Ranee Jayamaha: Moving from informal to formal in the provision of
remittances
Speech by Dr Ranee Jayamaha, Deputy Governor of the Central Bank of Sri Lanka, at the Global
Payments Week, Sydney, 3-6 October 2006.
* * *
Let me begin by thanking the World Bank, IMF and BIS officials for giving me this opportunity to speak
on the Worker Remittances in Cross Border Payment Flows.
Most of what has to be said on this topic has already been articulated by the previous speakers. Let
me therefore be very brief. I intend to make this presentation in three parts. Part I deals with an
overview of remittances. Part II elaborates the importance of remittances in the Sri Lankan economy
and Part III discusses possible solutions to issues relating to remittances at macro and micro levels.
Part I - Global overview
In terms of magnitudes, worker remittance has become a significant component in foreign inflows and
balance of payments in developing countries. The statistics presented here are largely estimates.
According to the latest reporting, worldwide remittances during 2005 had been approximately
US$ 250 bn and it is likely to increase further. In 2005, developing countries appear to have received
US$ 167 bn from about 175 migrants. It is also estimated that around 500 mn of the world population
is dependent on remittances.
Formal institutional channels
It is important to highlight some key points on the formal institutional mechanism/channels of
remittance flows. Traditionally, the banks collected and disbursed remittances. Now there are many
agencies involved in the remittance industry, but banks continue to play a lead role. Having realized
the increasing volume of cross-border remittance flows and the importance of remittances in the world
economy, the institutional channels have increased and they have begun to use technological
innovations to speed up the delivery of remittances. Remittance transfer services such as Western
Union, Eurogiro and Moneygram are well-known for cross-border transfers. More recently, SMART
Card companies and telephone companies have also begun remittance transfers with or without links
with banks. These new agencies have helped to speed up remittance transfers and provide alternative
delivery mechanisms, but remittance transfer prices remain at high levels. It is also noteworthy that
governments as well as the formal financial institutions are keen to ensure that remittances are used
effectively and prudently by the recipient countries as well as the individual recipients. The word
'effectively' refers to the use of foreign exchange inflows by the countries for its development activities,
while 'prudently' refers to the use of remittances by the recipient in a meaningful manner. From the
institutional point of view, 'prudently' also means risk-mitigating mechanisms placed by the formal
financial sector in remittance transfers.
All remittance flows are cross-border transfers and they take the form of large value transfers or
individual low value transfers. In the past, the formal institutional mechanisms concentrated heavily on
disbursing funds to the recipients. Given the heightened importance of remittances in national
economies and the promotion of smooth remittance flows between countries by the international
organizations, the formal financial sector has now begun to pay greater attention to the initial point of
remittance collection (capturing). This means that the institutional mechanisms are focusing on both
capturing as well as disbursing of remittances. The international cooperation and coordination is very
important at the point of capturing because the banks and formal financial institutions in the country of
origin should facilitate cross-border transfers of remittances without placing prohibitive rules and
regulations and pricing on the remitter.
Payment system and technological advances
As you are aware, technological advances, partnerships and improvements in the payments
infrastructure have significantly contributed to enhance remittances on a worldwide basis. In that
sense, the payment system improvement is a key to the enhancement of remittance transfers. The
technology advances are intended to facilitate automation, reduce costs, provide additional delivery
channels and mitigate risks involved in cross border transfers. However, the reduction of costs and the
introduction of additional delivery channels are yet to be developed to a satisfactory level by the formal
institutional network, not only by introducing enhancements to the payment infrastructure, but also by
making a concerted effort to reduce cost on remittance transfers.
Several international banks and money transfer systems such as Eurogiro, Western Union have taken
the initiative to target both blue and white collar workers at reduced transfer prices. Despite the
facilities offered by these money transfer systems, there still remains a significant portion of
remittances of un-skilled workers that are not captured by the formal money transfer systems.
