High fees on diaspora funds holding back Africa’s growth

It costs almost twice as much for a Kenyan in the diaspora to send money back home than it does to send it to India.

One pays about Sh10,600 ($124) to send Sh86,000 ($1,000) to sub-Saharan Africa, and about Sh5,500 ($65) to send a similar amount to India in South Asia.

This is according to the Africa Progress Report, commissioned by the African Progress Panel and released this month, which partly accuses Money Transfer Operators (MTOs) of unfairness.

As a result of the 12 per cent charge on total remittances to the continent, the money sent to sub-Saharan Africa has not achieved its full potential.

In the month of February, for instance, about Sh9.4 billion was remitted to Kenya from the diaspora, according to Central Bank of Kenya figures. This means that Kenyans abroad paid about Sh1 billion in transfer charges, compared to the Sh500 million it would have cost to send a similar amount to India.

The global average cost of sending $1,000 is about Sh6,700 ($78). In Latin America and the Caribbean, it costs an average of Sh6,500 ($76) to send $1,000. In East Asia and the Pacific, it costs Sh7,700 ($88). Financial lifeline The Group of Eight (G8) most industrialised nations, as well as the Group of 20 major economies have committed to lower the global average to Sh4,300 ($50).

Unlike aid, remittances go directly to households. They provide a financial lifeline for families facing hardship, as well as provide a source of investment for sectors such as agriculture, housing and education.

“Remittances also play a vital role in the balance of payments of many countries, helping to finance current account deficits and stabilising currencies,” notes the Africa Progress Report. World Bank projections suggest that remittances to sub-Saharan Africa could reach Sh3.5 trillion by 2016. “Unfortunately, the full development potential of remittance transfers has yet to be realised because charges on remittances to Africa are far higher than for any other region,” the report adds.

Research by Overseas Development Institute (ODI) released in April and titled Lost in Intermediation: How Excessive Charges Undermine the Benefits of Remittances for Africa suggests that the region could be losing at least Sh120 billion annually as a result of these high charges. The exorbitant cost, the institute argues, is enough to take 14 million children to primary school, which is half of the continent’s out of the school population.

The figure is also enough to enable eight million people in the region access improved sanitation through Ventilated Improved Pit (VIP) latrines.

The cash is also enough to construct boreholes that would supply water to about 21 million people. The African Progress Panel, which is chaired by former UN Secretary General Kofi Annan, urges the international community and African governments to put the reduction of remittance charges at the centre of the international development agenda. Fundamentally indefensible “While there are many technical and regulatory issues to be addressed, the charges imposed on African remittances are fundamentally indefensible,” the panel says.

The report also takes issue with MTOs, who effect 80 per cent of transfers to Africa. It notes that two companies, Western Union and MoneyGram, account for two-thirds of this. “Both companies operate exclusivity agreements with their agents and commercial banks, which raises the cost of market entry,” it says.

The report argues that many MTOs appear to charge a fee that is uniform and unrelated to underlying conditions to receiving countries in Africa. “This overcharging impacts even more negatively on rural communities,” says Mr Annan in the report’s foreword.

Money transfers

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