“It’s a convenience thing. People will use the channel and
the touch point most convenient to them.” This is according to Richard
Malcolm, south and east African regional vice president for Western
Union. The US-based company provides global payments services, allowing
consumers and businesses to send and receive money around the world.
While Western Union reportedly has 27,000 brick and mortar agent
locations spanning 50 countries in Africa, it has focused its attention
on expanding its alternative or digital transaction channels. For example, integrating with more mobile networks and allowing people to receive transactions through prepaid cards.
“We see Africa as being the hotbed or ground zero for some
interesting technological advances,” Malcolm added. “Some of the things
that are happening here in Africa, happened here first… We are talking
about mobile money transfers, definitely. I am also talking about what
we call account based money transfers, so where a person with a bank
account can send or receive from their bank account or into their bank
account.”
Malcolm said the company is also working with a bank in Kenya, where it will be announced soon that the bank has introduced the ability to receive Western Union transactions from its ATMs.
A reason why mobile and digital channels have become a key focus of
Western Union’s business in Africa is that they are generally the most
convenient transaction methods for many people across the continent.
“I think if you take an average of Africa, you will probably find
that the average, let’s call it banked population, is probably less than
10% across Africa. You have some countries that are performing better,
like South Africa where it’s about 50%.”
However, while a large majority of the African population might not
have a bank account, a large percentage has mobile phones which they use
to make payments and transactions. Kenya, for example, has 30.7 million
mobile subscribers, a penetration of 78%, according to recent research
by the Communications Commission of Kenya.
“Kenya was a single digit banked population, probably in the mid
2000s [or] the early 2000s,” said Malcolm. “After their very spectacular
and interesting M-Pesa product… we see today that Kenyans are probably
around, even over, 70% financially included. So the mobile phone is
everywhere and it’s invaluable.”
African diaspora and remittances
Malcolm said remittances into Africa are a big part of Western
Union’s business, adding that many African countries rely on these money
transfers as a GDP input.
“In fact, [for] many countries in Africa over 30% of their GDP is
relying on remittances… if you reduce the transaction to its most basic
form you have an Ethiopian who lived out in a rural area, has left, is
working now in, let’s say, the United Arab Emirates (UAE)… they will be
working as a maid or a driver in the UAE [and] sending money back to
their rural family or dependents who may be in a village or on a farm.
That money goes back into the local economy, into a micro economy, and
it empowers that micro economy, it empowers the village, it empowers the
farm, and it leads to micro growth,” explained Malcolm.
“These [are] little hot spots of growth, as this money comes in and
people in Ethiopia, in that family, use it to buy school uniforms, to
buy food, and just generally support themselves,” he continued. “So
really you cannot underestimate the relevance and importance of
remittances into an under-financed environment.”
Western Union also opened a location in Hargesia, Somaliland in 2011
where Malcolm said it is seeing transactions go into the autonomous
economic region from places like the UK and US. “And you cannot imagine
just how important this is for the people in that type of environment.”
He added that Zimbabweans, who have moved into neighbouring Southern African countries, are another large remittance market.
African markets are unique
“Each country sometimes requires very unique and specific solutions,
particular to the personality or the characteristic of that country… So
for the Zimbabweans in South Africa sending back to Zimbabwe, we want to
find services that work for them, that they have a need for,” explained
Malcolm. “So this is really our approach and we will take this in the
direction customers need.”
His advice to foreign multinational companies looking to expand into
African markets is to focus on the unique differences in each market.
“Even neighbouring countries can be worlds apart, and to try and lump
them together is inappropriate. You will bring products to the market
that you believe work but the customers don’t need. So really focus on
the customer need.”
Source: How We Made It in Africa
In a small and stuffy room in midtown Manhattan, some people are filling in forms while others wait patiently in line to submit them. It is spring in New York City but the sweltering heat and the poor ventilation is reminiscent of summer. The teller shielded by a glass window barks orders through a round hole. With one hand on his suitcase, Omar tugs at his collar to loosen the red and blue striped tie around his neck. Pearls of sweat are visible on his forehead. “I am sending money to a person,” he speaks deliberately. Seemingly satisfied with his answer, the teller continues to punch her keyboard and shouts the next question, “How much?” He knows the drill. And like most migrant workers in the city, the trek to this hole in the wall is part of his routine on pay days.
Billion dollar industry
It’s hard to believe that this grimy cubicle is the face of a billion dollar industry. The global money-transfer industry, having escaped the financial crisis unscathed, is making huge profits. Not only do the companies charge a fee to transfer money to another country, they also make profits off the exchange rates. Like when Omar sends his monthly $200 contribution to his family in Ghana, he pays up to 8% in remittance or transfer fees. Remittance is money sent to someone as an allowance.
