Development & Aid, Economy & Trade, Global Governance, Globalisation, Headlines, Latin America & the Caribbean

ECONOMY: Remittances Could Produce ‘Financial Democracy’

Peter Richards

LIMA, Apr 6 2004 (IPS) - Encouraged by the increasing flow of remittances from workers overseas to their relatives in Latin America and the Caribbean, the region’s development bank is urging commercial banks to offer more services to people once considered too poor to even command a small loan.

The Washington-based Inter American Development Bank (IDB) says remittances are helping workers’ struggling relatives in Latin America and the Caribbean pay day-to-day costs such as mortgages, electricity and grocery bills and school fees.

The IDB’s Multilateral Investment Fund (MIF) says remittances to the region from foreign workers last year totalled 38 billion U.S. dollars compared to 32 billion dollars in 2002, making it the largest and fastest growing remittance market in the world.

The bank estimates that 450 billion dollars worth of remittances will flow into the region during the coming decade, and officials suggest the money could lead to ”financial democracy”, with low-income families getting access to financial services like saving accounts and home improvement loans.

”One of the most promising options created by this new reality is the possibility of deepening financial markets by incorporating a segment of the population that had been excluded up until now,” said MIF Manager Donald F. Terry at the IDB annual meeting here in March.

According to an MIF study in Mexico, Ecuador and Central America, although a large percentage of remittances are used for basic needs, such as food, rent and health care, up to 20 per cent could be directed toward long-term savings or investments.

”Commercial banks can create channels for these investments by offering special savings accounts for immigrants in their country of origin. These accounts can be structured to facilitate paying a mortgage, starting a business or saving for a child’s future education,” it said.

Individual remittances typically range between 200 and 300 U.S. dollars a month and most of the estimated 150 million transactions take place outside the financial system.

MIF officials said one of their goals is to boost dramatically the number of families that receive remittances via the formal banking system. Only 5-10 per cent of the estimated 20 million households that now get remittances do so via a bank.

Workers’ earnings sent to the region last year surpassed foreign direct investment (FDI) and official development assistance (ODA) combined, according to the MIF, at a time when foreign investment as well as multilateral and bilateral support was declining.

Net equity investment to the region dropped from 34.5 billion dollars in 2002 to 23.5 billion dollars in 2003, while net support from governments and multilateral agencies fell from 7.4 billion in 2002 to 3 billion dollars last year, according to MIF figures.

The agency predicts that the flow of remittances will continue growing, due mainly to a combination of demand for labour in industrialised countries that have waning population growth rates and the paucity of job opportunities in most Latin American and Caribbean countries.

”People will continue to move north and billions of dollars will continue to flow south,” says Terry.

The largest recipient nation for remittances in 2003 was Mexico (13.7 billion dollars), followed by Brazil (5.2 billion), Colombia (3 billion), the Dominican Republic (2.3 billion) and El Salvador (2.2 billion).

Caribbean Community (CARICOM) countries were also among the top earners. Jamaicans working abroad sent back 1.4 billion dollars, followed by Haiti (977 million), Guyana (136 million), Trinidad and Tobago (88 million) and Belize (73 million).

Cuba, the only communist state in the Caribbean received 1.2 billion dollars, according to the MIF.

Nearly 30 billion dollars of total remittances came from the United States.

Officials explained that a number of major U.S. banks have started offering special services designed to meet the needs of immigrants, such as debit cards that can be used draw on accounts internationally.

Other measures being considered include incentives for commercial banks to offer products tailored to immigrants, such as foreign currency accounts and specialised savings accounts; reduced licensing fees related to remittances; and partnerships between banks and credit unions in origin and destination countries.

The MIF said that when it started studying remittances in 2000, its focus was the high cost of the transactions.

At the time, sending 200 dollars to the region cost an average 15 per cent. Today’s cost is nearly half that, an average of about eight per cent, largely due to increased competition between service providers, Terry says.

That competition is increasingly coming from major commercial banks, which now vie with traditional money transfer companies. Technology is also leading to lower transfer costs, said Terry, who predicted further reductions in the next five years.

MIF officials said they have enlisted the support of more than 20 banks, money transfer companies, credit unions, micro finance networks and think tanks to draft a set of core recommendations for the remittances industry and for governments.

They would include increasing transparency, embracing fair competition, promoting alliances and partnerships, and expanding financial systems to include the ”unbanked” population.

”At the MIF we want to promote the creation of coordinated systems of money transfers that end provider exclusivity, improve service and reduce costs,” said Pedro de Vasconcelos, a MIF financial specialist.

Terry said the main recommendation calls for a ”do no harm” policy, arguing that it would be counterproductive and unfair for governments to try and take more money in taxes from those receiving money from overseas.