The remittance: A phenomenon of formal and informal market
Saturday, 16 February 2008
Md Abdul Jabbar
Remittance market represents the total funds sent by individuals who are residents abroad to recipients through both formal (i.e., banking system) and informal i.e., "Hundi" channels. If Bangladesh achieves the goal of incentivising increasing use of the informal sector for sending remittances, the flows through the banking system would be $4.0 billion greater -- at around $10.0 billion within three years. Reducing transaction fees over three to five years to the IADB average target of 5.0%, which is not unreasonable given the lower starting point, would increase net formal sector remittances by more than $500 million per year.
Statistics indicates a remittance flow of about $6.50 billion in 2006, fully $3.70 billion of which came from the KSA, the UAE and the UK. These numbers are mere compilations of returns from the commercial banks of their remittance activity. The majority of the Bangladesh diaspora consist of unskilled labourers as is the ease within the Latin American countries, where the remitting community abroad consists overwhelmingly of poorly educated unskilled workers in low wage jobs in the US and Europe.
The valid study of remittance behaviour must be segment specific covering professionals/paraprofessionals; technical and clerical workers; skilled production workers; industrial, construction, and agricultural labourers; service workers and domestics; and mariners. But in the Bangladesh context, the data as such are not available. However, the Bangladeshi working abroad include a wide range of unskilled labourers. There is a low percentage (15%) of professional and technical workers on one end of the spectrum and a correspondingly large segment of service workers, including growing mainly female domestics, on the other.
The Bangladeshi diaspora covers more than 140 countries or so. They are present in significant numbers in North America, Europe, the Middle East, and developing Asian countries. However, a lower number of Bangladeshis in the US are permanent residents unlike the case with the Philippines -- about 2.0 million of legal status and 1.2 million irregular ones.
Formal banking channels in Bangladesh account for a far lower share of remittances than in the case of Latin America, largely due to the absence of the long-standing involvement of the banks and more recent market entry by other commercial banks. At the worst case, they account for a third of the real potential market and may account for a half of it. We know that reducing the informal share of remittances has tremendous financial leverage simply because of the scale of the flows. The formal Bangladesh remittance market is highly competitive and reasonably priced compared to the Latin American standards, but there is substantial scope for improvement.
The remittance market is expanding as an important source of fee revenue for the commercial banking sector. The sheer size of the market continues to attract new entrants including new banks; card companies (VISA) and various entrepreneurs and non- government organisations (NGOs). Many of these initiatives are still in the planning stage or are seeking funding. Despite the above competitive situation, non-banks and informal channels remain robust and anecdotal evidence suggests that they may be expanding their share of the market.
The most cost effective means to remit money cross-border is by electronic transfer between financial accounts. This is even more efficient if the accounts are intra-bank, especially if there is a single accounting platform.
The second most efficient way to remit money is through the ATM system, where the remitter issues his beneficiary a duplicate foreign bank issued card for use at ATMs. In Bangladesh, the use of ATM is very new and a few banks have their plan to work with it. Recently only the Dutch Bangla Bank Limited (DBBL) has focused its efforts to utilise the advantages of ATM services. The other banks may come out with such ideas that would help them reduce the pressure on valuable space.
Critically, this method requires that the remitter has a deposit money account or a payment card account. Many Bangladeshis abroad either lack access to financial accounts (for reasons of status or because foreign banks do not want them as customers) or bank with institutions that treat foreign remittances as a high cost "exception process" or simply do not offer the service.
The limited market research and the consultant's experience in other developing economies indicate that up to 80% of households are "unbanked," meaning they do not hold a deposit money account.
The formal banking system is simply a set of deposit monthly accounts from which customers can access cash, and make or receive payments through a variety of access instruments including check, payment cards, and electronic transfers (ACH, GIRO, wire), etc. Households without deposit accounts in the formal system are economically "disenfranchised" because they can neither send nor receive deposit money through the banking system.
The exclusion of the poor from the formal financial system limits their ability to efficiently manage their resources, save and establish sound financial habits. This, in turn, reinforces their poverty and makes it less likely they can use credit effectively.
It should be noted that BMET has estimated that over 20% of expatriate Bangladeshis open a deposit account during their pre-departure formalities but they are a small fraction of the potential market. Anecdotal evidence suggests that most remittances sent to bank accounts are immediately taken out as cash.
The failure of the banking system to develop economically viable means to "bank the unbanked" is a market failure, typical of developing economies, where banks are narrowly focused on an affluent minority, and corporate and real estate lending.
