REPORT: ODI & Comic Relief: $1.8bn African remittance super tax

23 April 2014

Africans living abroad face some of the highest fees in the world to send money home, costing their families some $1.8 billion a year in lost income – warns a new report from the Overseas Development Institute (ODI), the UK’s leading think tank on development.

The report, funded by Comic Relief, analyses global charges on money sent to sub-Saharan Africa. It estimates that reducing African charges to global average levels would generate enough revenue to put some 14 million children into school, almost half of the out-of-school total in the region, and provide safe water to 21 million people.

Sub-Saharan Africa is the poorest region in the world, but faces the highest remittance costs. Charges average 12% on transfers of $200, almost double the global average. There is no sign of charges falling, despite international pledges by the G8 and the G20 to reduce the cost of remittances to 5% by 2014. 

The report’s co-author and ODI Director, Kevin Watkins, said: ‘This remittance super tax is diverting resources that families need to invest in education, health and a better future. It is undercutting a vital lifeline to hundreds of thousands of poor families in Africa. Africans living abroad make huge sacrifices to support their families, yet face charges which are indefensible in an age of mobile banking and internet transfers.’

It is not just African migrants in rich countries who face high charges. The world’s top ten remittance transfer charges are all to be found in sub-Saharan African countries. Ghanaians sending money, for example, to Nigeria can pay as much as 39% in fees.

Lack of competition in global and regional markets is a key factor behind these high charges. Just two money transfer operators – Western Union and MoneyGram – control almost two thirds of the remittance market in Africa. Both companies operate ‘exclusivity arrangements’ with agents, which restricts market entry. Financial regulations in Africa also raise charge levels by giving banks an effective monopoly on remittance payments.

Based on extrapolations from the available data, ODI researchers conservatively estimate that operations involving Western Union and MoneyGram, account for around a third – US$586 million – of the US$1.8 billion loss associated with high remittance charges each year. Western Union charges 9.4% on average on transfers to the region, while MoneyGram charges 10.4%.

Remittances to Africa have been rising. Transfers reached $32 billion (2% of GDP) last year and are expected to grow at more than 8% annually until 2016. This income is less volatile than foreign direct investments and other private capital flows and directly reaches households, cushioning the impact of external economic shocks. Among others:

  • In Somalia, eight in ten new business ventures are funded by remittances.
  • In Ghana, remittances have halved the likelihood of households falling into poverty and improved school attendance.
  • Ethiopian households receiving remittances are less likely to sell productive assets to cope with food shortages.

Siddo Deva of Comic Relief said: “Imposing such high remittance fees from hard-earned income is hurting the African diaspora and, more importantly, their families and communities in the countries of origin. Diaspora organisations would like to engage governments and regulators to find creative solutions to unlock the true potential of remittances to the region.”

The report calls on regulatory authorities in OECD countries to investigate whether or not market concentration has the effect of artificially raising prices. The authors also call for greater transparency on the provision of information on foreign currency conversion.

The report urges African governments to review current regulations. It calls for legislation to outlaw exclusivity agreements between money transfer operators, banks and agents, along with measures aimed at allowing post offices and micro-finance institutions to compete with banks.

For more information, please contact Alfonso Daniels from ODI’s media team at [email protected] or +44 (0)7808 791265.

** ODI and Comic Relief are organising a major public event on 16 April 2014 to launch the report. This will bring together key government, industry and African diaspora representatives to discuss high remittance costs and propose solutions. **

ENDS

Notes to editors:

  • The $1.8 billion in higher-than-average remittance costs to sub-Saharan Africa is the average of two benchmarks. The lower bound estimate is derived from the gap between remittance charges for Africa and those applied to other regions. The upper bound one is the gap between charges for Africa and the 5% international target. Using these reference points, Africa is currently losing between $1.4 and $2.3 billion annually, the average being $1.8 billion.
  • The figure showing that Western Union and MoneyGram represent around a third – $586 million – of the $1.8 billion lost in higher-than-average remittance charges each year is the average of two benchmarks: average charges in the region, on the one hand, and their share of remittance pay-out outlets on the other.
  • Information about sub-Saharan Africa having 12% average remittance costs, the top ten remittance charging corridors being located in sub-Saharan Africa, and remittance market projections for the region are based on World Bank data