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Africa: The High Cost of Remittances

AfricaFocus Bulletin
April 24, 2014 (140424)
(Reposted from sources cited below)

Editor's Note

"Remittances from African migrants play a vital role in supporting health, education, food security and productive investment in agriculture. Yet many of the benefits of remittance transfers are lost in intermediation as a result of high charges. Africa's diaspora pays 12% to send $200 - almost double the global average." - Overseas Development Institute

The positive impact of remittances on development has gained much attention in recent years, both from international agencies and from governments. But, argues a new report from the Overseas Development Institute, the high cost of remittances in fees paid to intermediaries, such as the dominant companies Western Union and Moneygram, takes an enormous cut from the potential. Africans in the diaspora sending money back to their families, both from outside the continent and between countries in Africa, pay extraordinarily high fees. Reducing these fees to the world average, by increasing competition and better regulation, could provide an estimated $1.8 billion a year in additional resources to recipient countries and families.

This AfricaFocus Bulletin contains excerpts from this report, particularly the key messages and executive summary. For the full 36- page report, with figures, tables, and documentation, visit

For previous AfricaFocus Bulletins on migration, remittances, and related questions, visit

++++++++++++++++++++++end editor's note+++++++++++++++++

Lost in intermediation: How excessive charges undermine the benefits of remittances for Africa

Kevin Watkins and Maria Quattri

Report - April 2014

Overseas Development Institute

Key messages

  • Remittances from African migrants play a vital role in supporting health, education, food security and productive investment in agriculture. Yet many of the benefits of remittance transfers are lost in intermediation as a result of high charges. Africa's diaspora pays 12% to send $200 - almost double the global average.
  • In effect, Africans are paying a remittance 'super tax'. Reducing charges to world average levels and the 5% G8 target would increase transfers by $1.8 billion annually. That figure is equivalent to the sub-Saharan African cost of paying for the education of some 14 million primary school age children - half of the out-of-school total; improved sanitation for 8 million people; or clean water for 21 million.
  • Weak competition, concentration of market power and flawed financial regulation all contribute to high remittance charges. Just two money transfer operators (MTOs) - Western Union and MoneyGram - account for two-thirds of remittance transfers. We conservatively estimate that the two companies account for $586 million of the loss associated with the remittance 'super tax', part of it through opaque foreign currency charges. 'Exclusivity agreements' between MTOs, their agents and banks restrict competition and drive up prices, as do African financial regulations favouring banks over other remittance payment options.
  • Governments and regulatory authorities in sending countries should do far more to promote competition and encourage innovation. Financial regulators - such as the UK's Financial Conduct Authority - and legislative bodies should actively review the practices of MTOs. All regulators should demand higher standards of transparency for foreign exchange charges, as envisaged in the Dodd-Frank legislation adopted by the US. African governments should do more to secure a better remittance deal for their citizens. Prohibiting exclusivity agreements is one immediate priority, along with ending the stranglehold of banks on remittance payments.

Executive summary

Remittances - the money sent home by migrant workers - play a vital role in Africa. They help to pay for health, education and productive investment in agriculture. During periods of crisis they provide a financial lifeline. For many economies in the region, remittance transfers now occupy an important position in the balance of payments. Yet Africa is failing to secure all of their potential benefits. No region faces higher charges for remittance transfers. In effect, Africa's diaspora face a 'remittance super tax' that hurts families and holds back development.

There is no justification for the high charges incurred by African migrants. In an age of mobile banking, internet transfers and rapid technological innovation, no region should be paying charges at the levels reported for Africa. In this report we argue that market concentration in the global money transfer industry, financial regulation in Africa, and high levels of financial exclusion are driving up costs.

Remittances to Africa are rising. In 2013, transfers to the region were valued at $32 billion, or around 2% of GDP. Projections to 2016 suggest that remittances could rise to over $41 billion. With aid set to stagnate, remittances are set to emerge as an increasingly important source of external finance.

Charges on remittances to Africa are well above global average levels. Migrants sending $200 home can expect to pay 12% in charges, which is almost double the global average. While the governments of the G8 and the G20 have pledged to reduce charges to 5%, there is no evidence of any decline in the fees incurred by Africa's diaspora.

Remittance corridors within Africa have some of the highest charge structures in the world. Migrant workers from Mozambique sending money home from South Africa, or Ghanaians remitting money from Nigeria can face charges well in excess of 20%.

Why does Africa face such high remittance charges? That question is difficult to answer because of the highly opaque nature of remittance markets and the complex range of products available. Much of the relevant commercial information needed to establish detailed structures is unavailable.

However, three factors combine to drive up charges. The first is limited competition. Global markets are dominated by an oligopoly of money transfer operators (MTOs) and regional markets by a duopoly: Just two companies - Western Union and MoneyGram - account for an estimated two-thirds of remittance pay-out locations in Africa. As in any market, limited competition is a barrier to cost reduction and efficiency gains. Second, there is evidence of 'exclusivity agreements' between MTOs, agents and banks. These agreements restrict competition in an already highly concentrated market.

