> Posted by Anne H. Hastings, Manager, Microfinance CEO Working Group

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A few weeks ago, I attended the Global Forum on Remittances and Development sponsored by the International Fund for Agricultural Development (IFAD), the European Commission, and the World Bank. Much of the meeting was focused on two critically important questions:

  1. Are or could remittances be a major driver of financial inclusion?
  2. Is it possible (and desirable) for a greater percentage of remittances to be put to productive use as opposed to consumption once the funds arrive in the hands of the recipient?

First, a few facts to underscore why these discussions are so important:

  • In 2014 there were at least 240 million international migrants. That is a BIG number – bigger than the populations of all the countries of the world except China, India, the U.S., and Indonesia.
  • This year these migrants will send back to their countries of origin more than 440 billion U.S. dollars! This amount is more than three times the amount of foreign aid. It is estimated that $200 billion of this amount goes directly to rural areas in developing countries where the most poverty is.
  • Remittances can constitute up to 40 percent of GDP or more in some countries, often the most fragile, most conflict-ridden countries in the world.
  • Some 750 million people are estimated to receive remittances, the vast majority in developing countries. Forty percent live in rural areas.
  • The global average cost of sending this money home is 8.6 percent of the amount sent, so the potential customer benefits to cost reduction are very important. (In July 2009 the G20 set a goal of reducing the average cost from 10 percent to five percent in five years. Despite failing to achieve the objective, it recently established a new goal of three percent by 2030!)

Are remittances a driver for financial inclusion? Could they be? In a moment of frustration, Fernando Jimenez-Ontiveros, the Acting General Manager of the Multilateral Investment Fund said at the conference, “We’ve been working on these issues for some 15 years, and estimates are that 60 percent of senders and recipients still don’t even have an account! We’ve got to do better!”

In fact, the senders of remittances are most often people who are excluded not only from the financial sector, they are also excluded from employment and economic opportunities in their countries, which is why they leave in the first place. IFAD, through its Financing Facility for Remittances (FFR) program, has been supporting pilots around the world to test different approaches for transitioning migrants and their families back home from financial exclusion to financial inclusion. A good number of these pilots have worked – when all the conditions are right.

I can help to enumerate these conditions based on 17 years of experience as CEO of Fonkoze, Haiti’s largest microfinance institution (MFI). In 1995, when I first met Fonkoze’s founder, Fr. Joseph Philippe, he explained his vision – he wanted to build a bank the poor could call their own. This wasn’t a project or a program – he was trying to build a national institution. However, he cautioned, success will be elusive unless we engage the Haitian Diaspora.

Once I figured out what a Diaspora was (the dispersion of people from their original homeland), I asked whether the Haitian Diaspora would be able to finance this start-up. He explained that that was naive – most of the Diaspora were poor Haitians sending money home to even poorer family members. So I asked how we could gain their support. He said, “We have to offer a reasonably priced, convenient, and secure service for them to get their money home.” This was in 1995 when microcredit supporters weren’t even thinking about remittances.

So from the first day, the idea was that this bank for the poor would offer both credit and money transfer services – but even that wasn’t enough. It also needed to offer savings and currency exchange (since so many U.S. dollars were circulating through the economy) and ultimately insurance. The founder was clear that Haitians needed a full range of financial services at their disposal.

So as we were building this institution, which today has 46 branches, over 200,000 savings accounts, and more than 60,000 borrowers (mostly women), we had to develop a money transfer service, along with all the other financial services. We succeeded in offering our own remittance service through an informal partnership with a bank in the U.S., but it wasn’t a perfect offering, and we wanted our clients to have a full range of options. So we also became agents for MoneyGram and other money transfer operators (MTOs), putting up their signs at all our locations and maintaining the liquidity needed to pay out transfers to any recipient.

Our own service required the recipient in Haiti who wanted to receive transfers to open savings accounts with us. The transfer was automatically deposited into their account when senders deposited it in our bank in the U.S. This had the added advantage of encouraging our clients to open and use savings accounts. On the other hand, for MTO transactions, we had to pay out in cash, and that had to be in U.S. dollars as required by Haitian law, unless the client specifically asked to exchange the money with us.

It quickly became clear that offering the service was not enough. We also needed to find mechanisms for helping our clients learn to use these services. We implemented a version of Paolo Freire’s theory of education as explained in Pedagogy of the Oppressed – a form of peer learning where we would train those clients who knew how to read and write to teach the other clients who didn’t. Included were basic literacy training, business skills, women’s health, children’s rights, and environmental protection.

All of this was designed to bring our clients in Haiti toward full financial inclusion. I would say that the services we had designed accomplished that reasonably well. People coming to pick up their remittance would learn about the loan or savings program while standing in line and, when the cross-selling was done well, they would take up the additional service.

Pretty soon, we had women who had moved from using the money received from relatives abroad purely for consumption to using some of it to start a little business. Then they would learn that they could get a loan to manage the expansion of their business and save the better part of the money transfer in a Fonkoze savings accounts. They became quite skilled at figuring out which service would work best for each need they had.

