The High Transfer Service Cost To Africa

By Nicholas Botwe

The Perspective
Atlanta, Georgia
August 21, 2014



Latest World Bank figures show that remittances from foreign workers are expected to be $436bn this year, more than three times what poor countries receive in overseas aid. World Bank figures indicate that between 2007 and 2012 remittances to Africa grew by 34.5% and reached a total amount of $60.4bn in 2012. The same year, for the first time, remittances became the largest external financial source to Africa, ahead of foreign direct investment (FDI) and official development assistance (ODA), with 35% of global remittances to Africa originating in the EU.

However, the ODI has observed that the cost of sending money back to Africa is far higher than the global average. Africans are effectively paying a ‘super tax’ on money transfer fees that are more than double the global average, according to a report by the Overseas Development Institute (ODI). The ODI, a UK-based think tank, said cutting the costs of money transfers (remittances) to Africa would enable the continent’s Diaspora “to make a bigger contribution to the region’s development and strengthen self-reliance”. “This remittance super tax is diverting resources that families need to invest in education, health and a better future. Africans living abroad make huge sacrifices to support their families, yet face charges which are indefensible in an age of mobile banking and Internet transfers,” ODI director Kevin Watkins said.

Africans in the Diaspora are charged twice the global average in taxes to send money to relatives back home, a recent study has revealed. Sub-Saharan African expatriates working in the U.S. and Europe pay twice as much to wire money home than their Southeast Asian or Latin American counterparts, according to a report from a British economic development organization published this week. LONDON (Thomson Reuters Foundation) – Africans face the highest remittance fees globally, regularly paying a “super tax” to send money home at a cost that hurts families and holds back development in the world’s poorest continent, a think tank said on Wednesday.


The ODI said the potential for development gains through lower remittance charges can be illustrated by studying current aid flows. For comparative purposes, the ODI used a “mid-range” figure between its ‘upper-bound’ and ‘lower-bound estimates’ of $1.8bn. “This is equivalent to half of the aid provided to Africa by the UK, the region’s third largest bilateral donor, or some 40% of remittances to Africa through the World Bank’s International Development Association – the largest source of multilateral aid for Africa.”

In 2011 the World Bank, with support from the African Institute for Remittances Project, launched the ‘Send Money Africa’ remittance-price database – to monitor the cost of sending money to Africa. According to the bank, 30 million African migrants sent close to $60bn in remittances to 120 million recipients in 2012 alone. The bank said South Africa, Tanzania, and Ghana are the most expensive sending countries in Africa, with prices averaging 20.7%, 19.7% and 19% respectively.

Africans are charged exorbitantly high fees for remitting money. The London-based Overseas Development Institute (ODI) said reducing remittance charges to global average levels would generate $1.8 billion, enough to put 14 million children through primary school, or provide clean water to 21 million people. Transaction fees cost the region an estimated $1.8 billion annually, the report from the Overseas Development Institute (ODI) said.

Whereas remittance fees have gone down for people sending money to Latin America and Southeast Asia — in keeping with G8 and G20 targets to reduce transaction costs — the cost of sending money home to Africa has remained the same.

Remittances account for 5 percent of the entire continent's GDP, but Maria Quattri, one of the authors of the report, argues a great deal more is “lost in intermediation. That money could be used to educate 14 million children in the region, “half of the number out of school,” Quattri said Research conducted by ODI show that for every $200 or £119 transferred to Africa from overseas, senders were charged an average of 12%.
Imposing such high remittance fees from hard-earned income is hurting the African Diaspora. The global average set by the G-20 nations in 2014 is a 5% tax rate and this means that the African Diaspora is being charged twice the global average. It is undercutting a vital lifeline to hundreds of thousands of poor families in Africa. "Imposing such high remittance fees from hard-earned income is hurting the African Diaspora and, more importantly, their families and communities in the countries of origin," Siddo Deva of Comic Relief told reporters.
 “The message of the report is the poorest people in the world — Africans — are paying the highest charges for remittance fees,” she told Al Jazeera.
Some have resigned themselves to exorbitant fees, what ODI says is 12 percent of every $200 sent home.

“We have no choice. You have to send money home to family and friends. We are Senegalese,” said Rahma, who works at a popular restaurant in New York’s Little Senegal called Africa Kine. She did not give her last name.