Third, financial exclusion and poor regulation in Africa escalate costs. Few Africans have access to formal accounts (which limits access to pay-out providers) and most governments require payments to take place through banks, most of which combine high costs with limited reach and low efficiency.

No measure would do more to strengthen the development impact of remittances than a deep cut in charges. Cutting the 'remittance super tax' would enable Africa's diaspora to make a bigger contribution the region's development. It would also strengthen self-reliance. Unlike aid, remittances put money directly into people's pockets, providing a source of investment and support for consumption.

In this report we estimate the additional finance that would be generated under a range of charge-reduction scenarios. We build these scenarios by comparing current charges in Africa with two benchmarks: the current global average charge of 7.8% and the 5% target charge set by governments. We treat the gap between current charges and these benchmarks as indicative of the lower-and upper-bound estimates for the 'remittance super tax'. Converting that gap into financial terms, we estimate that Africa is losing between $1.4 billion and $2.3 billion annually as a result of high remittance charges.

Tracing this implicit loss through the remittance system is a hazardous enterprise. Africa's diaspora is linked to families, friends and communities through a complex web of intermediaries. The commercial terms on which MTOs interact with African banks are not widely available. Similarly, the real costs associated with regulatory compliance, foreign currency trade, agent fees and other dealings are largely unknown.

Despite these limitations it is possible to derive some indicative figures. Using market share (as defined by share of payment outlets) as a proxy for indicative shares in the 'remittance super tax', operations involving MTOs would account for between $807 million and $1.3 billion of our estimated global loss. As market leaders, Western Union and MoneyGram would account for $586 million of the revenue loss associated with the gap between African and world average charges.


The potential for development gains through lower remittance charges can be illustrated by reference to current aid flows. For comparative purposes we use a mid-range figure between our upper-bound and lowerbound estimates of $1.8 billion. This is equivalent to half of the aid provided to Africa by the UK, the region's third largest bilateral donor, or some 40% of transfers to Africa through the World Bank's International Development Association (IDA) - the largest source of multilateral aid for Africa.

Viewed from a different perspective, a diversion of revenues associated with the remittance super-tax into education would provide, at current financing levels, sufficient resources to put around 14 million primary school-aged children into school - almost half of the out-of-school population for the region. Alternatively, it could finance access to improved sanitation for 8 million people, or the provision of safe water for 21 million people.

This report calls for a number of measures to lower Africa's 'remittance super tax', including:

  • Investigation of global MTOs by anti-trust bodies in the EU and the US to identify areas in which market concentration and commercial practices are artificially inflating charges.
  • Greater transparency in the provision of information on foreignexchange conversion charges, drawing on the example of Dodd-Frank legislation in the United States. * Regulatory reform in Africa to revoke 'exclusivity agreements' between MTOs on the one side, and banks and agents on the other, and promote the use of micro-finance institutions and post offices as remittance pay-out agencies. Governments and MTOs should work to promote mobile banking as a strategy to support the development of more inclusive financial systems.
  • Engagement by Africa's diaspora and wider civil-society groups to put remittances at the centre of the development agenda. The public interests represented by Africa's diaspora and remittance receivers should be placed above the commercial interests of MTOs and banks in the regulation of remittance systems.


Economic remittances from migrants are an important and growing source of finance for Africa. These remittances represent a source of opportunity and, for many, a financial lifeline during periods of hardship. Yet Africa is failing to realise the full potential of remittances.

Migrants from Africa, the world's poorest region, face the highest charges on remittances. At an average of just over 12%, these charges are almost double the global average (excluding Africa). If remittance charges were reduced, there would be a double benefit: the overall flow of transfers would increase and a greater share of the transfer would reach the intended beneficiaries.

The excessive charges levied on African remittances raise wider questions. Migrant workers make enormous sacrifices to secure the higher income that comes with changed location. They bring farreaching benefits to destination countries, generating economic growth, meeting demand in labour markets and creating more diverse societies. Many take considerable risks in moving to higher-income countries. Yet the international community and Africa's own governments are failing to support their efforts to improve their lives, support their families, and promote self-reliant development.

This paper makes the case for putting remittances at the centre of international cooperation on development. ...

While highlighting a wide range of potentially innovative options [to increase the development impact of remittances] - including diaspora bond issues and partnerships between diaspora and local governments - it offers a simple message: namely, no measure would have a greater impact than deep cuts in the costs of intermediation.

1. Africa in the global remittance economy

Remittance flows to developing countries have increased rapidly over the past decade. They reached $414 billion in 2013 - some four times the level in 2000 (World Bank, 2013a). To put these transfers in context, they represent around three times the level of aid. In addition, remittance transfers - unlike aid - are on an upward trajectory and are projected to reach $540 billion by 2016 (World Bank, 2013a).

