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A Complete Guide to Remittance

According to estimates by the World Bank, remittances are expected to exceed $436 billion to developing countries in 2014, marking an increase of 7.8% over 2013 figures. This is more-than-likely due to an increase in foreign workers from developing countries such as India, China and the Philippines sending money home to friends, family and loved ones in their home country. Some countries such as India and China receive tens of billions of dollars in remittance each year. In 2013, India received an estimated $70 billion with China not far behind receiving an estimated $60 billion.

If you’re a migrant worker looking to send money home, you might have found yourself confused by the conflicting and hard-to-follow remittance advice out there, which is why we created this guide. So, if you’re wondering exactly what remittance is, how much it’s likely to cost you to send money home to your loved ones, the effort currently being made by organisations to reduce such fees, and the personal actions you can take to ensure your family receive as much of your remittance as possible, keep reading.

What Exactly is a Remittance?

A remittance is nothing more than the transfer of funds made by a foreign worker to a person in his or her country of origin. For example, if a migrant worker originally from a European country such as Germany or Spain was working as a laborer in the UK, he or she may choose to send money home in order to support family or loved ones. This would be classed as a remittance. A huge number of foreign workers choose to send money home every year and for many developing countries, remittances are one of their largest financial inflows and contribute greatly to their economy.

Why are Remittances so Important for Developing Countries

Remitance imageFor many developing countries, the total value of remittances received each year often exceed and overshadow major parts of the their economies. Vietnam, for example, received an estimated $11 billion in remittances in 2013 according to data published by the World Bank. This comes close to the value of all petroleum exports, which comes in at $12 billion.

Similarly, the Philippines received $25 billion in remittances in 2013, which exceeds the value of their entire electronics export industry currently estimated at $22 billion. The story is the same for many other developing countries too. Bangladesh, for example, received $11 billion in remittances in 2009 - 2010, comparable to their ready-made garments industry that is valued at $13 billion. For Tajikistan, remittances were responsible for more than half (52%) of their GDP in 2012 and for the Kyrgyz Republic, remittances contributed almost a third (31%). So, you’re not only helping your loved ones back home when sending a remittance, you’re likely also contributing greatly to your countries economy. 

Why Remittance Fees are a Problem

Every time a foreign worker makes a remittance payment, they will incur a fee on their payment, usually taken by the bank through which the remittance transfer was made. This is one of the biggest problems faced by foreign workers looking to send money home, as remittance transfers between some countries can be as high as 30%. For example, if you were a South African born foreign worker working in Botswana, you may end up paying as much as 30.02% during the transfer process. In fact, the average total cost percentage between the two countries comes in at 25.48% according to World Bank data.

 However, fees aren’t this high between every country. A Bulgarian-born individual working in the UK likely wouldn’t pay half as much in fees. Currently, the average total cost percentage between the UK and Bulgaria comes in at 11.91%. With some transfer services such as Transferwise; you could pay just 1% in fees according to the data. You can check the average transfer fee percentages (and view a lot of other data) between many countries using this webpage at the World Bank website.

The Pledge for Lower Remittance Fees

Remittance data
As of Q2 2014, the global average total cost of sending a remittance payment came in at just over 8% (8.14%), according to the World Bank. This was a slight decline from the previous quarter (8.36%) and marked a new lifetime low for the global average. However, many still feel that these fees are far too excessive, especially for developing countries that rely on remittance payments as a major contributor to GDP. In 2009, a pledge was made by the G8 in L’Aquila, Italy to halve the world’s average remittance fee percentage to just 5% (view the full PDF here). 

Since then, the global average cost of sending a $200 remittance has fallen from 9.81% in 2008: a reduction of almost 1.7% in 6 years. The World Bank estimates that this has saved approximately $42.48 billion globally in remittance payments between 2009 and 2013. Clearly, some progress has been made since 2009 (as demonstrated by the Q2 2014 statistics above), but there’s still a long way to go in terms of achieving the 5% average. If these figures could be achieved, it could save developing countries billions of dollars per year in fees, and would also have a hugely positive impact on foreign workers looking to send money home, as more money would be made available to their loved ones. 

How to Save Money When Remitting Money Home

With the global average remittance payment fee percentage standing at just over 8%, the average fee paid on a $200 remittance would be $16.28. From certain countries however (such as South Africa to Botswana), this fee could be almost quadrupled to 30%+, meaning that you could end up paying as much as $60 ore more on a $200 remittance. That’s $60 that your loved ones back home will never see. Unfortunately, there’s very little you can do about the somewhat extortionate rates charged when sending money between some countries, but there are a few ways to ensure that you pay as little as possible. 

Firstly, you should make sure to compare the remittance percentage fees between a variety of banks and services. Some data for this is available on the World Bank website (as you can see from the screenshot above), but it’s usually best to use a live comparison tool for the best results. Secondly, it makes sense to send money home when the exchange rate between the country you work in and your home country is in your favor. Basically, the higher the exchange rate, the better. So, if you’re working in the UK and wish to send money home to Hungary, an exchange rate of £1/320 HUF will be more favorable than £1/300 HUF. 

Note: This won’t affect the remittance percentage fee you’re charged, but it will leave your family with a little more money in their pockets due to the favorable exchange rate between the two countries.

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