Memorandum submitted by UK Money Transmitters
Association
EVIDENCE TO THE SCRUTINY ON PRIVATE SECTOR
DEVELOPMENT IN RELATION TO THE IMPORTANCE OF PERSON TO PERSON
REMITTANCES AS AN IMPORTANT BUT STILL UNDER-RECOGNISED SOURCE
OF FUNDS FOR THIRD WORLD DEVELOPMENT
INTRODUCTION
The UK remittances market place is one of the
most dynamic UK financial sectors today and the UK Government
has been seeking to encourage its growth. Reference is made in
this regard to the Chancellor's Pre-Budget Report 2005 which makes
explicit reference (para 5.148) to the importance of remittances
for development purposes.
Money transfer services are typically offered
both by the UK high street banks and also by a discrete, and rapidly
growing number, of registered money transfer operators (MTO's).
There are 1,950 registered MTO's in the UK with nearly 24,600
registered premises. These include well know names such as Western
Union, Moneygram and Chequepoint, which offer global (or near
global) coverage as well as small community based money transmitters
which may only provide services on one corridor (eg India or Nigeria).
The UKMTA represents smaller and medium sized money transmitters
registered with HM Revenue and Customs. The UKMTA presently has
around 400 MTO's in its network.
According to research carried out by the UKMTA,
the vast majority (85%) of UK money transfer companies offer money
remittance services, processing money transfers on behalf of consumers
(often migrant workers) wishing to send remittances back to friends
and family in their country of origin. Most of these transactions
are for small sums of a few hundred pounds.
Money transfers sent from one family member
to another represent the safest and most secure way of directing
financial support into the hands of those who most need them in
developing countries. They are then being used for all sorts of
development purposes, including payments for education and health
services.
The UKMTA recognises that DFID is already supporting
the development of the UK remittances market, and we applaud and
support the initiatives which are already being taken; however,
we believe that there is scope for the UK Government to go much
further to recognise, harness and utilise remittances sent from
the UK as a tool for the funding of local infra-structural projects
around health and education at grassroots level in developing
countries.
REMITTANCES—THE
LARGEST SINGLE
SOURCE OF
PRIVATE SECTOR
DEVELOPMENT AID
According to the DFID UK Remittance market report
(published November 2005), the number of people living outside
their home country globally is 175 million. These people form
the core sending group for the remittances which they send back
to their home country. Global remittance flows to developing markets
was estimated at US$ 125.8 billion in 2004 (£73 billion),
this value has grown by at 13% annually since 2000.
Moreover, migration and remittance experts argue
that the unofficial transfers could be as large as formal flows.
This could represent to a total flow to developing countries of
US$ 251.8 billion (£146 billion).
These international statistics are replicated
in the UK. According to the UK remittances report (DFID, November
2005), total volume of remittances sent from the UK totals £2.3
billion. The UKMTA believes that this figure can reasonably be
increased by at least 100% to take account of remittances sent
through unofficial mechanisms—this gives a total annual
volume for remittances sent from the UK of £4.6 billion.
The remittance funds sent by individuals can
be usefully compared with the grant funding made available by
government to developing countries. In 2004-2005, DFID gave £3.8
billion (DFID statistics). It is already clear that, by volume,
money remittances may represent a larger potential source of funding
for overseas development than official aid.
We believe the UK Government should be examining
in a much more pro-active way how these remittances funds are
being used on the ground now in developing countries and what
potential there may be to further harness them in the future.
WHAT IMPACT
ARE REMITTANCES
HAVING ON
GLOBAL POVERTY?
Research published by the World Bank's International
Migration and Development Research Programme in 2005 shows that
international remittances reduce the level of poverty in developing
countries. In a nutshell, and quite obviously, the greater the
volume of remittances sent, the greater the impact in reducing
the levels of poverty.
The World Bank research demonstrated that a
10% increase in international remittances from each individual
migrant will lead to a 3.5% decline in the share of people living
in poverty.
IMPACT OF
REMITTANCES—LESSONS
FROM THE
USA/LATIN AMERICAN
CORRIDOR
At present, there is no firm data relating to
some of the major corridors for migrant remittances (eg the Europe/Africa
corridor or the Gulf States/India corridor), but possible indications
may be extrapolated from research already done on another corridor,
for example, the USA/Latin America corridor.