Egypt and Nigeria are among the top recipients of migrant remittances, says the African Development Bank’s latest report, the African Economic Outlook 2013. According to the report, the two countries received 64% of total remittances to Africa in 2012 – US$18 billion transferred to Egypt and US$21 billion to Nigeria.
The World Bank estimates that there are 140 million Africans living outside the continent. Scores of young Africans, like Omar, move to the West in search of better jobs every year. Omar settled on driving a yellow cab in New York City after holding various odd jobs, he told Africa Renewal. He bragged about how he made US$1,000 some days after pulling an all-nighter. A portion of his money goes to pay for his parents’ rent and school fees for his
siblings in Ghana.
As a green card holder, which gives him permanent residency in the United States, Omar can use walk-in payment facilities like the one in midtown Manhattan without fuss. Wire transfer companies have recently been under greater scrutiny and tighter regulations put in place requiring them to “know their customers.” To send money abroad, the sender’s identity and that of the receiver must be disclosed. Often tellers will ask for proper identification. But for illegal migrants, this is not an option. They often work and get paid under the table and therefore prefer to use informal channels. These unrecorded flows are believed to be at least 50% larger than recorded flows, says Dilip Ratha, a World Bank senior economist in charge of migration and remittances. Globalisation has created a demand for a cheap and mobile labour force, notes Rob McCusker in his article on underground banking written for the Australian Institute of Criminology. There is often the cultural expectation, he says, that migrant workers will send a proportion of their earnings to families back home.
Hawala
A lot of the money sent informally is hard to track. For example, money carried by visiting friends or acquaintances. But there are informal banking systems like the hawala (which means “trust” in Arabic) networks that serve people who want to remain anonymous because they require no identification. The fees are much lower, between 3% and 5%. The term hawala is now often used to mean “transfer,” explains Ibrahim Farah, a Somali-American who operates a money transfer business in Nashville, Tennessee. Speaking to Nashville Public Television’s series, Next Door Neighbours, Farah says it’s an age-old practice that was used by Arabic traders in the past to protect themselves against highway robbers. Hawala was later used in the Middle East, Asia and Africa to move money quickly and safely.
With the collapse of the banking system in Somalia following civil war in the 1990s, hawalas were used by refugees and internally by businesses and non-governmental agencies to pay employees. Backed by the World Bank and the UN and fuelled by the Somali diaspora community, the Somalia remittance network channels about US$1.5 billion a year. The money has helped keep Somali families afloat over the years, especially during the 2011 famine. However, because of fears that these alternative banking systems could become vessels for money launderers and terrorists, many countries have introduced new legislation and tighter controls, which has forced some hawalas to close.
Redefining remittances
Somalia is not the only African country where migrant remittances have become an important source of external funding. Officially recorded remittance flows to Africa by the World Bank are estimated to have increased from US$ 9.1 billion in 1990 to nearly US$40 billion in 2010. These remittances equalled 2.6% of sub-Saharan Africa’s gross domestic product in 2009, or almost 60% of official aid flows to the region.
African countries rely heavily on external funding for development. But foreign direct investments and official development aid have declined over the years, notes the African Development Bank (AfDB). Development experts believe remittance flows can help reduce poverty and grow economies. However, a big chunk of the remittances go to pay hefty bank fees. “High transaction fees are cutting into remittances, which are a lifeline for millions of Africans,” states Gaiv Tata, the World Bank’s director for finance and private sector for Africa.
Ghana, South Africa and Tanzania are the most expensive countries in Africa to send money, with fees averaging 20%, according to the Send Money Africa database funded by the African Institute for Remittances. One reason is the limited market competition for cross-border payments. The database shows Africans pay higher fees to send money home than any other migrant group. Opening up the remittance market to competition and better information to consumers could bring remittance prices down, says Massimo Cirasino, another senior World Bank economist.
The world’s eight most industrialized countries known as the G8, and the group of finance ministers and central bank governors from the G20, plan to bring remittance fees down to 5% by 2014 from the current average of 12.4%. This would put US$4 billion back in the pockets of Africa’s migrants and their families. The plan will involve increasing competition and banning exclusivity agreements, providing consumers with more information on prices and conditions through innovation and improved efficiency. For example, an overhaul of the Rwandan payment system has helped reduce the cost of sending money to that country from 19% to 15% over the past two years.
