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Why are Africans getting ripped off on remittances?

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-earned dollars that they send should actually get there, to be spent on 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 US$8 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.

Here are some highlights of the executive summary:

“Remittances to Africa are rising. In 2013, transfers to the region were valued at $32bn, 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. 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.

“Third, 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.”

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 organisation has worked on this, with its Remitaid proposal, arguing for tax rebates on money remitted by migrants in the 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 vs 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 ideologised, polarised 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 US.
  • 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 civil society 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.”

Dr Duncan Green is head of research at Oxfam GB and a visiting fellow at the Institute for Development Studies. He is author of From Poverty to Power: How Active Citizens and Effective States can Change the World.

This article first appeared on the World Bank blog.

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  • Augustine Yada

    These proposals make a lot of sense, but the trouble lies mainly with those charged with the responsibility to take appropriate action in having the right legal and compliant policy frame work and to implement such rules and regulations, with out most
    efficiency and purpose.

    All African governments whose economies directly or indirectly benefit from diaspora remittances must be seen to act with added sense of urgency and commitment, to rectify the anomaly.

    This is a lifeline and life saving initiative, which ultimately means life and death for millions in Africa, especially sub-Saharan Africa’s rural communities.

    A more cost effective, efficient, affordable and sustainable method of taxing money transfers is a must and should be in place within this year. I don’t see any reason why this cannot be achieved, within the shortest possible time.

    All those negatively impacted by high fees for remittances, should and must keep pushing for urgent reforms, until such reforms are put in place and fully operational.

  • Remittances are increasingly coming to the fore on conversations on financial services in Africa. The cost of transfer could come down with adoption of innovations such as Bitcoin (the architecture). Certainly, crypto-networks and mobile money networks, should have a seat at the table with the rest of the Western UNions, Moneygram, Mastercard etc. This seems logical. The reality is that organisations that feel threatened, pull out all the stops to remain relevant. It is not unimaginable to think that these companies have intensively lobbied for costs to remain as they are and give them more time to evolve (certainly, they would be foolish not to). Nkurunziza makes a point.

    Costs need to come down, as low as current technology allows. There is the matter of regulation of course, but, if there is an impetus to really see the friction of money assuaged, the tools exist to succeed.

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