Remittances sent by Latin American migrants in the United States, Japan and Europe to their families back home now top the impressive sum of $43 billion a year.
The amount of remittances that actually reaches the 18 million families whose lives depend on the flows will increase substantially this decade if a major IDB initiative is successful.
The IDB's Multilateral Investment Fund (MIF) has created a network of TKTKKTK financial institutions to work together with ambitious goals: to lower the average costs of remittance transactions by 50% and increase by half the number of families who receive remittances through the banking system. If all goes to plan, these goals will be reached by 2010 and will put more money in the pockets of remittance recipients and create more financial services for them.
"We're trying to continue to lower transaction costs and – what is more difficult – trying to bring remittances into the world's financial system," says Donald Terry, manager of the MIF, an autonomous fund administered by the IDB that lends and invests in projects to develop the private sector, especially micro-enterprise, in Latin America and the Caribbean. "It's expensive to be poor," he points out, explaining that because the majority of transnational families operate outside the financial system, they pay a premium for services like money transfers and fees for converting foreign exchange.
This is a huge task: about 100 million transactions are involved in sending remittances from the US to Latin America every year – and about $5 billion is gobbled up by the money transfer organizations that handle the transactions; only 50% of Latin American immigrants in the US hold bank accounts, and 90% of the recipients of remittances in Latin America are unbanked.
The effort aims to "bank the unbanked", and the IDB's secret weapon in this campaign is to link large banks with microfinance institutions. The two types of institution have the ability to serve people at both ends of the remittance transaction: migrants work primarily in developed countries, where they could be served by commercial banks; microfinance institutions work with a low-income clientele in urban and rural areas so are positioned to reach recipients of remittances.
Whatever asymmetries may exist between the large conventional banks and small microfinance institutions (MFIs) are smoothed over by the IDB, which helps build alliances. "We act as a broker, talk with banks in the country where there are immigrants and say we did good due diligence [on the MFI] and we trust in this institution," says Tomas Miller, investment officer of MIF.
Model
The model for banking the unbanked on the sending and receiving ends of the remittance transfer, says Terry, is the working relationship established between La Caixa in Spain and Banco Solidario, a microfinance institution in Ecuador. With $150 billion in holdings, La Caixa is Spain's largest savings bank, and it handles more than 14,000 efficient remittance transfers yearly through its extensive branch network. The alliance of La Caixa and Banco Solidario allows emigrants to receive loans of up to 70% of the cost of purchasing a home in Ecuador, and to designate the use of their remittances in Solidario accounts in Ecuador for items such as savings, education, home improvement and productive investment.
Like Banco Solidario, other microfinance institutions are expanding through serving transnational families. A leading example is Fedecaces, a federation of 31 savings and loans cooperatives in El Salvador with 87,000 clients. Fedecaces literally knocked on doors to identify families who receive remittances and offer them services. In 2001, Fedecaces formed an alliance with Vigo, a money transfer organization, to expedite transfers. Since then, Fedecaces's remittance business has ballooned from 3,500 transactions a year valued at $1.2 million to 210,000 transfers totalling $88 million. In addition, 4,000 recipients have joined the affiliates, opening savings accounts, says Berta Silvia Mena, business manager of Fedecaces. The cost of transactions fell sharply from more than 10% of the value of the transfer to a flat fee of $10 for $1,500 in remittances. MIF provided financial support for Fedecaces to upgrade its information systems to accommodate these transactions.
New products
New financial products will be created for remittance families as soon as this year through the banking the unbanked initiative. Leaders in this effort include two MFI networks, ACCION International and Women's World Banking.
Remittance receivers in five Latin American countries are being surveyed by ACCION affiliate MFIs to identify their financial needs. In Haiti, transnational families are asking for programmed savings accounts that would channel a portion of their remittances to emergency funds, education and Christmas savings. "The idea is to be forced to save and be discouraged by fees from easy access to savings," says Maria Jaramillo, director of remittance and savings programmes for ACCION International. In Colombia, remittance receivers say they want to have prepaid cards loaded by migrants overseas and processed by a leading local bank, Banco Caja Social, which sees the cards as the entry point for getting receivers banked. The next step is for ACCION and local institutions to develop and market these products, says Jaramillo.