Remittances are an important share of foreign reserves for countries, but their impact on development and economic growth are minimal if they are only spent on consumption. Cash-strapped African governments are trying to get migrants to invest part of their wealth in their homeland in the form of diaspora bonds. The capital raised could be earmarked for big development projects. The initiative is not new. The governments of India and Israel have raised about US$40 billion since the 1950s using these bonds, noted Suhas L. Ketkar and Dilip Ratha in a 2007 World Bank research paper on diaspora bonds.
Sub-Saharan Africa is the most expensive region to send money to with an average of 12.4% compared to the global average cost which is around 9%. Photo: Africa Renewal/Bo LiIn Africa, Ethiopia was the first country to issue diaspora bonds to finance a hydroelectric power dam. The so-called Millennium Corporate Bonds, issued in 2009, failed to sell. Analysts cited lack of trust in the government as a guarantor and political risks as some of the reasons for the flop. In 2011, the government re-advertised the bonds as the Renaissance Dam Bonds, lowering the minimum denomination to an affordable US$50 and offering to pay yields or interest to the buyers every six months. Waiving remittance fees associated with the purchase of the bonds was another new feature added. Meanwhile, Rwanda had a more successful outcome. When Rwanda’s major donors suspended aid after the UN accused its government of backing rebels in the Democratic Republic of the Congo – a charge it denied, Rwandans living internally and abroad, as well as “friends” of Rwanda, were called upon to donate to a “solidarity fund” named Agaciro Development Fund, which means “dignity” in Kinyarwanda. By August 2012, the fund had attracted pledges of about US$31 million, according to The Guardian, a UK newspaper.
Issuing Diaspora bonds and turning remittance flows into bonds or instruments that can be sold to investors are good alternatives to borrowing from the international capital market, says the AfDB. According the bank’s research, Africa could potentially raise $17 billion annually using future flows of exports or remittances as collateral. The arguments in favour of enlisting migrants as investors are that migrants are often interested in housing, infrastructure, health and education projects and they are thought to be more loyal than financial investors in times of stress.
Selling the bonds in small denominations is also a plus for low-wage earners. However, as Ethiopia learned, patriotism alone cannot drive investment – people have to make a financial return. Trust is another important factor in marketing bonds to the diaspora. Transparency in the use of funds could ease concerns. If done right, experts believe these bonds could be a promising financial vehicle for African countries to attract resources, and for the diaspora to satisfy their yearning to contribute to the development of their countries.
Source: AfricaRenewal
Eric Guichard
By: Eric Guichard, the founder and chief executive officer of Homestrings
With US$40 billion in annual remittances into Africa, the
African diaspora has become the subject of much public policy discussion
as a potential source of sustainable supplemental development finance.
In recognition of the power of the diaspora, President Kagame of Rwanda
recently announced the launch of a Rwanda Diaspora Mutual Fund whose
objective is to tap into the offshore savings of Rwandans, and other
East African diaspora, to finance key public sector projects in Rwanda.
Similarly, in 2011, The Central Bank of Kenya redirected a segment of
its regularly scheduled domestic currency infrastructure
bond to target investors from the Kenyan diaspora. Other countries have
plans to follow similar paths. According to the World Bank, aggregate
African diaspora savings amount to about $35 billion. These sums are
deposited in Western banks earning negative interest rates, when
adjusted for inflation.
Dr Dilip Ratha, lead economist at the World Bank Migration and
Remittances Unit narrows it down to two key factors: (1) patient capital
and (2) counter-cyclicality. Diaspora remittance flows are linked to
families in the home country. What’s more, the character of these flows
is unique in its counter-cyclicality. Ratha’s findings suggest that in
periods of economic stress in the home country remittance flows tend to
increase, unlike foreign direct investments
and development aid which tend to flee in periods of duress in either
home or source country. This factor tends to suggest a more patient,
long-term character to diaspora flows. This is especially important when
considering Africa’s infrastructure needs. Infrastructure investments
typically require long term commitments. The same commitment is also
required for financing small- and medium-sized enterprises (SMEs).
Until recently, conventional wisdom suggested that all diaspora flows
were consumed by recipients for subsistence. However, according to a
recent World Bank study, conducted in the case of Kenya,
the breakdown of remittance receipts can be roughly classified in the
following manner: 50% for family support, 15% medical, 10% education
related and an amazing 25% of remittances are directed at some sort of
investment (SMEs, real estate, services…). In 2011, according to the
Central Bank of Kenya, the country received $891 million in diaspora
remittances. Based on the CBK’s own figures, this would mean that $222
million, or close to a quarter of a billion dollars, is available
capital to be directed into the productive sector. This number rivals
$180 million in total foreign direct investment received by Kenya in
2011, as reported by the World Bank in 2012.