Enabling regulatory environment
An enabling regulatory environment is necessary to enhance cross-border remittance transfers. While
recognizing the need to deter money laundering and terrorist financing through cross-border transfers,
laws relating to this type of activities should not discourage genuine remittance flows through the
banking system. Nor should they be discriminatory or prohibitive to remitters or receivers. Most
countries with fully open current and capital accounts have facilitated cross-border transfers than the
countries with capital controls. The situation is expected to be improved with the relaxation of
exchange controls in both the remittance originating country and the recipient country. There is also a
need to monitor and regulate the agencies and other service providers which recruit migrant workers.
It is reported that, in some instances, the agencies tend to persuade migrant workers to go for lower
wages and salaries or employ them under harsh working conditions. There have also been instances
where the agencies or agents take money upfront from workers and have left them in the lurch.
Remittances through informal channels
According to estimates, still 30-40 percent of remittances are transferred through the informal
institutional networks and private channels. In some instances, informal systems do not transfer
foreign currency from the origin/host country to the recipient/home country. Arrangements are made to
provide funds in local currency at the recipient's end. For example, if a migrant worker in the US
wishes to transfer USD 500 to his family in Sri Lanka, he prefers to go to informal systems like Hawala
and Undial because of the high charges and commissions in the formal banking sector. Under the
informal money transfer systems, the dollars may stay in the US or get to Sri Lanka at a later time. The
Hawala agent's representatives in Sri Lanka provide Sri Lankan rupees to the migrant's family speedily
and at a relatively low cost. If dollars are retained with the Hawala agent in the US, Sri Lanka's
banking sector lose the opportunity of using foreign currency and, therefore, the country does not gain
any benefit from the worker remittance. If the Hawala agent sends dollars at a very later date to
replenish the equivalent of Sri Lankan rupees, again there is an opportunity cost to the country as
foreign currency is not available when needed. There is also a possibility of the Hawala agent sending
dollars to Sri Lanka through an un-known courier service, but such dollars may not get to the banking
sector at all.
It is difficult to institutionalize remittances of illegal immigrants as such immigrants do not wish to
identify themselves to the formal banking and financial institutions in the host country. Hawala and
Undial systems are popular among illegal immigrants. It is, therefore, important for the remittance
receiving countries, where possible, to compete with informal systems and divert remittances to the
formal banking channels. Banks and financial institutions should be more innovative and make
arrangements to collect/capture remittances from legal/illegal migrants at the field level and coordinate
with the host country's banking/financial institutions to transfer monies to remitter's home country
speedily and at a reduced cost. Informal transfers largely take the form of cash. The absence of an
efficient financial infrastructure at the remitter's end as well as receiver's end is also found to be a
discouraging factor that contribute to the use of informal channels. In some destinations, there is no
access to sophisticated infrastructure in the host countries for cross-border transfers. Migrant workers,
therefore, depend heavily on informal systems.
In this context, a global attempt should be made to facilitate cross-border remittance transfers as such
transfers have a significant impact on the development of many nations.
Part II - Importance of remittances in Sri Lanka's economy
I now proceed to illustrate how dependent Sri Lanka is on worker remittances. Over the last couple of
years, worker remittance has been the single largest inflow of foreign exchange after exports in Sri
Lanka. Remittances have played a significant role in financing the widening trade deficit and
maintaining balance of payment surpluses. During 2005, over 75% of the trade deficit was financed by
worker remittances.
