JOHANNESBURG, 27 February 2013 (IRIN) - New data from the World Bank has revealed that African migrants pay more to send money home to their families than any other migrant group in the world.
While South Asians pay an average of US$6 for every $100 they send home, Africans often pay more than twice that - and in South Africa, which has the highest remittance costs on the continent, nearly 21 percent of money set aside for family members back home is spent on getting it there.
With an estimated 120 million Africans depending on remittances from family members abroad for their survival, health and education, the World Bank argues that high transaction costs are cutting into the impact remittances can have on poverty levels.
To address this, the Bank is partnering with the African Union Commission and member states to establish the African Institute for Remittances, which will work towards lowering the transaction costs of remittances to and within Africa. It will also leverage the potential of remittances to influence economic and social development.
“The World Bank’s approach supports regulatory and policy reforms that promote transparency and market competition and the creation of an enabling environment that promotes innovative payment and remittance products,” said Marco Nicoli, a finance analyst at the Bank who specializes in remittances.
Costly and difficult
Owen Maromo, a 33-year-old farmworker who lives in De Doorns, a grape-growing region in South Africa’s Western Cape Province, told IRIN that his family in Zimbabwe relies on the money he sends home every month.
“I’ve got a house there and I need to pay rent. I’m also taking care of my youngest brother - since my mum died four years ago - and my wife’s family.
“Almost every Zimbabwean here is budgeting to send money back home,” he added. “If they could, they would send money home on a weekly basis.”
In a 2012 report by the Cape Town-based NGO People Against Suffering Oppression and Poverty (PASSOP), interviews with 350 Zimbabwean migrants revealed some of the reasons sending money home from South Africa is both costly and difficult.
A key impediment is the stringent regulatory framework that governs cross-border transfers from South Africa. Exchange control legislation, for example, requires money transfer operators (MTOs) to partner with a bank. According to PASSOP, this has had the effect of stifling competition that would likely reduce transaction costs.
Legislation intending to counter money laundering and terrorist financing requires that customers provide proof of residence and proof of the source of their funds before they can access financial services. This effectively excludes the many migrants living in informal settlements and those who are paid in cash.
PASSOP found that even among migrants who do have access to banks and MTOs like Western Union and MoneyGram, many lack the financial literacy to make use of them.
“Some have just come from rural areas in Zimbabwe, so it takes time for them to know about such things,” said Maromo, adding that lack of documentation was another major obstacle. “If you’re undocumented, you can’t go through the banks.”
Three-quarters of the Zimbabwean migrants interviewed by PASSOP relied instead on “informal” remittance channels, such as giving money or goods to bus drivers, friends or agents to send home. This is often not much cheaper than using banks or MTOs, and it is significantly riskier. Of the respondents who used such methods, 84 percent reported negative experiences, including theft of their money, loss or destruction of their goods and long delays in remittances reaching intended recipients.
Maromo relayed his own experience sending money home through an agent who charged a 15 percent commission to channel the money through his South African bank account before handing it over to Maromo’s relatives in Zimbabwe. “Some time ago, I nearly lost 2,000 rand ($225) because I deposited it in [the agent’s] account and he was saying he didn’t have it and giving excuses. In the end, we got the money, but it cost us nearly 1,000 rand ($113) in airtime calling Zimbabwe,” he said.
“Some are using bus drivers or those people who are going home, and you have to trust them because you’re desperate, but there can be a lot of problems,” he added. “There are a lot of people whose money just disappears. Almost on a daily basis, you hear those stories.”
Lowering transaction fees
Now, Maromo uses a UK-based online transfer service called Mukuru.com, which is popular with many Zimbabweans living overseas. The proof of residence and source of funds requirements are the same as for traditional MTOs, but the site charges 10 percent on transfers from South Africa to Zimbabwe - less than most banks.
The South African Reserve Bank and the treasury have committed to bringing the cost of remittances down to 5 percent by relaxing regulations for smaller money transfers, negotiating with regulators in the Southern African Development Community on exchange control regulations, and removing the requirement that MTOs partner with banks.
However, at the time of writing, the Reserve Bank has not yet responded to questions from IRIN about how these changes will be implemented and within what timeframe.
Rob Burrell, director of Mukuru.com, said achieving the 5 percent target would be tough considering the numerous costs that MTOs have to cover, including fees paid to the companies that collect and pay out the money, the cost of supporting transactions through a call centre, and licensing and reporting requirements. “We would need everyone pulling together,” he said.
Burrell noted that less stringent laws governing MTOs in the UK mean more competition but much weaker anti-money laundering controls. To operate in South Africa, Mukuru.com has to comply with the regulation that they partner with a local banking license holder.
“In the UK, it’s easier to obtain your license. There are 4,000 [MTOs operating in the UK] compared to 12 in South Africa, but the downside is that it’s very difficult to police them all,” he told IRIN. “My last audit in the UK was four years ago because they can’t handle the volume of licenses.”