New study reveals money transfers to Africa up to 50% more expensive than global average
A study of the cost of remittances, carried out by London’s Overseas Development Institute (ODI) with support from the fund-raising charity Comic Relief, has revealed that transfers to African countries cost around half as much again as the global average, and twice as much as transfers to Latin America. Workers are paying an average of 12% in fees to transfer money back to relatives in sub-Saharan Africa; put another way, someone sending $200 home to provide for a relative’s education would incur a $25 fee. The ODI estimates that if remittance charges were brought down to the world average of just over 8%, the money saved could educate an extra 14m primary school children, half of all those currently out of school on the continent.
The bulk of this money goes through money transfer companies rather than banks, since the recipients are unlikely to have bank accounts, and transfer companies are quick, efficient and have a wide network of agents. But just two big international players dominate the business in Africa, Moneygram and Western Union, and participants in a meeting to launch the research were highly critical of the way they seemed to be abusing their market dominance.
The ODI report urges governments to increase competition in money transfer remittances and to establish greater transparency on how fees are set by all market operators. It is now following up with African central banks and finance ministries, as well as UK and US regulators, to bring about change.
ODI found that in more than 30 countries the two big players had more than 50% of the market; and in 10 countries they had more than 90%. Sometimes either Moneygram or Western Union had an effective monopoly, but even where both companies were present it did not necessarily mean that customers had much choice; one company could still have a monopoly of outlets in a particular area, and the companies habitually make their paying-out agents sign contracts promising not to also act as agents for their rivals.
At the end of 2013, when the ODI did its research, the fees and charges to send money to most of Africa were around 12% – a bit less to Zambia or Tanzania, a bit more to Uganda, Malawi and the Gambia – compared to a world average of just over 8%. The governments of the G8 and G20 countries have pledged themselves to working towards reducing this to 5%. One country where the big two are absent – Somalia – has far lower remittance charges; transfers go through a number of smaller, competing companies.
However, inter-Africa transfers are the most expensive. Dilip Ratha at the World Bank says exchange controls are one of the reasons the rates are so high; in some places sending money out of the country is illegal. Ratha believes some sort of regional currency market should be created.
The report identified 10 routes with bank transfer charges over 20%. Charges from Nigeria to Ghana were 22%. To send from Tanzania to the rest of East Africa, or from South Africa to its near neighbours is particularly expensive, peaking at 25% for bank transfers between South African and Malawi. Some of the fees charged by money transfer companies are even higher; if you send money that way from Ghana to Nigeria you may have to pay an incredible 39%.
In some places mobile phone based systems like M-Pesa have made in-country transfers much easier and cheaper, but they haven’t really taken off internationally, largely because conservative, inflexible regulatory systems insist that all international transfers must go through conventional banks, and African banks often have very high charges.
Chukwuemeka Chikezie of the Up Africa consultancy told the UN humanitarian and news analysis service IRIN that a lot of the responsibility lay with African governments. “One of the reasons M-Pesa took off in Kenya was because the authorities nurtured and enabled innovation. If you look at other countries the regulators have tended to stifle innovation. They are very risk-averse and they don’t enable even limited experiments to prove that the markets can absorb technical innovation.”
The big profits made by the transfer companies are tempting other players into the market with new ways of sending money aimed at undercutting Moneygram and Western Union. Western Union has responded by offering so-called “zero-fee” transfers to Africa if the money is sent from a bank account rather by credit card or cash. This would mean a saving of just under £5 ($8.40) for someone sending $100 from the UK to Liberia. The company would still make money (nearly $4) by using a favourable exchange rate, but it would bring the cost down to just below the G8/G20 target.
Glenys Kinnock, opposition spokesman on International Development in the upper house of the UK parliament, who chaired the original meeting to launch the research, called on the country’s financial regulatory authority to intervene over the issue of excessive charges. “It is not a technocratic issue,” she said, “although it may sound like one. It is also about people’s lives and the future of their children… These things have to change. We can’t put up any longer with the prospect of its making things so difficult, very often impossible, for people who have such needs.”