Remittances are estimated to account for 24 percent of foreign capital flows into African countries. The remaining 76 percent is made up by fixed direct investment, exports, debt, portfolio flows and foreign aid. Remittances from international migrants contribute more than three times that of foreign aid. Moreover, in several countries where foreign aid is falling, remittances are rising.
When people migrate it’s usually to seek better employment opportunities, and in many cases to find ways to support relatives and communities in their own countries. Around the world, over 250 million people live and work in host countries, and between them they send over $500 billion home every year.
In Africa, there are several notable emigration patterns. The largest includes citizens from Nigeria, Ghana, Egypt and Ethiopia migrating to the US. Between 1970 and 2015, the number of people residing in the US, but born in Africa, increased from 80,000 to 2.1 million. Another substantial pattern consists of people emigrating from North Africa to Europe, and in particular to France. The third significant migration is from Zimbabwe to South Africa. Zimbabweans living in South Africa send over $1 billion home every year.
Remittances differ from other capital flows in that they often flow to the poorest communities, and in many cases, they are received by women. The economic effects of remittance flows are mostly positive, though there can be negative effects and some risks too.
On the whole, remittances from migrant workers lead to lower inequality within a country. Since these payments are received by the poorest communities, they can also stimulate local economies, often in remote areas. In many cases, they can also lead to improved nutrition and healthcare in these communities.
On a national level, remittances can cushion the effects of economic shocks to a country’s economy. Because they are recorded as income on the balance of payments account, they improve the strength of a country’s currency.
The negative effects are less obvious. In some cases, communities can become overly dependent on remittances from relatives working in other countries. This can discourage people in these communities from trying to support themselves. Migration can also lead to a ‘brain drain’ – it’s usually the best qualified and most entrepreneurial citizens that seek opportunity elsewhere. If skilled people work abroad, they can provide vital support to their families back home. But, some economists believe local economies suffer more in the long run without these people.
Over the last few years, we have seen a backlash against immigration in some of the host countries. Immigration has been a central theme of the political agenda in both Europe and the US and contributed to Donald Trump’s election and the UK’s decision to leave the EU. In South Africa, perceptions about immigrants led to violent protests and a series of xenophobic attacks. While it can be argued that these sentiments are more a matter of perception than reality, they can still lead to strained international relations and potentially be detrimental to trade.
The effects of remittances on a country’s GDP depend on how the money is spent. If recipients invest the money they receive on building small businesses, overall productivity is improved. On the other hand, if the money is spent only on consumption, there is no immediate benefit to a country’s economy. If consumption increases without a corresponding increase in productivity, imports increase and the money flows straight back out of the economy. Several studies have actually shown that remittances don’t necessarily lead to an increase in economic growth. UN economists have said that remittances would be more beneficial if they could be channelled into local infrastructure projects or vocational training.
For some time, FinTech companies in Africa, have been building remittance products and services. Can these FinTechs also improve the effect remittances have on local economies?
The immediate opportunity lies in reducing the cost of remitting money. Fintech companies are already offering money transfer services at close to half the cost charged by banks, but there is room for further improvement. Lower fees being paid to intermediaries means more money goes to local communities.
The remittance industry is becoming closely connected with the microlending industry and there are several opportunities for remittances to be leveraged to obtain credit, or even used to earn interest. For example, the records of cash transfers from overseas can be used to obtain a loan. And, if remittances can be saved in a mobile wallet, these balances can be used to extend loans to other local community members. Indian economist, Dilip Ratha, has suggested that a people’s bank could be structured around the remittance platform in each community.
Besides reducing costs and extending credit, the effect of remittances can be improved if they are directed into investment in local infrastructure, building small businesses, education and training. This may be where the next wave of fintech opportunities exist – and how they are set to compete with the banks
The FinTech revolution in Africa has been dominated by the potential of mobile technology. Many people in Africa still don’t have a traditional bank account, and many have never had access to a terrestrial phone line. It’s not surprising, therefore, that mobile phones have been central to many of the solutions to both problems. Mobile penetration in Africa is either very high, or rising rapidly, and gives millions of people access to payment services, mobile wallets and of course a means of communication. It’s therefore likely that the full potential of remittances might also revolve around mobile devices.
The other technology beginning to impact the remittance landscape is blockchain technology. In fact, the most compelling use case for Bitcoin is long distance money transfers. Several start-ups in Africa are using Bitcoin and other blockchain technologies to create remittance platforms, and many of these are also based on mobile devices.
The challenge to FinTechs going forward will be to find ways to allow communities to leverage the cashflows they are receiving to develop their local economies. Besides microlending services, they could offer education and training content. They could also give those remitting funds control over the way the money is being used. Read our blog on the African Payments Landscape
If FinTech companies can identify ways to help communities build businesses, infrastructure and educational resources, they can entrench themselves as a vital cog in these local economies. If that were to happen it would also mean FinTechs had succeeded where many banks and aid programs had failed.