CAPE TOWN // Towards the end of every month for the past half year, Edward Banda takes a morning to visit the bank. For most of his life Mr Banda, who works as a gardener in Cape Town but comes from Malawi 3,000 kilometres away, used cash, but six months ago, at 42 years old, opened his first bank account.
“It is much easier now to send money home,” Mr Banda says. “Before I would have to give the money to a driver to take to Malawi, and pray that he was a good man. I would pray that my family got the money because if they didn’t they would be hungry.”
Previously Mr Banda handed an envelope of cash to the long distance driver with instructions to hand it on from traveller to traveller until it arrived in his home village in northern Malawi, where his wife, Happiness, lives with his two children. It is a system that has been used for more than a century across the region. But it has drawbacks.
“It can take many, many days for the money to get home. Until it does Happiness must struggle and borrow if she wants to feed the children. With the bank I put the money in today and she gets it tomorrow.”
Mr Banda is fortunate in having access to a formal channel to remit money back home. Many do not. The World Bank estimates that money flows from migrant workers to developing countries will be worth US$440 billion this year, more than twice foreign aid. Of this, about $40bn is Africa-bound.
This makes remittances an important source of GNP for countries with limited income. However, much of this money is generated within Africa itself, especially from the mines and farms of the richest country in the region – South Africa.
“Generally remittances have a better impact because they are targeted directly to families with no ‘intermediation’ as is the case with development funding,” says Brendan Pearce, the chief executive of Finmark Trust, a non-profit that specialises in providing financial access to unbanked people. “These remittances are often the only stable income for these families.”
Research by Finmark shows the money is used to raise children, feed families and fund education. Households that receive remittances show improved health and economic outcomes.
The average remitting migrant would send between 4,500 rand (Dh1,221) and 6,500 rand home per year. About half of all migrants are likely to remit.
As much as 13bn rand flows across the border to countries such as Mozambique, Swaziland, Zimbabwe and Namibia. Almost 70 per cent does so via informal couriers such as drivers. Although this is less secure, it does allow anonymity and avoids the tight scrutiny that formal channels invite.
The informal channel also ensures door-to-door delivery, an important factor for people whose families reside in the deep rural areas of the region and live nowhere near an ATM or bank.
This option is, however, expensive. A migrant will have to negotiate a rate with a driver who can charge up to 30 per cent of the total amount.
As in the UAE and most formalised economies now, bank account holders are required to provide proof of residence or citizenship. Mr Banda is fortunate in that he is now a South African citizen but many of his Malawian compatriots are not.
They therefore have little choice but to use informal methods of moving money.
The layers of security and control under which banks operate add to the cost, and can act as a hindrance to people using formal money transfer services, says Mr Pearce.
Money laundering laws and exchange control add to the list of hurdles remitters face. Organisations such as Finmark spend a lot of time talking to regulators about easing up on restrictions that threaten remittances.
If regulations become too onerous, migrants may cease sending back money altogether, he warns. “This will have devastating consequences on poor families and countries as it will roll back the gains we have made in order to get formal remittance increasing. People will all be forced back into the informal sector which is expensive, and very risky for migrants.”
It’s not clear how many migrants live in South Africa, but estimates of up to 5 million people have been reported. These are often people who enter via South Africa’s land borders on a tourist visa and then simply do not leave.
Many find their way into jobs in the tourism industry or as farm labourers. Although most are from southern Africa, there are quite a few from all over the continent. Somalis are another subset and these have established themselves as small retailers running “spaza shops”, which are similar to baqalas in the UAE.
Also visibly growing are migrants from Asia, especially China and the Indian subcontinent. The Chinese specialise in the retailing of clothing and household goods, while Pakistanis and Indians have taken to selling mobile phones and accessories.
Almost all will remit money home regularly.
Fortunately the options for doing so are growing.
These include dedicated money-remittance services, such as the Dubai-based Dahabshiil and Western Union.
Another method increasingly available is the post office.
“More than 15 per cent of adult Africans use the over 26,000 existing post offices and postal agents to access basic financial services, including picking up remittances,” said Pedro De Vasconcelos, the remittances coordinator at the International Fund for Agricultural Development (IFAD). “Most of them live in rural communities many miles away from banks.”
Aware of the role post offices can play, development agencies such as IFAD are paying attention to the way they can be used to service unbanked people. In North Africa, post offices are already an essential part of the rural financial access infrastructure, says Mr De Vasconcelos.
Algeria, Egypt, Morocco and Tunisia have more post offices than bank branches and in much of Sub-Saharan Africa there are post offices in even isolated rural districts.
Post offices offer another advantage to money transfers beyond just being everywhere. They are usually cheaper, too. According to IFAD, remittance costs across Africa are the highest in the world, at close to 10 per cent of the total amount transferred.
The cost associated with post office remittances is closer to 6 per cent, IFAD data shows. This is likely to help drive down the cost overall of moving money by about 3 per cent by 2030. This works out to an extra $5bn a year in the hands of migrants’ families.
“In Africa, post offices are now considered part of the nation’s social fabric and an immediate access point to financial services,” Mr De Vasconcelos says.
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