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Financial I Institutions and Remittances

1. Financial institutions should care about remittances because they are large in size, stable during economic downturns, and benefit the poor. Remittances are a larger source of funding for many developing countries than foreign aid or investment. 2. Financial institutions can profit from remittances while also promoting development by facilitating the transfer of funds from migrants to their home countries. As migration and remittance flows continue growing, this represents a major business opportunity. 3. Technologies for transferring remittances are advancing, from paper checks to electronic transfers via mobile phones and stored value cards. While competition may intensify, new technologies also open larger markets and allow previously untapped corridors, like transfers between developing countries,

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59 views3 pages

Financial I Institutions and Remittances

1. Financial institutions should care about remittances because they are large in size, stable during economic downturns, and benefit the poor. Remittances are a larger source of funding for many developing countries than foreign aid or investment. 2. Financial institutions can profit from remittances while also promoting development by facilitating the transfer of funds from migrants to their home countries. As migration and remittance flows continue growing, this represents a major business opportunity. 3. Technologies for transferring remittances are advancing, from paper checks to electronic transfers via mobile phones and stored value cards. While competition may intensify, new technologies also open larger markets and allow previously untapped corridors, like transfers between developing countries,

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Ammar Hassan
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Why should financial institutions care about remittances?

Dilip Ratha1
1. Remittances are large, counter-cyclical, and pro-poor. They are better targeted
to the needs of the poor than official aid or foreign direct investment.
2. Financial institutions can make money while doing good for the poor, and for
development of poor countries.
3. Remittances, and migration, are here to stay. Remittances are the largest
single source of external financing in many developing countries. In 2006,
recorded remittances exceeded $200 billion. Their true size is even larger.
What you do for remittances will also apply to all retail payments, a much
larger sum.
4. In the short-term, remittance costs are falling due to increased awareness, and
greater competition. Yet, the market opportunity for financial institutions is
increasing as the flows are shifting from informal to formal channels, and in the
long-run, international migration, trade and investment flows are set to
increase.
5. The remittance market is global in scope. Spanish banks are aware of the
flows to Latin America than to other parts. Remittance flows from Spain to
other parts appear significant. A new data set on bilateral migration and
remittance flows indicates that Spain has substantial migration from Eastern
Europe, Africa and Asia. Indeed, the size of the intra-Europe remittance
market may also be under-appreciated. For example, it is not clear whether
France receives more remittances from Spain than Morocco! In Eastern
Europe, Romania, Ukraine, Poland, Lithuania appear large remittance
destinations from Spain; in Africa, Senegal, Equatorial Guinea, and Nigeria; in
Asia, China, the Philippines, India and Pakistan appear significant remittance
destinations.
6. Besides providing remittance services for migrants, financial institutions can
also provide remittance services for small-value transfers related to trade and
investments.
7. Providing remittances will bring new customers for their deposit, loan and
insurance products. At the same time, this process will encourage account-toaccount transfers rather than cash-to-cash transfers. This process of financial
deepening will encourage more saving by migrants and their beneficiaries.
This process will also enable better matching of available saving with
investment opportunities by professional financial institutions (rather than
individuals who may or may not know how to invest).
1

Presented at the Workshop on The Impact of Remittances on Finance for Development: Analyzing
Operational Frameworks organized by the OECD Development Center and the Spanish Ministry of Foreign
Affairs and of Finance, Madrid, Spain, March 12, 2007.

8. The technology for providing remittance services is changing. The traditional


paper checks or money orders have given way to electronic transfers that
worked through a combination of messaging and inter-bank clearing process.
Recently we are seeing automatic clearing house systems, stored value cards,
and cell-phone based remittances. These new instruments will mean more
competition and smaller margins, but they also mean newer and bigger
markets, and bigger profits. For example, many new instruments are being
introduced in the mature North-North corridors or North-South remittance
corridors. Yet, South-South remittance corridors are large, yet under-exploited;
these corridors can only be exploited through new technologies that do not
require huge and expensive infrastructure. Exploiting these new markets will
also require unconventional partnerships, for example, with post offices in
developing countries.
9. Financial institutions needing cheaper and longer-term capital can use futureflow of remittances as collateral. Financial institutions in many countries
Mexico, Brazil, Turkey, El Salvador, Kazakhstan, Egypt, Panama, and
Ecuador have raised over $10 billions during the last decade. Turkey raised
over $5 billion last year through securitization of diversified payment rights
(remittances, trade payments, investments). Even the remittances are not
owned, only intermediated, by the concerned bank, the fact that the bank has
stable access to foreign exchange from sources outside the national
boundaries enables securitization structures to mitigate several key elements
of sovereign risks (e.g., devaluation, expropriation and currency convertibility).
The potential market for securitization is likely several times the size of the
current market. Moreover, new research results suggest that many unrated
poor countries are more creditworthy than previously believed. This finding
suggests an even bigger market for future-flow securitization by sub-sovereign
entities from unrated countries.
10. A hitherto unexploited market relating to the financial resources of the
migrants is the market for so-called diaspora bonds. These bonds are
actually financial instruments that can be sold by financial institutions to the
members of the diaspora. Israel and India have between them raised nearly
$40 billion in the past by issuing diaspora bonds. Israel issued these bonds to
raise development financing while maintaining ties with its Diaspora. India
issued diaspora bonds to raise external financing in times of funding crisis,
e.g., after it faced sanctions from donors after the nuclear explosions in 1998.
In both cases, these bonds were purchased by the diaspora members at a
discount to the international borrowing costs prevailing at the time. Such
discounts have no doubt a patriotic element. They may, however, be justified
on rational grounds, as members of the diaspora are likely to have local
currency needs for themselves or their relatives (which would imply less fear
of currency devaluation); and they may also be able to influence the decision
to repay loans (implying lower default risks). So far only public institutions of
Israel and India have issued diaspora bonds. It should be possible, however,
for private or sub-sovereign financial institutions to also issue diaspora bonds.
For Spanish banks and financial institutions, this asset class can present
2

opportunities for investment banking (structuring, marketing of these deals on


a fee-basis) and portfolio diversification. Also their subsidiaries in developing
countries should be able to directly issue these bonds.
For migration and remittances data including bilateral flows, and the papers
mentioned below, see the website of Development Prospects Group
www.worldbank.org/prospects/migrationandremittances. The author can be
reached at dratha@worldbank.org.
Selected references:
Ketkar, Suhas and Dilip Ratha. Recent Advances in Future-Flow Securitization.
The Financier, December 2005.
Ketkar, Suhas and Dilip Ratha. Development Finance via Diaspora Bonds: Track
Record and Potential. February 2007.
Ratha, Dilip. Leveraging Remittances for Development. Presentation at the
Plenary Meeting of the Leading Group on Solidarity Levies, Oslo, February
2007.
Ratha, Dilip. Leveraging Remittances for International Capital Market Access.
World Bank, November 2005.
Ratha, Dilip, Prabal De, and Sanket Mohapatra. Shadow Sovereign Ratings for
Unrated Developing Countries. World Bank. March 2007.
Ratha, Dilip and William Shaw. South-South Migration and Remittances. World
Bank.

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