The Cost of Remittances and a $6B Difference for Sub-Saharan Africa


Remittances and Other Resource Flows to Africa, 1990-2010

Source: Dilip Ratha, Sanket Mohapatra, Çağlar Özden, et al., Leveraging Migration for Africa: Remittances, Skills, and Investment, Washington, DC: The World Bank, 2011.

 

According to World Bank estimates, members of the sub-Saharan African diaspora remitted about US $21.5 billion to relatives and friends in 2010.   To put this number into perspective, foreign direct investment to Africa in 2008 totaled US $58.6 billion and governments from around the world contributed a net US $39.5 billion in development loans and grants to the continent during the same year.

However, it is very expensive for sub-Saharan diaspora members to send money to their families overseas. The World Bank estimates that the average cost of transferring money to Africa is 30 percent higher than the global average (12 versus 9 percent of the amount sent).  In fact, among all developing countries the cost of transferring money to and between sub-Saharan countries is the highest.

For example, the average cost of transferring US $200 between Tanzania and Rwanda is US $49.19, whereas sending the same amount of money between Singapore and Bangladesh costs 91% less, or US $4.40.

The price of remitting money to sub-Saharan countries poses a significant cost for remittance senders and receivers as well as general development efforts for the region. Through a “back of the envelope” calculation, I estimated that the sub-Saharan diaspora paid approximately $2.58 billion in transfer costs during 2010.  This means that if the cost of remitting money to sub-Saharan Africa matched the global average in 2010, remittance receivers in the region would have received an additional $645 million that year.  Every dollar unnecessarily spent on transfer costs means one less dollar that ends up in the hands of those in need.

In addition, diaspora members tend to send less money home overall when money transfer costs are high.  Sending money home can be a great sacrifice for a diaspora member, since saving up for family overseas often means working extra hours and having less money to spend on the family members living in the host country.  So why bother when so much of it is goes to middle men?

A group of economists studying Pacific Island countries estimated that if the cost of sending money through banks and money transfers were lowered “to levels close to those found in the most competitive world markets,” existing remittance levels would surge upwards by 28 percent.

If the consumer responses they estimated were to hold true for the sub-Saharan African diaspora, I calculated that annual remittances sent to the region would increase by approximately $6 billion.  Therefore, the amount of money that reached families in sub-Saharan African received in remittances during 2010 could have been $27.5 billion instead of $21.5 billion.

The most widely-promoted policies for reducing remittance costs involve increasing competition by making it possible for more service providers to enter the market and disseminating information to diaspora members about available money transfer methods and their associated costs.

Entrepreneurs are already starting to by harnessing technology to find new and cheaper ways of sending money to this region, but there is still a lot of work to be done.  Consumers can help by “voting with their wallets” while advocating for lower money transfer costs and greater transparency.

I hope that readers of this blog will use this information as a source of empowerment, encouraging diaspora members and concerned citizens to become engaged in this issue.  For more information on remittance flows around the world, visit the Migration Policy Institute’s Global Remittances Guide.

 

We are excited to learn about your thoughts and experiences on this topic.  Do you send money to family members or friends in sub-Saharan Africa?  How much does it cost per transfer?  Would you send more money if transferring money were cheaper?  Why or why not?