[INTERVIEW] Remittances and Financial inclusion: Opportunities hidden in plain sight

  • Ayako IBA, MFR

Ayako IBA introduced the topic and guest speaker Pedro de VASCONCELOS, a renowned specialist in global remittances. The interview was a kick-off to the broader panel discussion afterwards.

Firstly the importance of remittances in the context of microfinance and financial inclusion was highlighted by explaining the magnitude of the USD 450 billion per year that flows back into developing countries courtesy of their citizens working overseas. Usually this takes the pattern of sending home amounts of some USD 200 per month which often augments a necessary income flow for families. The impacts of these relatively modest contributions is not to be underestimated. Research has shown that these USD 200 at average cover 75% of the daily needs of the recipient families. These needs may well be considered the ‘family SDGs’ as they often cover education and health expenses for about 800 million families. The remaining 25% of remittance income is usually invested but typically not through MFIs.

A second reason for discussion is therefore the contradiction that families may be excluded from accessing MFI loans of savings or deposit schemes, yet have 25% of the monthly USD 200 available as disposable income that could work for them to generate more income. This is even more a potential option since the transfers are in stable currencies and – thus – fairly immune to crisis.

This a not a new observation as the phenomenon of remittances has been studied for at least twenty years. But where the first identified issue, the high costs of transfers, was well studied and has become more manageable, the undedicated destination of the 25% of the USD 450 billion is still open for discussion and innovative approaches that could strengthen financial inclusion solutions.

Iba continued by confirming that it is indeed almost paradoxical that the financially excluded are often considered as having no money to invest at all even if they receive regular remittances. Is this a challenge that could be picked up by impact investors? Vasconcelos responded that in fact many receiving families are impact investors in their own right: they often invest remittances in impact-triggering activities such as education and health. Consider for instance the highly impact-negative consequences if such remittances would stop from being sent. Indicative is that the UN Secretary-General in his first Covid-related speech pointed to the catastrophic impact it might have if as a consequence the flow of remittances would be jeopardised.

What is critical therefore is to facilitate the flow of funds and cut costs. Digitalisation is often identified as a major objective to pursue. And where helpful, receivers of funds could also be assisted in making highly strategic investments. IFAD and others are stimulating and monitoring developments and advising where relevant, facilitated by the rapidly changing ecosystem. Of particular relevance is to not only address family needs but also community needs.

Iba stated that we may also look at the fact that many financial intermediaries, both local and global, have stayed away from remittances. What are they missing? According to Vasconcelos, MFIs -often located among remittance receivers- have missed out and referred customers elsewhere, perhaps missing out on business opportunities from these transaction services as well. An important consequence is that remittance income was often not factored into loan repayment capacity, therefore risking to underestimate a client’s credit worthiness. Now the opposite may happen in the form of remittance agencies offering more comprehensive financial services, directly competing with MFIs and probably already ahead in terms of digitalisation allowing for quicker turn-around time and lower handling fees. And these digital service agencies are increasingly linked and integrated with financial service providers in developed markets with roots in emerging markets. In short, the remittances market is maturing rapidly, and dedicated MFIs run the risk of being left out if they don’t act.

Next Actions would be further discussed in the ensuing panel session on remittances.