Remittances – money sent home by international migrants to their families – provide three times the foreign aid of most countries and they do a lot of good for developing communities. However, there are many barriers to getting the money where it’s needed.
Changing the world with remittances
Dilip Ratha grew up in Orissa, in India. Although his parents were poor, he dreamed of going to the USA for his postgraduate degree, so he borrowed money for the airfare and crossed two oceans with just a $20 note in his pocket. In the USA, he worked part-time in a research centre while he studied, to finance his studies and to send money home to his family.
In 2014, there were 232 million international migrants just like Dilip Ratha around the world. 180 million of them live away from home and regularly send small amounts of money back to the family that helped them secure a better future. When times are hard for their family, they send more.
These amounts of money are known as remittances, and they add up to $413 billion per year, sent to help communities in the poorest developing countries of the world.
A good case study is Nepal, where the percentage of poor people declined drastically even during a time of political and economic crisis, because of remittances sent from family members living in India. The poor made up 42% of Nepal’s population in 1995, which lowered to 31% just 10 years later in 2005.
India itself is a country that benefits from remittances. In 2013, India received $72 billion in remittances, an amount larger than its exports for IT services.
In Tajikistan, remittances made up 42% of the country’s GDP. And remittances have proven to be a lifeline in poorer countries that suffer conflict or natural disasters, such as Somalia and Haiti.
Children benefit when their families receive remittances, with higher birth weights and lower school dropout rates reported in Mexico, Sri Lanka, and El Salvador.
It costs to send money
While they’re valuable to those who receive them, remittances can be costly to send as international money transfers.
On average, people send $200 per month in remittances. But when the same flat fee is charged on amounts up to $500, this takes a significant chunk out of the money that can be sent.
Globally, this fee amounts to 8% of the remittance. In Africa, the fee to send money between countries is more than 20%.
In villages like the one Dilip Ratha grew up in, the only place that offers international money transfers is the local post office. They are able to charge whatever they want because they have an exclusive agreement and there simply is no other option to get the money where it needs to go.
A simpler fee for international money transfers
There is a simpler and cheaper way to charge for international money transfers.
M-Pesa in Kenya enables people to send money and receive money at a fixed cost of only 60 cents per transaction.
The U.S. Federal Reserve Bank started a program with Mexico to enable money service businesses to send money to Mexico for a fixed cost of only 67 cents per transaction.
Why haven’t these faster, cheaper options been taken up internationally? Banks fear that this will lead to money laundering, even though there is no data to support this fear.
Dilip Ratha recommends that governments and Reserve Banks worldwide take the following steps:
- Recognise that small remittances are not money laundering, and therefore lower the fees for these international money transfers under $1,000. Fees should be reduced from 8% to 1% globally.
- Make illegal the monopoly-like exclusive agreements between post offices and money transfer companies.
- Create a non-profit philanthropic charity to create a remittances platform on a not-for-profit basis, since this would do more good than all of the foreign aid currently being given. Such a platform would need to comply with complex regulations in different countries.
You can read more about international money transfers on our website.