Business | Investment
Remittance costs remain expensive
Charges vary from as little as 2.5% in the Gulf to almost 26% in Europe.
- By Cleofe Maceda, Staff Reporter
- Published: 22:48 October 2, 2009
For most developing countries, working expatriates are considered engines of growth. Their remittances are a major source of external financing that can help alleviate poverty, raise education levels, promote entrepreneurship, reduce infant mortality and foster financial development and economic progress.
In 2008, remittances to developing countries were $328 billion (Dh1.2 trillion), more than twice the amount of official aid and over half of foreign direct investment inflows into these countries. The volume of remittances from the Middle East alone has ballooned by 63 per cent since 2003.
According to Money Transfer International (MTI) Middle East, the amount of money sent home by the migrant workforce in the Gulf is currently running at around $30 billion annually.
A huge chunk, or about $10 billion a year, is sent by expatriates living in the UAE. About $14.9 billion is also remitted every year by foreign workers in Saudi Arabia and substantial sums by expatriates in Kuwait, Bahrain, Qatar and Oman.
While the financial turmoil dented the sending power of the migrant population across the globe, industry sources are confident that the volume of remittances from the Middle East will expand next year.
According to a recent report by the World Bank, the growth pace of remittances from Gulf countries has slowed down but remained positive, while those from the United States have registered negative growth.
"Despite the global financial crisis, all the indications suggest that the remittance flows from the UAE will expand by between three to five per cent in 2010. This is based on growing indications of an economic upturn, which will lead to more migrant workers being hired for projects," says Premal Patel, director of MTI Middle East.
However, while most of the spotlight is on the amount of remittances, little is known about the impact of money transfer costs on consumers' wallets. Some UAE expatriates who regularly send money home have observed that remittance costs are still a bit too expensive, ranging from three to 20 per cent of the money sent.
Ephraim John Badilla, a Filipino expatriate who sends money twice or thrice a month through money transfer operators (MTOs) and banks, said that transaction costs were still heavy on his pockets.
"The cost actually varies, between Dh15 and Dh35, depending on how fast or slow the money is delivered. If you choose the urgent one, then the fee is higher. But I find it expensive now as I used to send money for Dh10 per transaction," he says.
"Also, as soon as my family receives the money, another 100 pesos are deducted. Fees should somehow be reduced. After all, the dollar exchange rate isn't compensating its value. Other people I know send only Dh30 [but are still made to pay a fixed] rate of Dh35. Does it make sense?" Badilla lamented.
Leaders at the Group of Eight (G8) Summit in L'Aquila, Italy, acknowledged the need to ease the financial cost of money transfer transactions, pledging to reduce charges by half, from 10 per cent to five per cent, in five years.
The same observation was echoed by the World Bank in its recent study with the Centre for Economic Policy Research and Thorsten Beck Tilburg University.
The report found that remittance transactions across the globe are indeed expensive, with estimates averaging 10 per cent of the amount sent. Costs can vary, though, ranging from as low as 2.5 per cent to as high as 26 per cent of the amount sent, and tend to be expensive if the transfer is initiated from banks.
The World Bank looked into MTOs, banks and other types of providers in 119 corridors (between sending and receiving nations), including 13 major remittance-sending countries and 60 receiving countries.
Using data collected by interviewers posing as customers and by researchers contacting individual firms, the report analysed the remittance charges as well as the potential drivers of high costs.
Since a typical remittance transaction involves sending close to $200, the study reviewed the costs of sending the local equivalent of $200 and $500 to various countries.
Costs were found to be lowest for transfers initiated from Saudi Arabia to Pakistan (2.5 per cent of the amount sent) and highest for transactions from Germany to Croatia (25.8 per cent).
Costs are definitely not fixed, even if you consider the same sending or the same remittance-receiving country. Remittance costs to India, for instance, varied between 3.1 per cent from Saudi Arabia and 13.3 per cent from Germany. The costs of remittances sent from the United States varied between 3.7 per cent to Ecuador and 14.1 per cent to Thailand.
Costs also differ, depending on the types of providers. The study found that banks, in particular, "charge significantly higher fees" than other MTOs (12.4 per cent versus 8.8 per cent). In 43 out of 63 corridors, average costs for banks exceeded those for MTOs.
When it compared rates imposed by MTOs, the study found that Western Union charged slightly higher costs.
"The average costs for this institution is 10.8 per cent, relative to 8.8 per cent for all MTOs," the report says.
