Tag Archives: money transfers

What is remittance and why does it exist?

When foreigners go to work in a country other than their own and send money back home to their people, this practice is known as remittance. It is a normal concomitant to migration and it’s estimated that approximately 5% of the world’s population live outside their home countries. As the world continues to be integrated and essentially become a global village, movement between countries and continents increases and remittances continue to grow as workers move abroad in the hopes of securing jobs.

Remittances have since the 20th century played an important role in the economies of countries like Spain and Italy when emigrant workers would send money back home. However, in recent years remittances to developing countries have grown due to the increased immigration of workers from these countries to developed nations like the United States and the United Kingdom. The Remittance Prices Worldwide Database established in 2008 by the World Bank offers remittance advice and shows that 60% of total remittances are to developing countries. For some of these developing nations remittances can be as high as 10% of their GDP and in 2013 a new record was set with $400 billion going to these nations out of $500 billion of global remittances. The leading source of remittance has been the US for years followed closely by Switzerland, Saudi Arabia and Russia in recent times. On the other hand, the leading recipients have been Asia (China and India) and Africa (Nigeria, Kenya and Sudan)

Reasons for why people send money back home have been studied for years despite the reasons being quite simple. The altruism model suggests that the most basic reason for remittance is to aid family and friends back home. Pure concern for relatives and dependants in the home country drives migrant workers to send money. The well-being of their families is of paramount importance especially in periods of natural disasters and conflicts which see increased influx of remittances to families in affected countries.

For most families that send their children abroad to study and consequently work there, financing the initial costs of the migration is an expensive venture. Since the migrant is unable to cover the cost of travel and maintenance alone, they receive a lot of financial support from the parents which at times leaves them financially strained back home. Once the migrants secure jobs, they in return send money back home in essence to mitigate the financial toll it took on the family and help the family make invests assumed they would have made had they not spent their savings on the migration process.

The desire to themselves invest in the home country and develop assets is another reason for the continued sending of remittances. Some migrant workers go back home after living aboard for a while and start their own businesses. Working in developed nation exposes them to how successful businesses are run and with this in mind, they are able to notice opportunities at home to invest in. They therefore send remittance to secure such assets as land, financial assets, and real estate. Some send money to invest in public assets that might improve their popularity especially if they have interests in a political seat when they return home.

Remittance is a source of much needed funds to governments in developing countries who have difficulty borrowing money in most cases due to instability of governments. In some countries remittances exceed aid such as USAID sent from developed countries and important in the home economy’s growth. Funds from abroad help develop the domestic financial system with many wire transfer and banks getting into competition by providing favourable rates which encourage continued remittances. Governments have also in many countries developed policies to encourage their citizens in the diaspora to invest in their home countries through remittances which aside from exemption from taxation include dual citizenship and a chance to vote in presidential elections.

Due to the difficulty in tracking remittances and the reluctance of certain governments to release such information, money from remittances can be fertile ground for laundering money and can be used to finance terror. Many countries have tried to develop systems to track how this money is spent but this is difficult because most of it is sent to private persons who have discretion of expenditure.

Although it is thought that remittances decrease when the attachment to family gradually weakens or as migrants determine to permanently reside abroad, they do not altogether stop. This is especially encouraging to countries that continually depend on these as a source of funds and the billions of people who directly or indirectly benefit from remittances.