The Curious Case of Remittances in Sub-Saharan Africa and Bitcoin

Remittances inarguably play a key role in the economies of East African countries (both macro-economic and household benefits). Africans working abroad periodically send money back home to family and friends. These monies, termed remittances, play a crucial role in the socio-economic development of the beneficiaries and communities where it is received. Additionally, it contributes to the foreign exchange reserves of beneficiary countries. Remittances in SSA are far more stable than FDI and private financing inflows.

Kenya for example, receives over $1.2 billion in annual remittances. Sudan is a close second, receiving $1.1 billion. The chart below shows the comparative figures of Kenya, Sudan, Uganda, Rwanda, Ethiopia and Tanzania.


What’s the problem?

Migrant workers sending money home incur extremely high cost in fees. The figures in East Africa & Africa are particularly grim. Cross border bank remittances from Tanzania to Kenya, Tanzania to Uganda and Tanzania to Rwanda cost a whopping 24% in fees. Money transfer operators (MTOs) like Western Union & MoneyGram charge 9% fees in Kenya and as high as 39% in Ghana for International transfers. Remittance fees are a burden on migrant workers’ hard earned wages and by extension, hamper the socio economic status of their beneficiaries. It is estimated that by reducing these fees comparably to other remittance corridors and regions, $1.8 billion can be saved in fees – enough to put 14 million primary school-aged children into school.

Migrant workers from Africa pay the highest charges in remittances averaging 12% in fees; double the global average excluding Sub Saharan Africa.

Why does Africa face such high remittance charges?

The truth is there is no logical reason why. Comparatively, other regions corridors pay much lower fees for a similar service. South Asia for example, is the least costly region to send money to, with an average cost of 6.58%. 3 reasons are frequently fronted for these steep costs.

Limited competition in the African remittance space is a factor. The remittance business is largely dominated by an oligopoly of MTOs who exert their control by imposing opaque foreign exchange margins & hefty transfer fees. Western Union and MoneyGram control over 65% of remittance outlets in Africa. Their sway in the region allows them to unjustly set high fees. Cost reductions and efficiency gains that would arise from a free, competitive market are instead lost in MTOs’ murky business operations.

Secondly, exclusivity arrangements between MTO, agents and banks stifle competition and limit the options that exist for migrant workers & their beneficiaries. These agreements have come under heavy criticism by central banks in Nigeria, Ghana and Tunisia. Exclusivity clauses have been revoked in Tunisia while regulatory authorities in Nigeria and Ghana are reviewing these agreements.

Lastly, financial regulation in Africa dictates that only banks can play a role in remittance. Bank charges are as high as 16% from the US to Kenya. In several countries, ONLY banks are authorized to carry out money transfer operations. Micro finance institutions & Post Offices, despite being readily accessible to beneficiaries, can only act as payment agents for MTOs and banks.

In 2007, the governments of the G8 and G20 pledged to reduce charges to 5% by 2014. This target has not been achieved, especially in East Africa.

What is the Remedy – Bitcoin and more

This status quo can be remedied by a handful of solutions. One way is through new technology such as Bitcoin. Globally, several tech based startups are successfully tackling this problem in Kenya, Philippines, Mexico and Latin America by leveraging Bitcoin’s ultra-low transactions costs. BitPesa (in Kenya) has already drastically lowered the cost of remittance from the UK by charging a fee below the G8 & G20 target – a flat 3%.

Average % Cost of Transferring $200 by Type of Remittance Channel

Another way is by revisiting financial regulations in Sub Saharan Africa to get the best deal for migrant workers and their families. Exclusivity agreements by MTOs should be revoked and free market competition allowed to set in. Post offices and Micro finance institutions are well-poised to participate in their own capacity; they are well distributed and offer financial access to the unbanked.No measure would do more to unlock the full potential of remittances than a cut in charges. Achieving this goal will require some significant changes – in banking regulations, in the practices of money transfer operators, and in approaches to new technology” – ODI Report

Clearly, innovation, competition and fair regulation will lead to whole wide benefits for the peoples and economies of East Africa.For a ppt summary of the contents of this post view the slides here. comments powered by