The Inter-American Development Bank (IADB) estimates
that remittance flows to Latin American and Caribbean countries
at over US$ 45 billion in 2004. In 2005 they will have reached
$55 billion—higher than foreign direct investment and overseas
development assistance to the region. The magnitude of such transfers
raises important questions about their development impact and
how national governments and the international community can maximise
their potential.
Examining the impact of remittances separately
from other effects of migration is difficult. However, an increasing
number of studies show that the overall effect of remittances
on education and health services in developing countries is positive.
Evidence indicates that children from recipient households
stay in school longer:
— In El Salvador, US$ 100 of remittance
income lowers the probability of children leaving school by 54%
in urban areas.
— In the Philippines, a 10% rise in
household income through remittances leads to a proportional increase
in enrolment rates among children aged 17 to 21.
— Across Mexican rural municipalities,
illiteracy among children aged 6 to 14 falls by 3% when the number
of households receiving remittances rises by 1%.
Remittances play an important role if the public
health care system is unable to provide universal health insurance
or adequate treatment and preventative care. Studies in Mexico
show that:
— An additional peso in remittance
transfers raises households' health care expenditure by between
six and nine centavos.
— Infant mortality falls and birth
weight among Mexican children improves with remittances. A 1%
rise in the portion of households receiving remittances reduces
by 1.2 lives the number of children who die in their first year.
— Remittances may reduce infant mortality
by improving housing conditions, allowing mothers to stay home
and care for the newborn baby, or by improving access to public
services such as drinking water.
A consensus is emerging among international
organisations and national governments that work in these areas.
Facilitating remittance flows should allow recipient families
worldwide to offer their children a brighter future.
REMITTANCE FLOWS
TO SUB-SAHARAN
AFRICA
One of the major focuses of UK Government policy
in recent years has been to increase the flows of funds to Sub
Saharan Africa. Based on World Bank figures (see appendix A, Ev
318), more than US$ 13.5 billion flowed through officially recognised
channels to Sub Saharan Africa in 2005. However, bearing in mind
the flows of remittances through informal channels, the total
figure may be as much as US$ 27 billion.
The question for UK policy makers is (taking
account of what has happened in Latin America/Caribbean) how can
the significant flows of remittances from the UK be most usefully
utilised for development purposes?
WHAT ROLE
CAN THE
UK GOVERNMENT PLAY
IN INCREASING
THE FLOWS
OF REMITTANCES?
It is suggested that there are two major areas
where the UK Government can have a role to increase both the volume
and the impact of remittances (to sub-Saharan Africa and elsewhere).
— Encourage more policy development
(in the UK and in receiving countries) to maximise the impact
of remittances
— Reduce the barriers and obstacles
in the UK remittance market to increase remittance flows
UK GOVERNMENT—EXISTING
POLICY INITIATIVES
ON REMITTANCES
Within the EU, DFID has proved to be a pioneer
in its work on remittances—certainly no other European national
government appears to have recognised the importance of the remittance
money in development terms. It is noted however that a report
on Workers Remittances to be published shortly by the European
Investment Bank may begin to stimulate the policy discussion at
European level.
At the moment, the policy section within Department
for International Development is to be highly commended for the
work which it has already done to encourage the money transfer
market place in the UK to develop.
The UKMTA would comment as follows on the two
major UK Government initiatives we know about:
(i) Remittances Taskforce—a
private sector led initiative which is being funded by DFID. It
will aim to implement the nine recommendations in the UK remittance
market report. The taskforce is still in process of being formed/work
programme agreed. It is too early to know what its impact will
be but it will only be effective if it has effective buy in from
all stakeholders on the steering group (money transfer companies
and the UK banks).
(ii) Sending Money Home website—Provided
by Profile Business Intelligence, funded by DFID. Includes market
data/price comparisons for companies sending remittances from
the UK on approximately 12 corridors (eg UK-Nigeria, UK-China).
Some doubts remain as to whether money transfer customers (as
oppose to industry specialists) are finding the website useful.
For example, currency exchange rate information is updated relatively
infrequently, making the website ineffective in providing the
up to the minute pricing information which customers might naturally
want.
WHAT MORE
CAN THE
UK GOVERNMENT DO?
There are a range of initiatives which the government
can take which will increase the flow of remittance funds to developing
countries.