Capillarity is the ability to move deposit money from account to account in the banking system. Small-sized thrift banks, rural banks and other "grass-roots" financial institutions are poorly integrated into the national and international payments system. There is a general lack of automation and technical capacity. Products beyond simple savings or home finance schemes are limited.
These institutions require strengthening at the level of management processes and technology, if they are to fully realise their potential as value creating end points for remittances. There is a general lack of automation and technical capacity. Products beyond simple savings or home finance schemes are limited.
A banked population is an indicator of development, which in turn facilitates development. Spain was 80% unbanked in 1960, and now has 90% of its population banked. Remittances played a major role in its development. Even Mexico is 63% banked.
Banking in a modern economy is economic enfranchisement. The Philippines should aim to give the majority of households access to a simple, low cost deposit account within five years, including all recipients of remittances from abroad. This, together with increasing value, choice, and service through competition and technical innovations, is central to shifting remittances from informal to formal channels.
Positive incentives for non-resident Bangladeshi (NRBs) to bank and invest in Bangladesh are essential. This is not only a matter of providing significant tax advantages. Twenty per cent of Portuguese bank deposits are in non-resident accounts (which include free inward remittances services in many cases). Innovative private sector banks in India have created compelling products for non-resident Indians (NRIs). For example, ICICI Bank offers NRIs a complete range of methods for sending money back to India at low cost, either electronically through ACH transfers to its branches and correspondents overseas, or over the counter of partner banks in cash or check form. ICICI offers NRI account holders high interest Indian rupee accounts with the choice of currency upon maturity so that depositors are fully hedged against currency depreciation. NRIs can hold deposits and investments in a range of currencies and manage them over the internet.
Our government should focus its emphasis on creating comfortable environment so that the expatriate customers can find favourable incentives and be lured to remit their hard-earned foreign currency in the home country through formal channel. Formulation of new policy for easy access of foreign remittance into the home country without any hassle should be coordinated and designed by the Bangladesh Bank immediately. The experience of private banks mobilising the major portions of the remittance of the country should be consulted as well. And by adopting this type of corridor for inward remittance, the government can utilise a new scope of development financing. It would be a new horizon for the government to reduce dependence on foreign direct investment (FDI) with such new privilege created for the toiling people of the country. This will demonstrate again that it is the people who matter for development of the country.
(The writer is Senior Vice President, Islami Bank Bangladesh Ltd)
Remittance market represents the total funds sent by individuals who are residents abroad to recipients through both formal (i.e., banking system) and informal i.e., "Hundi" channels. If Bangladesh achieves the goal of incentivising increasing use of the informal sector for sending remittances, the flows through the banking system would be $4.0 billion greater -- at around $10.0 billion within three years. Reducing transaction fees over three to five years to the IADB average target of 5.0%, which is not unreasonable given the lower starting point, would increase net formal sector remittances by more than $500 million per year.
Statistics indicates a remittance flow of about $6.50 billion in 2006, fully $3.70 billion of which came from the KSA, the UAE and the UK. These numbers are mere compilations of returns from the commercial banks of their remittance activity. The majority of the Bangladesh diaspora consist of unskilled labourers as is the ease within the Latin American countries, where the remitting community abroad consists overwhelmingly of poorly educated unskilled workers in low wage jobs in the US and Europe.
The valid study of remittance behaviour must be segment specific covering professionals/paraprofessionals; technical and clerical workers; skilled production workers; industrial, construction, and agricultural labourers; service workers and domestics; and mariners. But in the Bangladesh context, the data as such are not available. However, the Bangladeshi working abroad include a wide range of unskilled labourers. There is a low percentage (15%) of professional and technical workers on one end of the spectrum and a correspondingly large segment of service workers, including growing mainly female domestics, on the other.
The Bangladeshi diaspora covers more than 140 countries or so. They are present in significant numbers in North America, Europe, the Middle East, and developing Asian countries. However, a lower number of Bangladeshis in the US are permanent residents unlike the case with the Philippines -- about 2.0 million of legal status and 1.2 million irregular ones.
Formal banking channels in Bangladesh account for a far lower share of remittances than in the case of Latin America, largely due to the absence of the long-standing involvement of the banks and more recent market entry by other commercial banks. At the worst case, they account for a third of the real potential market and may account for a half of it. We know that reducing the informal share of remittances has tremendous financial leverage simply because of the scale of the flows. The formal Bangladesh remittance market is highly competitive and reasonably priced compared to the Latin American standards, but there is substantial scope for improvement.
