How to fill the remittance gap left by COVID-19

By Antonia Esser & Juliet Munro

When we think of the African diaspora, we often imagine large networks across Europe or North America and the indelible contribution they play to national culture and society. But get in a taxi in Cape Town and there is a high chance your driver is from Malawi, Nigeria, or the Democratic Republic of the Congo. While Europe, North America, and even the Middle East are often the first places we associate with African migration, more than 70% of people stay on the continent. Countries including South Africa, Côte d’Ivoire, and Uganda are among the top destinations.

Together, Africa’s diaspora contribute at least $84 billion to Africa’s GDP, significantly more than the $47 billion the continent receives from foreign direct investment, and the $50 billion the continent receives in aid. These funds play an important role in supporting everyday costs from food, school fees for siblings, health care for relatives to new homes for aging parents.

As COVID-19 grinds the global economy to a halt, many of Africa’s diaspora have seen their incomes slashed and their ability to send money home diminished. What’s more, those with money to send have little means of getting it there, as borders close and curfews stop money from moving too. By how much, nobody really knows at this stage. The World Bank reckons it could be at least 23%.

We will not know what permanent scars COVID-19 will leave on the way we work, travel, and move for some time. However, it is clear that the world as we know it has changed, and will continue to do so. And just as the virus has pushed people to embrace technology to ensure we can still work, learn, and socialize, we must also better embrace technology to improve the way people can send money home.

Research from 2015 and 2016 showed that 90% of remittances from the UK to Africa were cash transactions, mostly through an agent. While things are changing, many still rely on using cash to get money home. Until borders started to close and curfews came into force, few people saw the need to change. Although counterintuitive given the strength of mobile money in Africa, cash continues to be the only option for sending money to most remote places.

COVID-19 has exposed one of the biggest flaws in the system: an over reliance on cash at the expense of digital transactions. With focused investments and collaboration, we can ensure we build a stronger digitised system and potentially help people through this crisis.

When the pandemic first started to emerge, several African governments and the private sector slashed transaction fees and used incentives to encourage the use of mobile money over cash. With over 100 million mobile money accounts on the continent, this was a response that could be enacted relatively quickly and easily. Mobile money is generally more accessible and widespread than banks, ATMs, and money transfer outlets.

However, unlike mobile money, mobile remittances aren’t as simple. While remittances can easily flow within countries — say from Nairobi to Kisumu or Dakar to Kolda — cross border transactions such as from Cameroon to Nigeria remain difficult. And that’s mostly due to regulatory issues.

So, what can be done to help solve this issue? While there is a strong case, beyond remittances, for government investment into providing basic infrastructure, there are three areas governments could prioritize to encourage the uptake of mobile remittances.

First, use public-private partnerships to drive investment in critical infrastructure like network towers. Next, remove regulatory barriers and review taxes to encourage more competition and growth. For example, non-bank financial players, such as mobile money operators, struggle to access licenses for cross-border remittance services, while the distortionary taxation of digital transactions often voids any savings. Finally, explore digital government-to-person payments as well as digital currencies as a way to familiarize consumers with digital channels from a government perspective.

More can also be done by telecommunication companies and remittance service providers to ensure we can deliver services to the last mile. Using mobile money as an example, many villages will often have one agent providing services for multiple platforms. By collaborating and creating interoperability, we can increase the availability of access points where cash-out will be inevitable. If we can get remittance services to the last mile, we can reduce the miles cash has to travel. There are also opportunities to explore ways people can send remittances directly to schools, hospitals, or utility companies — typically the three key uses for remittances apart from day-to-day household expenses.

Development partners like FSD Africa are focused on strengthening financial markets and play a central role in delivering research, providing funding, and assisting in the development of fit-for-purpose policy and industry changes.

The impact COVID-19 is having on remittances goes beyond numbers and percentages. Remittances fill a hole in many family budgets, often measured by a sibling receiving an education or not. A loved one being able to get health care treatment, or not.

As we’ve seen across the world, the coronavirus has impacted economic and social policy in ways we could have never imagined. While we can’t correct some of the weaknesses this pandemic has exposed in global remittances, we can work together to drive change and make the system more resilient for when the next shock hits.

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Antonia Esser is an Engagement Manager at Cenfri, an independent not-for-profit think tank based in Cape Town. Cenfri does applied research around the digital economy, and supporting financial sector development through facilitating better regulation and market provision of financial services. Antonia’s main research area is payments: remittances regulation and infrastructure, national/regional payment systems setup and regulation, central bank digital currencies, as well as regulation for innovation regulatory systems. Over the past years she has been researching the market barriers and the role of technology in inclusive payments, cross-border remittances and insurance for regulators, providers, consumers and the private sector in sub-Saharan Africa. Furthermore, she is engaged in researching and developing African fit-for-purpose national and regional payments systems with a particular focus on remittance channels with various African regulators. Antonia currently forms part of the Covid-19 Remittances Task Force that aims to inform the UN bodies on necessary actions around remittances and is also a member of African Union’s African Institute for Remittances expert cohort.

Juliet Munro is Director at FSD Africa, a regional specialist development agency funded working to build and strengthen financial markets across sub-Saharan Africa, funded by UK aid from the UK government. Juliet’s focus to date has been overseeing programmes that cut across a variety of themes – from remittances, credit and housing finance to community finance, gender and financial integrity. More recently, her role has shifted to supporting the FSD Network in realising its objective of greater collaboration and coherence around programming priorities that achieve ambitious economic and welfare outcomes.