Remittances to Africa Squeezed by High Transaction Costs

It’s undeniable that the money sent from the African diaspora to their families on the world’s most impoverished continent contributes significantly to Africa’s battle with poverty. African diaspora is large, with 30.6 million people  50% of which are intra-Africa migrants, according to Anne W. Kamau and Mwangi S. Kimenyi of the Brookings Africa Growth Initiative. The  World Bank estimates that about $60 million remittances were sent to Africa in 2012. Those remittances support millions of Africans. Unfortunately, sending money to Africa specifically costs more than to anywhere else — transaction expenses are almost 3 percent higher than the global average. The African diaspora “could save US $4 billion annually”  by making such costs 5% lower.

Data from Send Money Africa (SMA) report, World Bank. Jan. 2013

The figures above are from the Send Money Africa (SMA) remittance prices database, which belongs to the African Institute for Remittances (AIR) Project organized majorly by the World Bank and the African Union Commission. According to the SMA, the intra-Africa corridors are the most expensive money transfer avenues in the world, while South Africa, Tanzania and Ghana featured as the most costly sending countries with 20.7 percent, 19.7 percent, and 19.0 percent cost respectively.

But the actual costs might be even higher, says Ismail Ahmed, the founder of World Remit, an online money transfer service provider.

“There are costs associated with going to a branch,” Ahmed comments, “In Africa, in many cases banks are in the cities, so people have to travel there, queue up, wait and then collect small amounts of money.” – The Guardian

Data from Send Money Africa (SMA) report, World Bank. Jan, 2013.

The lacks of transparency and competition in the African money transfer market are to be blamed for the elevated prices, according to a recent SMA report. The report underlines that the transparency problems surface in banks at a much higher rate than other remittance service providers (RSPs). 63 out of 77  providers that are considered non-transparent in the SMA’s fourth quarter 2012 survey are banks. As explained by the SMA, these non-transparent RSPs often fail to provide multiple service options for the customers. Wire transfer, which usually charges customers at a higher fee, is often the only choice available to the senders. Furthermore, a considerable number of banks do not disclose important information on money transaction services. For example, the exchange rate, which to a large degree,influences the costs of sending money, is not disclosed. Generally speaking, banks turn out to be the priciest RSPs in Africa.

Compared to the Gulf region, the cheapest market with high-level competitiveness for money transfer services, Africa is prevailed with the “monopolies” of banks and money transmitter operators (MTOs).  “Sending Money Home Africa”, a 2009 study by the International Fund for Agricultural Development of UN (IFAD) and The African Development Bank (ADB) stresses that in most African countries, banks are the only institutions allowed to payout remittances, due to the restrictions of countries’ regulations. In order to maintain a guaranteed business flow, most banks sign exclusivity agreements with Western Union and MoneyGram, two pioneer MTOs in the world’s money transfer market. As a result, Western Union and MoneyGram occupied “65 percent of all remittance payout locations” in Africa, according to the IFAD’s report.

Apparently, the “monopolies” of banks and MTOs strangle the competition in the African market and skyrocket the prices of sending money to Africa. On the other hand, what’s interesting  is that South Africa, Ghana and Tanzania, three countries that are proved to be the most expensive remittance sending countries according to the SMA, are also the representative fast-growing economies in Africa, based on UN’s 2011 statistics.

Data from Send Money Africa (SMA), World Bank. Jan, 2013

Regardless of what causes such dilemma in Africa, how can the problem of high costs be fixed? How can a healthy money transfer market develop? Kenya gives its own solution — mobile money transfer. As the World Bank reveals, Kenya is the cheapest African country to send money to, with 9.2 percent cost compared to the approximate average of 12% of African countries. Kenya’s mobile money (even though it’s not the first one to initiate it) undoubtedly contributes to its lower price in the market. By clicking keys on the phone, one can avoid spending money and hours on trains or buses to the banks by simply walking to a close agent store, paying cash for mobile credits. Kenya might be a model for other African countries to emulate.

Other solutions involve fixing the regulatory environment. Massimo Cirasino, the Manager of Financial Infrastructure Service Line at the World Bank, suggests in his article that “comprehensive reforms that address transparency; competition; the removal of legal barriers; the development of a better payment-system infrastructure; and the improvement of the governance and risk management of remittance-service providers” should be launched to improve the current situation in Africa.

According to Cirasino, the G8 and G20 have shown support to the World Bank’s “the 5×5 Objective”, which targets at 5% as the average global remittance cost by 2014, which could provide some solutions in the future.


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