The remittance market is expanding as an important source of fee revenue for the commercial banking sector. The sheer size of the market continues to attract new entrants including new banks; card companies (VISA) and various entrepreneurs and non- government organisations (NGOs). Many of these initiatives are still in the planning stage or are seeking funding. Despite the above competitive situation, non-banks and informal channels remain robust and anecdotal evidence suggests that they may be expanding their share of the market.
The most cost effective means to remit money cross-border is by electronic transfer between financial accounts. This is even more efficient if the accounts are intra-bank, especially if there is a single accounting platform.
The second most efficient way to remit money is through the ATM system, where the remitter issues his beneficiary a duplicate foreign bank issued card for use at ATMs. In Bangladesh, the use of ATM is very new and a few banks have their plan to work with it. Recently only the Dutch Bangla Bank Limited (DBBL) has focused its efforts to utilise the advantages of ATM services. The other banks may come out with such ideas that would help them reduce the pressure on valuable space.
Critically, this method requires that the remitter has a deposit money account or a payment card account. Many Bangladeshis abroad either lack access to financial accounts (for reasons of status or because foreign banks do not want them as customers) or bank with institutions that treat foreign remittances as a high cost "exception process" or simply do not offer the service.
The limited market research and the consultant's experience in other developing economies indicate that up to 80% of households are "unbanked," meaning they do not hold a deposit money account.
The formal banking system is simply a set of deposit monthly accounts from which customers can access cash, and make or receive payments through a variety of access instruments including check, payment cards, and electronic transfers (ACH, GIRO, wire), etc. Households without deposit accounts in the formal system are economically "disenfranchised" because they can neither send nor receive deposit money through the banking system.
The exclusion of the poor from the formal financial system limits their ability to efficiently manage their resources, save and establish sound financial habits. This, in turn, reinforces their poverty and makes it less likely they can use credit effectively.
It should be noted that BMET has estimated that over 20% of expatriate Bangladeshis open a deposit account during their pre-departure formalities but they are a small fraction of the potential market. Anecdotal evidence suggests that most remittances sent to bank accounts are immediately taken out as cash.
The failure of the banking system to develop economically viable means to "bank the unbanked" is a market failure, typical of developing economies, where banks are narrowly focused on an affluent minority, and corporate and real estate lending.
Capillarity is the ability to move deposit money from account to account in the banking system. Small-sized thrift banks, rural banks and other "grass-roots" financial institutions are poorly integrated into the national and international payments system. There is a general lack of automation and technical capacity. Products beyond simple savings or home finance schemes are limited.
These institutions require strengthening at the level of management processes and technology, if they are to fully realise their potential as value creating end points for remittances. There is a general lack of automation and technical capacity. Products beyond simple savings or home finance schemes are limited.
A banked population is an indicator of development, which in turn facilitates development. Spain was 80% unbanked in 1960, and now has 90% of its population banked. Remittances played a major role in its development. Even Mexico is 63% banked.
Banking in a modern economy is economic enfranchisement. The Philippines should aim to give the majority of households access to a simple, low cost deposit account within five years, including all recipients of remittances from abroad. This, together with increasing value, choice, and service through competition and technical innovations, is central to shifting remittances from informal to formal channels.
Positive incentives for non-resident Bangladeshi (NRBs) to bank and invest in Bangladesh are essential. This is not only a matter of providing significant tax advantages. Twenty per cent of Portuguese bank deposits are in non-resident accounts (which include free inward remittances services in many cases). Innovative private sector banks in India have created compelling products for non-resident Indians (NRIs). For example, ICICI Bank offers NRIs a complete range of methods for sending money back to India at low cost, either electronically through ACH transfers to its branches and correspondents overseas, or over the counter of partner banks in cash or check form. ICICI offers NRI account holders high interest Indian rupee accounts with the choice of currency upon maturity so that depositors are fully hedged against currency depreciation. NRIs can hold deposits and investments in a range of currencies and manage them over the internet.
Our government should focus its emphasis on creating comfortable environment so that the expatriate customers can find favourable incentives and be lured to remit their hard-earned foreign currency in the home country through formal channel. Formulation of new policy for easy access of foreign remittance into the home country without any hassle should be coordinated and designed by the Bangladesh Bank immediately. The experience of private banks mobilising the major portions of the remittance of the country should be consulted as well. And by adopting this type of corridor for inward remittance, the government can utilise a new scope of development financing. It would be a new horizon for the government to reduce dependence on foreign direct investment (FDI) with such new privilege created for the toiling people of the country. This will demonstrate again that it is the people who matter for development of the country.
(The writer is Senior Vice President, Islami Bank Bangladesh Ltd)