1980 1985 1990 1995 2000 2005(a)
Export Earnings (Goods) 1,065 1,315 1,984 3,807 5,522 6,347
Textile and Garments 110 293 628 1,853 2,982 2,895
Tea 373 442 495 481 701 810
All Other Exports 582 581 862 1,474 1,839 2,642
Export Earnings (Services) 279 329 531 821 953 1,540
Worker Remittances 152 292 401 790 1,160 1968
Foreign Direct Investment 43 24 34 28 175 272
Foreign Loans and Grants 307 517 526 847 422 972
Worker Remittances, as a %
of Total current account
Inflows 9 14 13 21 15 19
Trade balance 15 40 57 53 65 76
Loans and grants 50 56 76 93 275 197
Total imports 7 14 15 15 16 22
GDP 4 5 5 6 7 8
(a) Provisional
As shown in the table above, in 2005, remittances increased to US$ 1,968 mn, indicating a 22.6%
growth compared to 2004. The remittance flows have further increased to US$ 1,726.7 mn by end
September 2006 and a 20% increase is expected by the year end.
Remittances provide income support to families and opportunities for un-skilled workers to travel,
improve skills, earn foreign exchange and engage in self-employment afterwards. It is estimated that
about 1.3 mn Sri Lankan migrant workers are employed in different countries in various capacities.
The banking sector, the government as well as the country as a whole benefit from worker
remittances. The country uses remittances for payment of imports, goods and services while the
banks invest remittances in foreign currency bonds issued by the government. That helps the
government's foreign borrowing programme. More recently, the government resorted to issuing of
foreign currency denominated bonds and attracted a significant part of worker remittances through
banks. In addition, the banks also use worker remittances for their foreign currency trades and
investments. If not for remittance inflows, Sri Lanka would have been severely affected by the increase
in oil prices that raised the oil bill by three times in 2006. The enhanced remittance inflows also
reduced pressure in the foreign exchange market and hence on the exchange rate.
The geographical distribution of remittance inflows to Sri Lanka during 2005 has been as follows:
•
57% from Middle Eastern region
•
18.5% from European Union
•
6.5% from other European countries
•
6.5% from North America
•
4.5% from Far East-Asian countries
Government policy
Successive governments in Sri Lanka have encouraged and promoted Sri Lankans to work abroad,
both in skilled and un-skilled categories. The workers are permitted to open tax-free Non-Resident
Foreign Currency (NRFC) Accounts which facilitate the receipt and retention of remittances in foreign
currencies. Expatriates and workers are also allowed to have Resident Foreign Currency (RFC)
accounts after their return to Sri Lanka. Taking the deposits in these accounts as collateral, low
interest housing loans have been provided to the remitters and their families. The government has
introduced "Sri Lanka Nation Building Bonds" to enable Sri Lankan migrant workers and other
expatriates to participate in the Nation Building programme.
In addition to government, the Sri Lanka Foreign Employment Bureau, Association of Licensed
Foreign Employment Agencies, the Commercial Banks, Specialised Banks, money changers and
money transfer systems are key players in the remittance industry in Sri Lanka. The Sri Lanka Foreign
Employment Bureau continues to hold awareness programmes to educate remitters to channel funds
through formal institutions and also look into the welfare aspects of migrant workers. The banks have
now taken the initiative to establish links with migrant workers prior to their departure. The Central
Bank of Sri Lanka has permitted banks and financial institutions to establish exchange houses in
several countries to enhance accessibility by remitters. More recently, the Central Bank has taken a
keen interest to enhance remittance flows into the country.
From a payment system improvement point of view, it is essential for Sri Lanka to consider using
wireless ATMs and E-Banking systems in rural areas to facilitate speedy disbursement of funds. As
has been the case in the Philippines, Mobile Commerce (MCom) through SMART Padala (Philippines)
and global G-Cash services should be introduced in Sri Lanka. In the meantime, internet-based
transfer services such as wire transfers, automated clearing house transfers and cheque transfers
should be further facilitated. Sri Lanka should take steps to reduce high remittance fees from remitting
countries, such as Japan, Italy and the US by building up partnerships with banks in these countries
as well as money transfer companies. In Sri Lanka too, Telecom services and Dialogue GSM are
planning to introduce SMART Cards to connect remittance receivers and their bankers. As the SMART
card system may require the use of agents in outstations, the banks involved should register these
agents and provide on-line banking facilities to them. While the telephone company ensures the
security of money transfers, the agents and banks should attempt to reduce cost of money transfers
as well as mitigating risks involved in this activity.
