of remittances for decades.
In 2022, global remittances reached a record $647 billion, triple the official development assistance. This figure likely underestimates the actual value as informal channels, not captured in official statistics, are widespread. Notably, remittances to Egypt surpass revenue from the Suez Canal, while Sri Lanka and Morocco see remittances exceeding earnings from tea exports and tourism, respectively.
India leads as the largest recipient, surpassing $100 billion in annual remittances in 2022. Kenya, China, and the Philippines also receive substantial amounts. For smaller or conflict-affected nations, these transfers constitute over one-fifth of GDP, exemplified by countries like Tajikistan, Lebanon, Nepal, Honduras, and The Gambia.
During crises, remittances provide a vital financial lifeline, with diaspora workers often increasing support in the aftermath of disasters. Even amid global economic contractions, remittances remain stable. The United States is the primary source, particularly for Latin America and the Caribbean, while the Gulf Cooperation Council countries, especially Saudi Arabia and the UAE, contribute significantly.
Africa stands out as the most expensive region for money transfers, with costs reaching 8%. Regulatory complexities, multiple currency conversions, and a lack of interoperable payment systems contribute to the expense. Digital wallets accessible via smartphones emerge as the most cost-effective remittance method.
“When Africans leave their countries to work, study or live abroad, they still maintain family, business and friendship connections back home. These connections are often maintained through communication and the need for effective ways to send and receive items and money from home.,” LemFi Country Manager Kakea Mbacha
Cumbersome regulations aimed at preventing financial crimes hinder competition, with the remittance market exhibiting an oligopolistic structure. A risk-based approach, reducing regulations for smaller sums, could unlock the potential of cross-border digital remittances.
Lowering costs and improving regulation could enhance the positive impact of remittances. Beyond financial support, remittances have the potential to improve financial inclusion, access to international bond markets, and serve as collateral for borrowing. Governments seeking to tax remittances might find more success in fostering an environment conducive to investment rather than imposing taxes, which could divert flows to informal channels.
“Our services will not attract any fees as we strive to ensure that Kenyans in the diaspora can send money home instantly, at the best rates,” Mbacha
As populations in Africa and South Asia grow, along with increasing migration pressures due to climate change, remittances are poised to play a vital role in sustaining incomes and contributing to the global economy.