The above assumptions about size of diaspora savings pool are
supported by academic research conducted by George Washington
University’s Center for International Business Education and Research,
in conjunction with Western Union and USAID. GWU conducted an investment
interest survey targeted at US-based African professionals and
entrepreneurs who participated in a 2010 venture financing competition.
The results show an overwhelming interest in investing “back home”.
However, the study also reveals a dramatic gap between the “desire to
invest” in a range of opportunities from real estate to manufacturing
and services, and the “ability to invest” in those same opportunities,
as members of the diaspora. This suggests the existence of structural
impediments preventing the diaspora from accessing opportunities with
ease. A closer examination reveals that these structural blocs fall into
three key categories: transparency, regulatory and administration.
Transparency: Most opportunities sought by the
diaspora are not structured for ease of access by them. In part this is
due to the fact that amounts required may be too large relative to what
the diaspora can afford to invest, or that the opportunities are not
transparent enough to enable them to judge inherent risks on their own
as remote investors.
Host country regulations: Both the United Kingdom’s
Financial Services Authority and the United States’ Security and
Exchange Commission have household earnings tests that limit access to
private deals that are not listed on an exchange. Only those with
financial sophistication as defined by the regulators – with private net
worth exceeding $1 million – can invest in opportunities that are not
listed on a public exchange. Listing on an exchange can be an expensive
proposition even for sovereigns, much less for an entrepreneur in the
home country seeking to tap into diaspora capital.
Small transfers: Diaspora transfers on average are
small and most investment opportunities are seeking aggregates that are
larger than what one individual remitter can afford. Therefore the need
to administrate these small amounts into larger pools that can command
institution-like influence is critical.
The combination of these factors make it difficult for the diaspora
to participate in a meaningful way in the development of critical
sectors such as infrastructure, key SME industries and large scale real
estate projects.
To capitalise on the transformational nature of diaspora flows one has to simultaneously engage key constituencies:
Domestic banks: Domestic commercial banks play a key role in providing financial services
to the diaspora. Recently, Kenyan and Ghanaian banks have designed new
financial products directed at the diaspora to facilitate savings, and
investment including financing of the purchase of land and building a
home. Banks need to do more by offering more targeted private banking
services to the diaspora. This entails offering a wider choice of
investment opportunities that diaspora seek back home, and partnering
with other players to broaden their offerings;
Aggregating platforms: New aggregating platforms have emerged, including one that the author has initiated – Homestrings.com.
These platforms take advantage of a new web-based phenomenon called
crowd-funding. This method has also found success in the political arena
with the Obama campaign innovating fundraising via the web. Crowd-
funding platforms, such as Homestrings, have the advantage of being
omnipresent, being on the internet, and of being responsive to the needs
to the diaspora, in real time;
Government: Investment promotion agencies (IPAs)
have a key role to play in attracting diaspora capital. As a
facilitating agent they should be engaged in selling the investment
programme to their respective diaspora and, more importantly, working
with financial players to structure these opportunities in such as way
that it facilitates access to them by the diaspora. IPAs are also
critical in the education of investors – which in turn requires them to
have a good grasp of financial presentation practices;
Domestic private sector: As targets of diaspora
investments, the domestic private sector, in conjunction with the IPAs,
should create avenues of investment that facilitate access by the
diaspora. Whether it’s listing in the host country’s stock exchange
(AIM) or providing much needed due diligence transparency and education.
These efforts, combined with the sustained and targeted marketing
efforts of IPAs, form a powerful galvanising mix that could only be
beneficial to the home country.
Once the impediments are removed it comes down to constant marketing
to the diaspora. The Israel Bond Agency is the global benchmark in
diaspora engagement. Its organisational approach to raising funds from
its global diaspora is testament to what can be accomplished. Israel
raises between $1 billion to $5 billion annually from the Jewish
diaspora and diaspora related institutional investors. Its offices span
the globe and they are constantly informing the diaspora of various
developments and investment opportunities. They work collaboratively
with various public and private players in order to leverage the
existing financial infrastructure to their advantage.
The diaspora presents a significant opportunity to introduce a
paradigm shift in how development is financed. However, attracting the
diaspora to invest in the productive sector is a combination of
education, effective structuring, transparency and active promotion and
engagement. All vested parties must work together to facilitate diaspora
investments. Each party has leverage that the other doesn’t. By working
together, diaspora investment capital can be a sustainable, effective
and efficient source of development finance for Africa.
This article was first published in ‘New Africa: From Growth to Jobs’, a publication by Business Action for Africa.
