Africans abroad facing highest transaction costs globally

August 15, 2016
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World Bank says that such disproportionate costs not only represent a heavy burden on hard-working Africans but that they are also a barrier to productive investment by diaspora back into their home countries/FILE
World Bank says that such disproportionate costs not only represent a heavy burden on hard-working Africans but that they are also a barrier to productive investment by diaspora back into their home countries/FILE

, NAIROBI, Kenya, Aug 15 – Despite sending more than US$40 billion (Sh4.05 trillion) in remittances every year, Africans abroad face the highest transaction costs in the world.

This is according to the World Bank which estimates that Africans pay on average 9.5 percent of the total transfer sum in fees, reaching as high as 20 percent in some corridors.

World Bank says that such disproportionate costs not only represent a heavy burden on hard-working Africans but that they are also a barrier to productive investment by diaspora back into their home countries.

To address the issue, an action plan dubbed Nairobi Action Plan on Remittances, has been launched through a partnership between the IMF, World Bank and the Africa Institute for Remittances and leading African diaspora organizations to reduce remittance costs to Africa to less than 3 percent by 2020. This will be a full ten years sooner than the 2030 global target set by the Sustainable Development Goals.

“We regret the fact that remittance costs to Africa are significantly higher than the global average, and that costs within African countries are amongst the highest in the world; we acknowledge that this is a form of development infamy and highlights the urgency for immediate action to be taken for Africa to become a continent where remittance costs of all types and kinds are permanently low,” reads the Nairobi Action Plan on Remittances.

There are however other ways of reducing the cost of remittances sent to Africa. According to Alix Murphy, Senior Mobile Analyst at money transfer service WorldRemit, four steps could prove beneficial.

They include senders moving away from cash, paying attention to indirect costs and fees, fostering a competitive and efficient remittance market and moving to lower remittances costs for Africa.

Broken down, moving away from cash for instance means that cash is removed from the sending-side altogether and transactions are safely checked in real-time before they go through.

“Cash, by its anonymous nature, is the criminal’s friend. It’s the path of least resistance. Cash-at-agent models are more prone to AML/CFT failings simply because they lack the ability to monitor transactions in real-time (paper forms are typically processed once the transaction has already gone through), thus making it harder to catch fraud before it happens,” she says.

At the same time, Murphy says that paying attention to indirect costs and fees can be useful especially of the transaction are made online. She explains that policymakers often overlook that remittances incur costs beyond the transfer fee and exchange rate margin.

“Other indirect costs such as the time and money required to travel to an agent location, the opportunity cost of leaving one’s place of employment to go during business hours, and the security risk of carrying large sums of cash, can place a heavy burden on the sender,” she explains.

She also highlights the issue of fostering a competitive and efficient remittance market as there still are because there is some form of exclusivity agreements from most markets.

“Much has been done in recent years to remove exclusivity agreements from most markets. But even in jurisdictions where such agreements have been outlawed, non-competitive arrangements or ‘penalties’ imposed on local service partners serve as quasi-exclusivity agreements which compose a significant barrier to entry for new services in the market,” she says.

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