Jean Claude Farah, Western Union Financial Services' senior vice-president for Middle East, Pakistan and Afghanistan, points out that the company's remittance fees are not insensitive to competition. He argues that most of Western Union's fees are well within the five per cent cap proposed by economic leaders.
"Western Union is working constantly on making its prices more flexible, more competitive and more in line with the needs of its customers. The Middle East region is a perfect example. Customers can conduct a transaction from UAE to India for as low as Dh15, from Kuwait to India for one Kuwaiti dinar [Dh13.7] and so on," Farah told Gulf News.
Allan Dueck, regional head of product management and global transaction banking for HSBC Bank in the Middle East, traces the cost disparity between banks and MTOs to the operating models used by the two types of providers.
He explains that the money transfer operators' model is volume-based, with a low transfer fee and high exchange margin that is gained from bulking transactions together and sending them to one place.
A bank model is driven by individual transactions where timing, delivery to where the beneficiary wants to be paid, and certainty due to higher values are considered important.
"A loose analogy would be the airline industry and the differences between a budget carrier and a flagship carrier. A budget airline will charge a low price but you get no extras, no choice of the time you want to travel and you must fly to one of the airlines' specified destinations& A flagship carrier offers value-added services, multiple flights to suit your schedule and an endless array of destinations made possible by partnering with other airlines," Dueck said.
"The cost factors vary depending upon the money transfer corridor, the urgency of the payment, and the number of parties needed to get the money to the beneficiary and the currencies involved. Banks also have to factor in the internal, market infrastructure and ever increasing regulatory and compliance costs. With an alignment of these factors as well as HSBC's global presence and the value we gain from having a full service relationship with our customers we can be more than competitive when the payments are within our own network," he adds.
How do you transfer money to your home country? Do you think remittance costs are too high? How far would you want rates to drop?
Your comments
There should be a uniform currency rates. Some money exchanges increasing the rate while decreasing the remittance fee.
Abdul Jaleel Pallipparamba
Dubai,UAE
Posted: October 03, 2009, 15:00
I write a cheque and transfer money back home to Dad, the receiving bank processes the same for a total period of 5 - 7 days and my total transaction fee Dh0, except the fact I write a cheque. It's much better and less time consuming some bank's have a policy where you can mail a cheque
Adrian Menezes
Ajman,U.A.E
Posted: October 03, 2009, 10:22
remittance costs are too high. rates should drop as low as Dh 7 per transaction. My company pays me a salary of Dh1,700 monthly out of which I have to survive for the whole month + send back to hometown. if remittance costs are reduced at least by Dh 7 then the few dirhams that are balanced I can save as my savings since the Dh1,700 doesn't allow me to save any.
Mathias B.
Dubai,UAE
Posted: October 03, 2009, 10:07
I don't think the remittance cost is higher but if you send funds they charge Dh15 per transaction and they recover the profit by charging high exchange rate which has to be controlled.
Mohammad Khan
Dubai,UAE
Posted: October 03, 2009, 09:29
Yes, the remittance costs are high indeed. They should be reduced by at least half of what is being charged right now. Plus, benefits (in form of vouchers / lower transaction fee / better exchange rate) must be given to "loyal customers" who regularly transfer money from 1 exchange or transfer more than once a month.
Amrita J
Dubai,UAE
Posted: October 03, 2009, 09:04
I dont remit money to Malaysia anymore due to its high cost
Azman
Dubai,UAE
Posted: October 03, 2009, 07:56
Generally peoples are transferring their moneys through the money exchanges to get some good (money) value for the exchange money to their home countries, that too already paying minimum Dh15 to Dh35 depends upon the nature we send. People are suffering a lot in this global recession period. So, these kinds of increases are not able to tolerate by the foreigners. So, kindly authorities as consider the situation and keep remain the same remittance charge.
V.S.Saravanakumar
Dubai,UAE
Posted: October 03, 2009, 06:39
I dont think the remittance cost is running high here in Oman. To my experience, it is steady and did not see a big raise in the cost in the last couple of years. Its quite reasonable. Since the risk that the exchange companies and banks are taking is high, the amount we pay as service charge is very reasonable. I use private exchange company for transferring funds, which is reliable and confirmation of safe arrival of the fund is provided within 24 hours through short text message services. If we have proper banking services available at receiving countries, the charges will never be too expensive.
Ramachandran Nair
Ruwi,Oman
Posted: October 03, 2009, 00:56
More from Investment
More from Business
Business Editor's choice
-
DFSA chief to step down in September
Executive has been at post since 2008
-
Geepas idea blossomed in Dubai
The journey led from a small shop in Bahrain to a $1.27b company in the UAE