Africa has been part of a global remittance boom. In 2013, African migrants remitted around $32 billion - equivalent to around 2% of regional GDP (World Bank, 2014). Although sub-Saharan Africa (SSA) currently receives around 8% of reported global remittances, transfers grew by some 6% between 2012 and 2013. World Bank projections suggest that remittances to the region will grow at around 8.6% over the next few years, reaching $41 billion by 2016 (Figure 1). While official development assistance (ODA) still exceeds remittance transfers, the gap will narrow if these projections are correct.

Despite the projected growth estimates, remittance transfers to Africa have been increasing far more slowly than those to other regions. From 2009 to 2012, remittances to SSA were growing at an average rate of just 2% a year (World Bank, 2013a). This is less than half of the average for all developing regions and just one-fifth of the increase reported for South Asia. Only Latin America has reported a lower rate of increase, reflecting the impact of the US recession. The high charges incurred by African migrants, the focus of this paper, have almost certainly limited SSA's rate of growth.

Levels of dependence on remittances vary across Africa (Table 1). Nigeria accounts for 68% of total transfers to the region - some $20 billion in 2012 - and is the world's fifth largest recipient in absolute terms (World Bank, 2013a). Four countries report remittance transfers in excess of $1 billion: Nigeria, Senegal, Kenya and Sudan. Measuring remittances as a share of GDP provides a different perspective. There are nine SSA countries in the region for which remittances constitute more than 5% of GDP, rising to over 20% for Lesotho and Liberia.


3.The high cost of remittances to Africa

The high charges associated with remittance transfer to Africa have long been recognised as a constraint on development. Yet international efforts to reduce those charges have achieved limited results - in fact, recent evidence suggests that remittance charges may be rising (World Bank, 2013a).

At one level, the persistence of high charges in remittance markets is something of an enigma. New business models and new technologies are transforming financial services across the world. The extension of mobile phone ownership and rise of mobile banking is reducing dependence on fixed location access points and mobile transfers have been associated with increased financial inclusion and reduced costs. One of the most striking examples comes from Africa. The M-PESA network in Kenya is now one of the world's largest mobile money operators. Launched in 2007 by Safaricom, the country's largest mobile-network operator, M-PESA is now used by over 17 million Kenyans - some two-thirds of the adult population.

Yet despite the pervasive coverage of such mobile networks across Africa, technological innovation has yet to drive down costs in remittance markets. The barriers to cost-reduction include an oligopolistic international market reinforced by financial regulation in favour of a small number of banks.


When Africa's migrants send remittances home, they enter markets characterised by a concentration of market power. The 'big four' MTOs are Western Union, MoneyGram, Ria Financial services and Sigue. Western Union alone accounts for an estimated one-fifth of international remittance transfers - some $80 billion in 2011. MoneyGram, the second largest company, transfers around $20 billion annually. In the case of Africa, the two companies exercise what amounts to a duopoly in most countries (see below).

Remittance trade generates large revenues. In 2012, Western Union reported an operating income margin of 28% on $3.5 billion in transaction fees and $988 million in foreign exchange revenues (Western Union, 2012). MoneyGram reported margins of 20% on revenues of $1.4 billion (MoneyGram, 2014). Both companies have registered strong growth in revenues, reflecting a wider increase in crossborder remittances. The Middle East and Africa have been Western Union's fastest growing market, with 7% growth in 2012. Revenues on foreign exchange transaction have grown at a prolific rate, with Western Union achieving 16% growth in 2012 (Western Union, 2012).


Africa's high charge remittance corridors

It is not just on international remittances that African migrants face excessive charges. People crossing borders within the region as seasonal workers or traders face charges far higher than those for OECD-Africa corridors.

All of the world's top ten remittance-charging corridors are to be found in SSA, with South Africa and Tanzania figuring in all but one of these corridors. Workers from Malawi, Mozambique and Zimbabwe employed in South Africa, and Ugandans remitting money home from Kenya face charges well in excess of 20% if they conduct the transfer through banks. MTOs have lower charge structures, but these are still well above OECD- Africa levels. ...


Remittances already play a significant role in Africa's development. They could, however, play a far greater role. No measure would do more to unlock the full potential of remittances than a cut in charges. Achieving this goal will require some significant changes - in banking regulations, in the practices of money transfer operators, and in approaches to new technology. The introduction of more competitive markets with appropriate safeguards for financial integrity is long overdue. Yet despite a number of high-level initiatives, there is little evidence of charges coming down. This picture is unlikely to change until the reform of remittances is taken up as a development priority by governments in Africa, the G20 and civil-society groups, including African diaspora organisations.

AfricaFocus Bulletin is an independent electronic publication providing reposted commentary and analysis on African issues, with a particular focus on U.S. and international policies. AfricaFocus Bulletin is edited by William Minter.

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