(i) Increase competition in the UK money transfer
market to drive down transaction costs
Costs to UK consumers for sending money transfers
are higher than they should be. One of the major weaknesses of
the UK money remittance arena is that the market is not fully
competitive. The attitude of the banks to the remittance market
is ambivalent at best and potentially malign at worst. It is a
reasonable question to ask whether the banks welcome the competition
from money transfer companies in the remittance market place.
All the evidence is that UK clearing banks do
not welcome the accounts of ethnic minorities and migrant workers.
If a migrant does manage to open an account, charges for a bank
to bank transfer are extremely high (£25 basic charge is
standard), exchange rates are poor and the transfer may take up
to three weeks to arrive. Contrast this with the independent money
transfer sector, which can usually deliver a cash payment in the
destination country cheaply and quickly (often within a few hours).
Furthermore, the UK money transfer market is
dominated by two large money transfer companies creating, in effect,
an oligopoly. On small send amounts, for example, the effects
of market domination by two large players is particularly marked.
For sums up to £100, a charge of 14% is not uncommon. By
contrast, smaller independent operators, charge 5%. The foreign
exchange rates of independent money transfer companies are generally
10 to 20% more favourable to the consumer than those of the oligopolistic
large company.
In passing, we point out that the UK Government
has scope, relatively easily, to recognize and take action to
reduce the monopoly element in one area where the government has
a controlling interest, namely the Post Office, which, at present,
has an exclusive agreement with one large money transfer company.
We hope the UK Government might like to consider
whether this exclusive agreement is in the interests of money
transfer consumers more generally or whether it would be better
if the Post Office cash handling facilities could be available
to the wider community of money transfer companies.
(ii) Prevent the banks withholding bank facilities
from smaller money transfer companies
The UKMTA is concerned about the way in which
the money transfer sector is being treated by the UK high street
banks. Put simply, the banks are denying bank accounts to money
transfer companies. All these MTO's are registered with HMRC and
all have anti-money laundering controls in place. The attitude
of the banks represents a major impediment to the growth of the
money transfer sector since it is not possible for a money transfer
company to offer a money transfer service without a bank account.
Evidence gathered by UKMTA suggests that as
many as 75% of money transmitters have experienced problems obtaining
or retaining a bank account. 67% of banks have responded to money
transfer companies seeking accounts that they do not provide services
for money service businesses. 37% of banks have given no reason
for not offering account services to the money transfer companies
they have refused. The UKMTA has recently submitted evidence on
the banks attitude to smaller money transfer companies to the
Treasury Select Committee looking at the issue of Financial Exclusion.
There is no prospect of the UK remittances market
place reaching its full potential if banks continue to act unreasonably
to deny money transfer companies access to banking facilities.
The big risk arising from all of this is that,
if money transfer companies are prevented from operating legally
through lack of a bank account, they will then exit the formal
sector but continue to trade in the black market. The predominant
concern of the government and law enforcement agencies must surely
be to keep as many money transmitters as possible operating in
an open and regulated environment. Indeed, the importance of this
approach has already been emphasised to the UKMTA by the Metropolitan
police.
(iii) Get the regulatory burden right
There needs to be a level playing field for
regulation which should then be equally applied across those in
the remittances market place (both money transfer companies and
banks). Given the different regulators operating in the remittances
arena (both FSA and HMRC are involved), this has not been achieved
as yet.
Regulatory measures that have an impact on senders
in deterring him/her from sending will obviously reduce the volume
of remittances received in overseas countries for development
purposes. Typically, those sending money remittances are only
sending a few hundred pounds. Sending customer ID requirements
should not be set at a reasonable level and should not be set
in such a way as to be prohibitive for the sending customer.
The registration regime which money transfer
companies are required to follow (with HM Revenue and Customs)
does not help them obtain banking facilities. We recognise that
HM Treasury will shortly be launching a review in this area in
April 2006 and the UKMTA hopes to be actively engaged with this.
We believe there needs to be greater dialogue
within government between the Treasury and DFID as to what should
be the right level of regulation to enable the maximum volume
of remittances to be sent.
(iv) Improve UK Government policy towards
Diaspora communities living in UK so as to better harness remittance
flows
The huge number of migrants worldwide and their
engagement with the home country means that the UK Government
needs to promote an outreach policy to the Diaspora living in
the UK. This would enhance and strengthen links between the two
and ensure joint development strategies so that the impact of
remittances in developing countries can be maximised.
