| JOHANNESBURG, June 7
JOHANNESBURG, June 7 In his 2009 album
Troubadour, Somali rapper K'naan dedicates the song "15 Minutes
Away" to "everybody that's had to wait on a money transfer" and
complains, "it's kind of wack when they charge you like 10
percent on the dollar."
The need to reduce the cost of remittances to Africa may be
one of the few issues to have rappers, economists and
policymakers nodding in agreement.
Now, with official remittance flows to the continent growing
to a record $60.4 billion in 2012 - overtaking foreign direct
investment and official development assistance as the largest
external financial source for the first time, according to the
African Development Bank - it is likely to gain more urgency.
Africa is the most expensive continent to send money to,
with transfers costing an average of 11.67 percent of the amount
being sent, compared to around 8.35 percent for Asia. The global
average cost is just over 9 percent.
An average transaction cost of 11.67 percent would have
deprived some of the world's poorest people of more than $7
billion in 2012, the World Bank says.
There are other expenses besides the transaction fees.
Africa has the least payout locations in the world, which means
recipients who live in rural areas face the prospect of
traveling for a day or more to collect their money.
"It's expensive to be poor," said Donald Terry, a financial
inclusion expert at the Boston University Law School. "There are
more payout locations in one country Mexico, which receives $24
billion a year, than in the entire continent of Africa. Not only
is it expensive, it's extremely inconvenient."
Intra-African transfers are even more costly - in South
Africa and Tanzania average remittance prices are 20.7 percent
and 19.7 percent respectively.
The high costs force migrants to send money through informal
channels so the true size of remittance flows to Africa could be
more than double the official figure, some experts believe.
Lack of competition and transparency in Africa's remittance
market and regulatory hurdles are responsible for the high fees.
Many countries, whose legal and regulatory frameworks are
set up to deal with large cross-border transactions between
corporations rather than flows of a few hundred dollars, only
allow banks to pay out remittances.
Once a wider range of institutions are permitted to offer
remittance services, such as post offices and retail outlets,
competition and demand will increase, said Richard Malcolm,
Western Union's vice president for Southern and East Africa.
"As more and more entities start offering the service,
competition increases and the laws of supply and demand kick in
and that will regulate the market," he said.
Exclusivity agreements between money transfer companies and
banks are also common in Africa, restricting banks to paying
money out from only one company.
"In the early stages of the African remittances market one
or two companies signed up pretty much every single place that
was legally allowed to pay out so it basically stopped
competition," said Leon Isaacs, managing director of the
International Association of Money Transfer Networks.
But countries like Ghana and Nigeria have now banned these
types of clauses, said Isaacs, a sign that governments are
waking up to the importance of these flows. Remittances are
equivalent to nearly 10 percent of Nigeria's GDP.
The World Bank's Send Money Africa database, which allows
users to compare the prices charged by different remittance
service providers, should also bring more transparency.
Money transfer companies are looking at applying new
technology and Western Union is partnering with lenders
such as Ecobank and Kenya Commercial Bank to
provide an internet-based service.
In the future, mobile phone payments could help to bring
costs down given that cell phone penetration exceeds bank
penetration in Africa.
But, with the exception of Kenya which has embraced
Vodacom's M-Pesa and other mobile payment services,
many African countries need to develop a strong domestic market
for mobile payments before they can have a strong international
market, Isaacs said.
African banks, such as Kenyan lenders KCB and Equity Bank
, are taking a greater interest in migrants and offer
diaspora accounts. James Agin, KCB's chief business officer,
international, said the bank is "coming up with solutions to
substantially reduce the cost of money transmission."
In 2009, the G8 and G20 endorsed the 5x5 Objective to bring
global remittance prices down to 5 percent within five years, or
by 2014. Lower prices would allow families in Africa that rely
on them to save or invest in education or small businesses,
according to World Bank remittance expert Massimo Cirasino.
"The idea of the reduction is to free resources of up to $20
billion a year, which will go directly to migrants or their
families," he said. "There is a clear economic impact."