Factors attributing to this high transfer cost
ODI blames the rise in taxes for money sent to Africa on restricted or weak competition, as a result of "exclusivity agreements" between money transfer operators, agents and banks, and flawed financial regulation contributed to pushing charges higher, ODI said. It attributed the high charges to lack of competition with two money transfer operators— Western Union and MoneyGram—controlling almost two thirds of the remittance market in Africa. The companies operate ‘exclusivity arrangements’ with agents, which restricts market entry. Financial regulations also raised charges by giving banks an effective monopoly on remittance payments.

ODI researchers estimate that operations involving Western Union and MoneyGram, account for around a third - $586 million - of the loss associated with high remittance charges each year.
Western Union charges 9.4 per cent on average on transfers to the region, while MoneyGram charges 10.4 per cent. Remittances to Africa reached $32 billion or two per cent of the domestic economy last year and are projected to grow by more than eight per cent annually to 2016.  

This income is less volatile than foreign direct investments and other private capital flows and directly reaches households, cushioning the impact of external economic shocks.
In Somalia, eight in 10 new businesses are funded by remittances while in Ghana, the transfers have halved the likelihood of households falling into poverty and improved school attendance. In Ethiopia, remittances have helped families cope with food shortages without having to sell productive assets.

The report calls for investigation into whether market concentration artificially raising prices and for greater transparency in provision of information on foreign currency conversion.
The “highly opaque nature” of remittance markets and the complex range of products make it difficult to find out why charges are so high, the ODI said. “Much of the relevant commercial information needed to establish detailed structures is unavailable.”

The report added: “Few Africans have access to formal accounts – which limits their choice of pay-out providers and most governments require payments to take place through banks, most of which combine high costs with limited reach and low efficiency.

The World Bank report, Send Money Home, found out, among other things, that the cost of sending remittances by migrants abroad to Africa in the third quarter of last year was 3.48 percentage points higher than the global average for the period. The global average was at 8.58 per cent, the report said, citing Remittance Pricing, another arm of the bank. A reduction in the cost of remitting could likely cause migrants to increase the amounts they remit to their friends and loved ones, thereby leading to a rise in inflows.

Another key factor is the lack of a transparent regulatory framework to enhance free transfer of money through the informal sector to Africa. A key impediment is the stringent regulatory framework that governs money transfer to Africa. Exchange control legislation, for example, requires money transfer operators (MTOs) to partner with a bank. This has had the effect of stifling competition that would likely reduce transaction costs. It has been observed that even among migrants who do have access to banks and MTOs like Western Union and MoneyGram, many lack the financial literacy to make use of them. 
Legislation intending to counter money laundering and terrorist financing requires that customers provide proof of residence and proof of the source of their funds before they can access financial services. This effectively excludes the many migrants living in informal settlements and those who are paid in cash. 

Lack of infrastructure
Garbrah disagreed with the ODI report’s conclusion that wiring agencies are entirely to blame for fee discrepancies for Africans. He blamed the lack of integrated regional infrastructure, language and currency for what some call exorbitant costs.

“If you call Argentina or Brazil, it will cost half” of a call to Africa, he said. “The issue has to do with technology and infrastructure pricing, ultimately.”
Fee discrepancies “show that dilapidated infrastructure costs money,” he said, “If you are operating an ATM or a Western Union (in some areas) you need to have your diesel generator there. Those things accrue costs.”

MoneyGram discounts World Bank report on cost of remittances to African migrants
However, Global money transfer service provider, MoneyGram, has described as baseless a recent World Bank report which concludes that African migrants spend more to send money home, compared to their counterparts from other regions.

The company, which is the second largest medium for sending migrant proceeds to their countries of origin, said the World Bank was selective in its data analysis, insisting that MoneyGram's charges are the same across its operational areas.

"Our fees in Africa are exactly the same as they are in Latin America and everywhere else. With all due respect, I think the World Bank has a bad data and I think they have to know that," the Executive Vice-President at MoneyGram in charge of the United States of America (USA) and Canada, Mr Peter Ohser,  after a press briefing in Accra.

"If you look at the report, they are saying that the average remittance fee is $9. It is $9 if you use the banks and other services on the broad perspective. For MoneyGram, our charges are on a global basis; it is $5 and it even continues to go down," Mr Ohser said in reaction to the World Bank report which was released in January this year.

He spoke to the Business Times as part of activities marking the visit of a management executive team from the company to Ghana to, among other things, celebrate the milestone that MoneyGram had chalked up in the country.

"If you look at the report, they are saying that the average remittance fee is $9. It is $9 if you use the banks and other services on the broad perspective. For MoneyGram, our charges are on a global basis; it is $5 and it even continues to go down," Mr. Ohser said in reaction to the World Bank report which was released in January this year.

Although the World Bank cited Send Money Africa (SMA) as the source of its data, Mr.  Ohser and his team from MoneyGram said the analysis by the bank was selective and based on data that was hard to trust.
While disagreeing with the bank's position on the remittance charges, Mr. Herve Chomel, the Vice-President at MoneyGram in charge of Africa, said the World Bank needed to redirect its efforts at getting more people to send money through the formal money transfer system rather than picking and choosing data to favour its course.

"I think the World Bank saw us as an easy target. It’s very easy also to take numbers and make them say what you want them to say, but the reality is that we are at five per cent and not 20 per cent as the World Bank is saying," he said.

"Also, the real issue here is that overall, the most expensive way of sending money is through the informal sector. It is not transparent, it is slow and very expensive and consumers lose their hard-earned money in the process. Therefore, I think it’s important that the World Bank refocuses its attention and goal to protect the consumer and eliminate the informal sector, rather than picking data randomly, putting them out of context and making that say a headline that does not reflect the reality," he added.

Carl Scheible, Moneygram's executive vice president of UK and Africa operations, told the BBC World Service that the ODI figures were not representative. "We do not recognise these numbers as they are," he said. Moneygram charges depend on how much money is being sent. Mr Scheible said that most people send money to Africa in amounts of about £200, which have a lower fee.

When taken as a whole, the average percentage that Moneygram takes for money transfers to Africa from the UK is 5.1%, compared with a global average take of 4.9%, he said. In addition, prices have been coming down "quite dramatically" over the last decade because of digitisation.

However, costs to the business still include logistics and cash handling. "Cash has to be delivered, has to be picked up - we're talking armoured cars," Mr Sheible said.
"The reality is we are providing a very competitive service, a fairly priced service, based on speed, reliability, security of the money arriving."

Western Union said that it had "delivered much-needed services to individuals looking for fast, convenient and reliable ways to send money to family and friends" during 20 years of operations in Africa.
"Our 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," it added.

"These factors can impact the fees and foreign exchange rates offered by corridor and service type."

Transfer cost across borders in Africa
Although it can be even more expensive to transfer money within Africa, Western Union says that the average global revenue it earned from transferring money was 5-6 percent of the amount sent.
Migrant workers from Mozambique pay charges as high as 20 percent to send savings home from South Africa, the report said.

ODI's research does not account for the costs to Moneygram and Western Union, which include logistics and expensive cash handling processes. According to the report, ‘remittance corridors’ within Africa itself have “some of the highest charge structures in the world”. “Migrant workers from Mozambique sending money home from South Africa or Ghanaians remitting money from Nigeria, can face charges well in excess of 20%.”

Measures to address the high remittance cost of transfer to Africa
To address this, the world Bank is partnering with the African Union Commission and member states to establish the African Institute for Remittances, which will work towards lowering the transaction costs of remittances to and within Africa. It will also leverage the potential of remittances to influence economic and social development. 

“The World Bank’s approach supports regulatory and policy reforms that promote transparency and market competition and the creation of an enabling environment that promotes innovative payment and remittance products,” said Marco Nicoli, a finance analyst at the Bank who specializes in remittances.

Another potential solution, according to economic development consultant Sebastian Spio Garbrah of Damina Advisors New York, is for people living in African countries to encourage local banks to open offices in the U.S. and Europe and facilitate low-cost transactions that contribute to their nations’ GDP.

But for New York restaurateur Rahma, wiring agencies are less expensive than going through the Banque de l’Habitat du Senegal (BHS). For a transaction of $500, she said, she pays roughly $10 with MoneyGram, whereas at BHS, she pays $25 for the same amount. Rahma said she sends the money home to pay for hospital bills, tuition fees and other forms of domestic and family support.

Nicholas Botwe
Kings University College
Aplaku Hills, Accra. Ghana

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