The African Jotter

How Africa Loses Billions Due To High Cost Of Remittances

Global remittance is big business. Remittances are sums sent home by migrant workers. Numerous studies have proved that remittances directly impact the welfare of those receiving the sums.

And in Africa, remittances play a key role. They help to pay for health, education and productive investment in agriculture. Data from the World Bank shows that about 250 million global migrants transferred $601 billion to their home countries in 2016. From this sum, $441 billion went to developing countries, with African countries accounting for $39bn of this sum.

However, despite remittances contributing a huge quota to the GDP of African countries like Nigeria, Egypt and Morocco, the continent is still yet to fully benefit from its potentials. The middle men facilitating global remittance payments, such as Western Union and MoneyGram, charge way too much from African migrants. Africa’s Diaspora pays 12% for every $200 they send to the continent. This is way above the global average of 8%.

In 2014 for example, Western Union charged £8.90 to transfer £120 to Gambia. Its charge for transferring the same amount to India was just £4.90.

Thanks to Western Union and MoneyGram, African migrants face a ‘remittance super tax’ that affects families and holds back development.

“Forcing migrant workers to pay as much as $50 to send $200 is wrong, especially when they are sending salaries they have earned in the hope of supporting their families back home,” the World Bank said in a report.

But aside remittance transfers across continents, country to country transfers within Africa are also subject extremely high and ridiculous charges. On average, transfers within Africa costs more than 20%. Surprisingly, the only country with cheaper rates was Somalia, where neither MoneyGram nor Western Union operates.

So why does the rest of Africa pay so much for remittance transfers?

Three reasons explain why this happens.

First, the lack of competition gives MoneyGram and Western Union the duopoly to extort Africans. While global markets are dominated by an oligopoly of money transfer operators (MTOs), these two companies control an estimated two-thirds of remittance pay-out locations in Africa.

A second reason is the use of “exclusivity agreements’ between money transfer operators, agents and banks. These are sole-use agreements which stipulate that once a bank or agent works with Western Union or MoneyGram, they cannot work for other providers. These agreements restrict competition in an already closed market.

A third reason is financial market regulation, the high costs of intermediation and limited access to financial institutions in Africa represent additional cost-escalators. A Western Union spokesperson explained that “pricing varies between countries depending on a number of factors, such as consumer protection costs, local remittance taxes, market distribution, regulatory structure, volume, currency volatility and other market efficiencies.”

These factors can impact the fees and foreign exchange rates offered by corridor and service type. And with many African countries failing to develop efficient financial inclusion policies and better regulations, it is not surprising to see remittance rates remain so high.

However over the last few years, many changes and innovations are being introduced by fintech startups. And in the long run, the cost of remittances should see a steep drop in Africa.