Remittances – the money sent home by migrant workers – play a vital role in Africa. They help to pay for health, education and productive investment in agriculture. During periods of crisis they provide a financial lifeline. For many economies in the region, remittance transfers now occupy an important position in the balance of payments. Yet Africa is failing to secure all of their potential benefits. No region faces higher charges for remittance transfers. In effect, Africa’s diaspora face a ‘remittance super tax’ that hurts families and holds back development.
Key findings:
- Many of the benefits of remittance transfers are lost in intermediation as a result of high charges. Africa’s diaspora pays 12% to send $200 – almost double the global average.
- In effect, Africans are paying a remittance ‘super tax’. Reducing charges to world average levels and the 5% G8 target would increase transfers by $1.8 billion annually. That figure is equivalent to the sub-Saharan African cost of paying for the education of some 14 million primary school age children – half of the out-of-school total; improved sanitation for 8 million people; or clean water for 21 million.
- Weak competition, concentration of market power and flawed financial regulation all contribute to high remittance charges. Just two money transfer operators (MTOs) – Western Union and MoneyGram – account for two-thirds of remittance transfers. We conservatively estimate that the two companies account for $586 million of the loss associated with the remittance ‘super tax’, part of it through opaque foreign currency charges. ‘Exclusivity agreements’ between MTOs, their agents and banks restrict competition and drive up prices, as do African financial regulations favouring banks over other remittance payment options.
- Governments and regulatory authorities in sending countries should do far more to promote competition and encourage innovation. Financial regulators – such as the UK’s Financial Conduct Authority – and legislative bodies should actively review the practices of MTOs. All regulators should demand higher standards of transparency for foreign exchange charges, as envisaged in the Dodd-Frank legislation adopted by the US. African governments should do more to secure a better remittance deal for their citizens. Prohibiting exclusivity agreements is one immediate priority, along with ending the stranglehold of banks on remittance payments.
- Investigation of global MTOs by anti-trust bodies in the EU and the US to identify areas in which market concentration and commercial practices are artificially inflating charges.
- Greater transparency in the provision of information on foreign-exchange conversion charges, drawing on the example of Dodd-Frank legislation in the United States.
- Regulatory reform in Africa to revoke ‘exclusivity agreements’ between MTOs on the one side, and banks and agents on the other, and promote the use of micro-finance institutions and post offices as remittance pay-out agencies. Governments and MTOs should work to promote mobile banking as a strategy to support the development of more inclusive financial systems.
- Engagement by Africa’s diaspora and wider civil-society groups to put remittances at the centre of the development agenda. The public interests represented by Africa’s diaspora and remittance receivers should be placed above the commercial interests of MTOs and banks in the regulation of remittance systems.
The report calls for a number of measures to lower Africa’s ‘remittance super tax’, including: