Banks slammed on remittance abuse
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Emerging Markets

Banks slammed on remittance abuse

Fees charged for cash transfers home “too high”

The IDB and civil society groups are criticising banks for a short-term, profiteering approach to migrant workers’ remittances.

The IDB’s Multilateral Investment Fund (MIF), which specialises in researching remittances, will tomorrow announce in Guatemala City that remittances to Latin America and Caribbean (LAC) countries rose to $62.3 billion in 2006, 14% up on the 2005 total, $53.6 billion.

And now financiers and politicians are aware of the gigantic volume of remittances, a controversy is growing over how to manage them.

Donald Terry, manager of the MIF, told Emerging Markets that banks are taking a short-term approach, and doing little to turn receivers of remittances into customers of the financial services industry.

Transaction fees have “gone from outrageous to simply too high”, Terry said. Fees on remittances from the US to LAC countries have fallen from 15% in 2000 to 5.6% now, Terry said, but “they could come down to 3%”.

Terry says banks are “essentially acting as neighbourhood stores” and making no effort to convert remittance clients into deposit account holders.

In most cases where banks distribute remittances, they serve as licensed distribution agents for money transfer organisations, and keep remittances separate from other bank operations, an MIF survey has found.

The MIF’s strategy is concentrated on bringing remittance flows into the financial system. Its two aims are to “increase the financial resources of those who receive remittances” and to “improve the developmental impact” of the available funds.

Civil society groups say these two aims are contradictory. Marianna Bustamante of the American Civil Liberties Union, a campaigner on migration issues said. “The migrants should be the ones to determine how remittances are used, rather than financial institutions, the IDB or the World Bank. Any scheme for making use of remittances should come from migrants themselves.”

Banks see remittance flows as “a growing market with great potential”, said Roy Caple of HSBC Mexico. HSBC believes that having distribution channels through which to reach receivers of remittances is the key. It has strengthened its position in Latin America with its $1.8 billion purchase last year of Grupo Banistmo of Panama .

Terry at MIF says that while in the poorest Latin countries, 85% of remittances are spent on consumption, in better-off countries such as Mexico about 30% of flows are available for non-necessary spending.

The government in Ecuador – where the IDB reports that remittances go mainly to those “just beyond the bottom rungs of the economic ladder” on $250-$500 a month – is taking an active interest in managing remittance flows.

Maria Espinoza, minister of foreign affairs, trade and integration, told Emerging Markets that the government is working with families on “plans of co-development, to guarantee that remittances are used in a productive and creative way”. 

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