Remittance is the transfer of money by a person who resides in a foreign country to his or her home country. In other words, it is the money an expatriate sends to his/her country of origin via wire, mail, or online transfer. According to the World Bank, in 2018, the overall global remittance grew 10% to US$689 billion, including US$528 billion to developing countries and this is expected to grow by 3.7% to US$ 715 billion in 2019, including US$549 billion to developing nations.

Bringing it home:

Immigrants from Africa today number approximately 20 to 30 million adults, who send around $40 billion USD annually to their families and local communities back home. For the region as a whole, this represents 50% more than net official development assistance (i.e. government aid designed to promote the economic development and welfare of developing countries) from all sources, and, for most countries, the amount also exceeds foreign direct investment (FDI) (an investment in the form of a controlling ownership in a business in one country by an entity based in another country). Nigeria is by far the top remittance recipient in Africa, with $22.3 billion in 2017, perhaps unsurprisingly, as the largest population and economy in Africa. While Liberia was the African country for whom remittances accounted for the highest share of GDP at 25.9%.

These peer-to-peer transfers of funds across borders are socio-economically significant for many of the countries that receive them. In this article, We will be highlighting in what ways it is.

1. Greater financial and social inclusion for receiving countries: For many developing countries in Africa, remittance money constitutes a substantial amount of financial inflow and contributes to the economic growth of the receiving country, thus attempting to fill in any vacuum left behind by insufficient foreign aid and reduces the foreign exchange deficiency of the country. This shows that there is an enormous potential for using remittances to encourage development in countries. As a matter of fact, a study by World bank shows that remittance is, in fact, the second largest financial inflow to many developing countries in Africa. However, as an inevitable yet undesirable effect, an economy supported primarily by remittance money leads to a greater dependence on the global economy instead of evolving a sustainable, local economy. Some have argued that were remittances to stop flowing, some economies would collapse in an estimated three months.

2. Financial stability for middle to low-income households: The inflow of income via remittances brings financial stability for middle to low-income households as the money is used primarily to cover the daily expenses. The current economic studies by the World Bank have also claimed that spending on consumption generates lasting economic development. The increase in household expenditures through remittance has a direct and positive effect in the economy of a country as it boosts the ongoing demand for consumer goods and services, which, in turn, sparks production and results in the creation of new jobs.

3. Reduction in the level and severity of poverty: Remittances are believed to reduce poverty, as it is mostly people in search of greener pastures who migrate and send back money to their families. Remittances tend to increase when the home country’s economy slows, making it a particularly effective tool to combat poverty. This promotes economic growth, increased investment, and community development. Studies have also supported the fact that increases in spending have a multiplier effect. People participating in financial systems, are better enabled to start and expand businesses, absorb financial shocks, and invest in their children’s education. In fact, education has been better in households that receive remittance as research shows that the school dropout rate is lower and the enrollment ratio is higher in households that receive remittances. This particularly helps Sub-Saharan Africa which according to World Bank is at an economic downstream, and its population it’s likely underdeveloped.

As the scale of migrants has increased significantly in the past years, the impact of remittances is recognized in all developing countries. According to the World Bank, Remittances are considered a vital medium of financial support that directly influences the income of migrants’ families, thus allowing a better standard of living and enables higher investment in businesses.

Whether in the long run it is an effective means to improve economic growth or can be reckoned as a future solution on combating poverty is another question which still needs to be looked at. But as long as remittance flows continue, it will continue to benefit the lives of people receiving the funds.

Even though remittance is very impactful to the economy of the receiving countries as we have established above, the cost of money transfer across borders is still very high. According to the World Bank, in Q4 2018, the global average cost for sending remittances was 7.01%. That’s 7.01% of 687 billion dollars, that could have boosted the economy of many developing and third-world countries, and assist as many as a billion people across the globe who rely on remittances from abroad.

Unfortunately, the cost is not the only problem with remittances. There are speed, security and even the inconvenience of having to go banks sometimes.

Thankfully, Korapay is making huge inroads and taking away the painful complexity of traditional money transfer, making the process as easy as sending a text. Literally — all you’ll need is your recipient’s account number for a very fast, secure and low-cost international money transfer. The only downside? You’re going to have to come up with a better excuse for your cousin when she asks why you haven’t sent that money you owe her…

Credit Sources:

Worldbank.org

Wikipedia.com

Theguardian.com

thegreenbook.com