Growing Interest in Tracking Remittances Opens a Door for Microfinance

At the Inter-American Development Bank’s (IDB’s) forum last week on remittances, a million dollar tracking agreement was signed, addressing a lack of uniformity in collecting information on remittances to Latin America and the Caribbean.

Migrants to more industrialized countries, or even from a rural to an urban area, often send home a portion of their income, commonly referred to as remittances. The United Nations Capital Development Fund (UNCDF) estimates that in 2003, more than $88 billion was sent to developing countries from workers based elsewhere. Remittances follow foreign direct investment (FDI) as the world’s second largest source of capital flows. However, in developing countries, remittances play a much larger role relative to FDI, representing 2.9% of the total GDP ($26 billion) and 380% of FDI. Figures for remittances are generally conservative, as the true value is most likely much higher because a significant portion is transferred through informal methods (not through wire services or banks). In comparison to other forms of capital flow, such as FDI, remittances offer a steady source of funds that is relatively immune to political or economic fluctuations.

In recent years, “remittances sent by migrant workers have become a major source of hard currency for many countries in Latin America and [the] Caribbean.” According to the Multilateral Investment Fund (MIF), autonomously administered by the IDB, this region last year received around $45.8 billion from its expatriates. Approximately $1 trillion is generated by foreign-born adults in the United States annually, of which one-tenth is sent abroad in the form of remittances. In the past five years, awareness of such huge flows of capital has resulted in widespread competition to facilitate the transactions. Initially, immigrants were paying exorbitant fees to send money home, but with increased attention, competition has made the transfer of remittances home much more appealing, and easier.

The microfinance industry stands to benefit greatly from a more intimate involvement with money transfers related to remittances. Research shows that recipients of these funds are often the same people as those targeted by microfinance institutions. This offers microfinance institutions (MFIs) an important opportunity to facilitate money transfers for a fee, as well as to cross-sell other financial products. By commercially linking with money transfer institutions, MFIs have the opportunity to expand their operations, by offering a (formal) savings mechanism for micro-borrowers, and also providing a guarantor of credit to the same people.

Additional Resources

1) Inter-American Development Bank (IDB): "Remittances."
2) Inter-American Development Bank (IDB) Remittance Forum: "The Impact of Remittances on Microfinance"
3) Inter-American Development Bank (IDB) Press Release: "Competition, Coverage and Technology Seen As Key Factors In Cutting Cost of Remittances to Latin America and the Caribbean"
4) Development Gateway: "Leveraging Remittances for Microfinance"

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