Greater contact with the Diaspora would encourage
deeper understanding as to why remittance flows often pass through
unofficial channels and what can be done to address this. It is
recognised that formal services are often unavailable in remote
areas or remitters send money through trusted family and friends
to avoid formal interventions or government corruption.
(v) UK Government should think more strategically
about the role of remittances in reaching development targets
(for example, Millennium Development Goals)
At the G8 meeting at Sea Island Georgia in June
2004, leaders of the developed world came to together to agree
an ambitious programme to maximise the potential of remittances
as a source of funds to reduce poverty in developing countries.
Since June 2004, the UK Government has been taking steps to implement
this agenda and has made some progress.
The present government position, as expressed
in the Pre-Budget Report 2005 is as follows: "Remittances
have a significant positive economic impact in developing countries,
although they should be seen as a complement to aid, not a replacement."
The UKMTA is pleased that remittances are being
recognized, but believes that there is scope to go much further
to maximise the potential of remittances as a source of funds
for development. Remittances represent an investment by a migrant
in his country of origin which he/she has left, but has not forgotten.
Remittances have within them the potential to
assist expatriate workers who feel a commitment to the future
of their homeland, and beyond that, a commitment to their specific
province and to their village of origin. The UKMTA would like
to see the UK Government explore more actively an agenda to encourage
the use of remittances in developing countries for structural
development at a local level.
The UKMTA believes it would be possible to enable
migrant workers sending money with registered UK money transmitters
to earmark a portion of an individual transaction to a specially
designated country fund (eg Nigeria, Ghana) and even to a specific
project in a particular geographic location.
One of the key fundamentals for the success
of this initiative will be to identify suitable projects in the
target countries and also to ensure that these were promoted to
migrant workers in the contributing countries. We are certain
that DFID and its voluntary sector partners could help us to identify
suitable projects in developing countries.
The projects would be local enough for the migrant
to identify with the benefits generated for the local community
and might include schools, irrigation systems, health clinics,
etc.
And, of course, this initiative has the potential
to go much further. It would be a step in the right direction
if the UK Government would be willing to match-fund, in some way,
the contributions made by expatriates. It would be even more advantageous
if HM Treasury could be persuaded to see person to person money
remittances as a sort of donation and could be encouraged to make
them tax-deductible. To date, the Treasury has adopted no kind
of view on this, but have suggested that they are open to suggestions.
The UKMTA recognizes that the government has
a Millennium Goal target to reach by 2013 such that 0.7% of GDP
should be made available for Overseas Development Aid. It seems
likely, that, if agreed, the Private Members bill being promoted
by Tom Clarke MP (International Development—reporting and
transparency) will lead to more on going scrutiny of progress
towards this target.
The UKMTA points out that it is inevitable that
a percentage, maybe even a large percentage, of the remittances
which are sent by migrants each year are contributing in some
way towards Millennium Goal targets. Yet, at present, this contribution
is being ignored. At the same time, we recognize also remittances
also represent a private transaction within families, and this
should be acknowledged too. In policy terms, it is a question
of getting the balance right.
We suggest that a detailed debate needs to take
place in Parliament as to what extent remittances can and should
be included in the progress of the UK towards it Millennium Goal
targets.
There is obviously one opinion that says that
only the UK Government can contribute towards Millennium Goal
targets and that achieving Millennium Goals can only be achieved
from the official grant aid budget. However, there must be another
view which recognizes as important and profound the financial
contribution that migrants make through their labour and through
the funds they repatriate.
There is a real risk that migrant diasporas,
those who have most personal attachment to development in their
countries of origin and those who those are already contributing
substantially through their remittances, are being left out of
the equation. Their contribution, in development terms, is effectively
being ignored.
We believe this is a philosophical point which
the Committee might like to consider so that the contribution
that migrants are making through their remittances can be acknowledged
and harnessed in the most effective ways possible.
In summary, the UKMTA believes that the UK Government
(and governments worldwide) should pay more attention to integrating
`migration policy' within the larger global dialogue on economic
development and poverty reduction. In the past much attention
has been paid to the movement of goods and finance between countries.
It is now time to pay more attention to the movement of people
between labour-importing and labour-exporting countries. The development
impact of remittances they send home is an inevitable and welcome
corollary of this.
March 2006
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