In addition to the banking sector, Sri Lanka should speed up the linking of Sri Lanka's postal system
with the global postal network.
Eurogiro, based in Europe offers several products for payment transfers through the Eurogiro system
to accounts of postal members or to the accounts of third party banks. In addition, Eurogiro provides
cash and money order services, Western Union urgent cash, cash on delivery, cheque payments and
also bulk and pension payments. The Eurogiro postal network uses Tele Money Order (TMO), which is
linked to a two-day cash project using Eurogiro bulking principles. Among their products, cash
transfers, card payments and direct debits are also popular. In addition to the postal service, Eurogiro
connects with banks, other alliances and financial institutions. Sri Lanka's postal service should
explore the possibility of partnering with post office members in the remittance originating countries.
Issues relating to remittance transfers
Despite the promotional activities, institutional arrangements, favourable legal and regulatory
framework, improved payment infrastructure, there still remains several un-resolved issues relating to
remittance transfers. The lack of awareness of facilities available through formal channels is a prime
factor. The absence of, or ineffective links between banks/financial institutions and migrant workers
prior to their departure is another factor, which persuade migrant workers to use informal channels.
The lack of transparency of full knowledge of the pricing at the point of sale or at the time of delivery of
remittances is another important factor that needs to be addressed early by the formal channels. High
charges and commissions and the use of cheque float by banks, despite the introduction of the
Cheque Imaging System, which aimed at preventing paper cheques from being transported to different
destinations, are clear deterrents in disbursing funds at the recipient's level. Similarly, the delays and
paperwork involved transactions through the formal sector has been a deterrent. The distant work
sites in some of the Middle Eastern countries with no access to banking facilities has been reported as
another factor which provides opportunity for informal channels to capture remittances.
On the recipient's sides too, the unnecessary expenditure incurred on their savings through purchases
of non-priority consumer items has been cited as an imprudent way of spending valuable foreign
currency. In addition, migrant workers are faced with numerous social issues due to family
breakaways and health hazards through consumption of liquor and drugs etc. by remitter's family
members. This is not the forum to discuss these issues, although they are also important factors
affecting the remittance industry.
Part III - possible solutions
Macro level
In discussing possible solutions to improve remittance flows across countries, it is important to refer to
the General Principles for International Remittance Services prepared by the WB and the BIS. These
guidelines are prepared at a global level and require both host/home country support to implement the
recommendations underlying these principles. In summary, at macro level, the principles are as
follows:
Principle I : The market for remittances should be transparent and have adequate consumer
production
This requires transparency by individual remitting countries about their services as far as possible. The
global price including fees at both ends, the exchange rate and other transfer fees should be made
known to the remitter. Equally, the time it takes for transfers and accessing locations should be
reduced. The receiver should be encouraged to provide bank account details to the formal channels to
avoid delays.
Principle II: Improvements to payment system infrastructure that has the potential to increase the
efficiency of remittance services should be encouraged.
This principle involves both domestic payment infrastructure in the remittance receiving countries,
cross-border payment infrastructure in both home and host countries, including the infrastructure of
corresponding banks. There is a role to be played by the central banks of both remitter as well as
receiver's country in improving the cross-border payment infrastructure. Many central banks have
taken the lead in facilitating the payment infrastructure, but there still seems to be gaps in the use of
electronic networks in semi-urban and rural areas. The central banks and other relevant agencies
should encourage the operators to increase interoperability of electronic networks. Similarly, the postal
service should be encouraged to play a bigger role in transmitting remittances on a cross-border basis.
The postal network is well known in semi-urban and rural areas and they are in a position to provide
remittance services at competitive prices.