Of course, not everyone is a “natural entrepreneur.” So, again with the MIF’s support, we launched an educational program for individuals using the remittances purely for consumption to encourage them to consider alternatives. We listened to their reasons for not investing the money, and it became clear that they wanted to figure out a way to set up a business, but they simply didn’t know how. We went to rural branches, recruited clients directly from the lines of people waiting to receive remittances, and then brought them into a class to talk about how to set up a little business. The most successful part of this training program was identifying “businesses in a box” or “micro-franchising” opportunities that would allow the participant to easily launch a simple business. For example, one was to sell solar lighting where someone else was taking care of importing, distribution, and ensuring quality of the product.

But what about the members of the Diaspora? IFAD and the MIF ultimately helped us to demonstrate how we could organize them as well. We hired Katleen Felix, a woman with Haitian roots living in the U.S., to be our Diaspora Liaison. She was a godsend. We organized meetings in Boston, New York, Miami, and even Port-au-Prince to discuss the power of the remittances they were sending home and their potential as engines of development. We discovered that migrants did want to help in the development of their native countries.

It turns out that many of them wanted to invest a portion of the earnings in businesses, schools, or health care clinics in their home communities. So they asked Fonkoze to help them by “vetting” the businesses in the rural areas of Haiti that were “investment ready”. Ultimately, we set up one of the first Diaspora crowd-funding sites with the assistance of DePaul University and the Vincentian Family and hired business analysts in Haiti to identify enterprises that needed loans and were likely to be able and willing to repay.

Suddenly, the Haitian living abroad who wanted to do something for Haitians at home could make a loan of $25, that when combined with 100 other loans of $25, would allow a small honey producer in Haiti to receive a loan of $2,500. Ultimately we negotiated a partnership with Kiva that guaranteed virtually every loan request put up on the website would be fully funded. For Fonkoze, crowd funding through the website Zafen (Creole for “It’s our business”) and Kiva has offered a tremendous opportunity for migrants to have the satisfaction of helping in the development of their country without incurring too much risk.

All of this suggests that MFIs are, in many ways, ideally suited to making remittances on-ramps to financial inclusion if they indeed offer a range of services and if they are willing to take the time to help clients understand how to use them. In contrast to traditional financial institutions, MFIs often have a deep understanding of and interest in serving the excluded. The revenue they earn from facilitating remittances can contribute to their bottom line, and in the event that they can convert some of those remittances into savings, they can increase their capital for lending.

So why this isn’t occurring more often? Here are a few of the challenges:

  • National regulators must allow MFIs to become payers of remittances, accept deposits, and provide loans. Not all countries do.
  • MFIs must have the financial, technological, and human resources to offer these services.
  • MFIs must be large enough and have the geographical coverage to make a real business out of remittances.
  • They must be able to negotiate effectively with money transfer operators (MTOs) in order to ensure they receive enough fee to make the business sustainable.

The majority of MFIs are not able to effectively address these challenges. So why was Fonkoze able to do it? First, there was no regulation of MFIs in Haiti (not something we would recommend). Second, we probably didn’t have the capacity to offer these services at scale, though we could make a good point about their promise. We met the geographic coverage challenge above, but it took several years to get the reach and coverage needed. Finally, we were also able to negotiate reasonably well with the MTOs. We had a lot of help, of course, from our donors, investors, and a terrific board of directors always willing to assist in the negotiations. As Don Terry said at the Milan conference, “Fonkoze is a symbol of what is possible!”

What we never accomplished, however, was the scale needed to generate a sufficient return on investment. This has proven to be a challenge for most MFIs, which helps to explain why more MFIs have not entered this market.

Still, projects like Fonkoze’s have learned a lot. Let me summarize the lessons we took away:

  • Remittances can be an on-ramp to financial inclusion, but it doesn’t happen automatically.
  • The financially excluded do not suddenly become the financially included by taking a loan. They need access to a full range of financial services.
  • The services will only be of benefit if the person fully understands how and when to use them. This is not something that can be easily taught in a classroom. The best learning is “in the moment” when the need becomes apparent. For example, when the person comes to pick up their transfer is the time to explain to them the options for their money: Wouldn’t they like to save a portion of it in a savings accounts? Is it a good time to exchange into the local currency or would it be better to save in USD? Would they be interested in learning how they might use a portion of it to set up an enterprise of their own?
  • Once they’ve made their way onto the “on-ramp”, clients still need close support through continuing education and coaching.
  • Development professionals spend a lot of effort trying to turn remittances used for consumption into remittances for productive use. But let’s remember that it’s THEIR money – and they have the right to spend it as they see fit and not as the development professional prefers. If it’s needed for consumption, let it be spent on consumption.
  • That said, there are many in the Diaspora who want to invest in their home country but they need:
    • Easy-to-use and safe investment vehicles
    • Access to market information about investment-ready enterprises
    • Management support and monitoring of the business they invest in
    • Education on risks in the investments and how to mitigate them

At the end of the conference, the conclusion was that we still have a long way to go to make remittances a major driver of financial inclusion and to turn remittances into a tool for development in the countries of origin. As Pedro Tigre De Vasconcelos remarked, “There are no silver bullets here, but there sure is a golden opportunity!” For all of us in the microfinance sector, let’s deliver on the promise. Let’s convince more MFIs of the opportunity that this rapidly growing segment of migrants and their families back home represent.

Have you read?

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