In the Dominican Republic, Women's World Banking will test remittance transfers through its local affiliate, Banco ADOPEM (Asociacion Dominicana para el Desarrollo de la Mujer), a bank with more than 36,000 low-income clients, 85% of them women. The bank will promote its standard bank services – savings, programmed savings, CDs, debit cards and home improvement and productive investment loans – for receivers of remittances. Banco ADOPEM also plans to introduce new financial services for transnational families, including health care financing, life and accident insurance and capital loans for new enterprises.
New financial products for the low-income clients of MFIs will answer a wide range of needs. "Product design must be practical, innovative and amusing," says Manuel Orozco, senior fellow and project coordinator of the MIF-IFAD remittances and development programme. One new product being developed is return-of-the-body insurance to cover the costs that can reach $15,000 of returning a deceased migrant home.
Outreach and innovation of products could grow exponentially through the participation of Citibank, the world's largest financial group, in the MIF network. "We are beginning to work with microfinance institutions as partners in transmitting remittances," says Robert Annibale, global director of microfinance for Citibank. With MFIs, Citibank shares a view that "remitters are also potentials customers of a range of products, including debt card linked accounts, savings products, credit and insurance," he says.
Over the next five years, as transnational families are incorporated into formal banking relationships, the development impact of the flows should be enhanced. "If you are able to bank them, you will be able to mobilize part of the remittances for investment and possibly productive investment; we want to raise capital for individuals with entrepreneurial skills," says Orozco.
Of the 10% of Latin Americans who receive remittances, a majority are women, many of them heads of households. "Recognizing the economic importance of women is a key opportunity for development; they are a more productive vehicle for building education, health and housing," says Nancy Barry, president of Women's World Banking.
Remittance flows hit new high
Japan, the host of this year's IDB annual meeting, is gaining importance as a source of remittances to Latin America, and particularly to Brazil and Peru. Latin American migrant workers in Japan send between $2.5 billion and $2.8 billion in remittances to South America annually, according to preliminary results of an IDB survey, says Pedro de Vasconcelos, remittance programme coordinator for MIF-IDB.
Between 70% and 80% of remittances originating in Japan go to Brazil, which is home to the largest Japanese colony in the world outside Japan. About 20% of the flows from Japan go to Peru, and the remaining 10% are remitted to families in Argentina and Bolivia, says de Vasconcelos. Remittances to the Caribbean from Japan are tiny, he adds.
Latin American workers in Japan are conservatively estimated to number 420,000, the IDB reports. Of these, 85% are adults and 81% of the adults send monies to relatives back home, says de Vasconcelos.
Total remittances to Latin America and the Caribbean last year hit a new high of $45.8 billion, an amount that exceeds all foreign direct investment (FDI) and overseas development assistance (ODA) combined, according to the latest survey released in March by Donald Terry, manager of the Multilateral Investment Fund, the IDB's private-sector division, which spearheads all efforts with remittances. Remittances to Latin America and the Caribbean rose by 20% in 2004 from the previous year.
Some 16 million migrants from Latin America and the Caribbean send money regularly to their families throughout the region. The majority of the remittance senders are working in the United States. Mexico leads the region as a recipient of remittances. In 2004, migrants sent $16.6 billion home to Mexico, an increase of 25% from 2003. Brazil is the second biggest recipient of remittances, garnering a total of $5.62 billion in 2004. Colombia is the third leading remittances recipient in the region, taking in $3.85 billion from migrant workers last year.
Remittances are smaller in amounts but much more important relative to the national economy in smaller countries in the region. For El Salvador, remittances represent about 15% of GDP, a vastly larger percentage of the economy than the much bigger amount sent home to Mexico.