Principle III: Remittance services should be supported by a sound, predictable, non-discriminatory and
proportionate legal and regulatory framework
The implementation of this principle requires special laws and regulations for remittances, while the
existing or new laws should be sound, predictable, non-discriminatory and proportionate. Specially, for
remittance corridors, (e.g. US-Mexico, US-Brazil, the Middle East-Philippines) both sending and
receiving countries should cooperate with each other to sort out legal obstacles in transferring
remittances. It is also noteworthy to consider avoiding dangers of over-regulation in remittance
transfers. The Money Laundering and Terrorist Financing Acts can also deter some of the
cross-border money transfers. The authorities responsible for implementation of these legislation
should be mindful of the need to use judgment in dealing with genuine remittances.
Principle IV: Competitive market conditions, including appropriate access to domestic payment
infrastructures, should be fostered in the remittance industry.
This requires the avoidance of exclusivity conditions as imposed on an agent choosing to offer only
one remittance service and to promote several direct /indirect access to domestic payment systems in
the country. Here too, the central banks have a role to play. The central banks and supervisors should
work with competitive authorities to ensure consistent approaches and discourage exclusivity
conditions. It is also important for supervisors to ensure that money transfer systems are not
unnecessarily anti-competitive.
Principle V: Remittance services should be supported by appropriate governance and risk
management practices
Good governance and risk management practices by all stakeholders make remittance service safer
and help protect consumers. This requires the remittance industry developing guidelines for good
governance and risk management. Similarly, authorities should give guidance on how to meet
antimoney laundering and combating terrorist financing activity requirements in a manner that such laws
do not deter genuine remittance transfers.
Global and regional payment groups' support
In implementing the general principles for the international remittance services, the multilateral
organizations, such as Asian Development Bank (ADB), World Bank, International Monetary Fund
(IMF), European Bank for Reconstruction and Development (EBRD) and Inter-American Development
Bank (IADB) jointly have developed guidelines, of which the final report is expected to be released by
end 2006. The host/home country authorities should then evaluate their remittance systems against
each general principle and foster dialogue within and among countries, where possible, through
regional initiatives in payment systems, such as Financial Sector Assessment Programs (FSAPs),
Arab Payments Initiatives (API), Commonwealth of Independent States Payment Initiatives (CISPI)
and Western Hemisphere Fund (WHF). Behind the general principles, the critical elements are greater
competition, high service level risk mitigation, appropriate regulations and enhancement of payment
infrastructure on domestic as well as cross-border.
In implementing the general principles, it is also important for governments in both host/home
countries to recognize remittance service as part of public policy. Similarly, under the provisions of the
General Agreement on Trade for Services (GATS), opportunities should be sought for movements of
natural persons for delivery of services. Many countries, including Sri Lanka, attempt to re-orient their
policies to encourage skill migration under GATS.
Regional and international bodies should play an active part to resolve some of the cross-border
money transfer issues. International money transfer services should offer enhanced services at
reduced costs. International message services, such as SWIFT, should facilitate the remittance flows
through innovative products and technology link-ups between central banks and other stakeholders
involved in remittance transfers.
Micro level initiatives
In addition to the macro level global principles, at micro level, the formal financial institutions should
make all efforts to enhance accessibility to remitters and receivers. It is also necessary to recognize
the remittance collectors, such as Hawala and Undial and for formal financial institutions to establish
agency links with them. The moneychanger system should be streamlined, monitored and geared to
attract remittances. In speeding-up delivery at low cost, the postal network should be strengthened.
Both the postal network and the formal banking institutions should deliver remittances at doorstep. The
banks and financial institutions in the home country should provide a package of facilities to migrant
workers, prior to their departure. Opening of bank accounts, granting of housing loans are key to
attract remittances to the formal channels. Banks and other formal financial institutions should display
their charges and commissions on remittance services and be more transparent in their dealings with
remittances. These are some of the steps that should be taken by remittance recipient countries,
including Sri Lanka, in enhancing remittance inflows while making the remittance industry a sound and
safer one.
Thank you.