Africa Business World 

Removing the barriers to remittances in Sub-Saharan Africa

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In contrast to the global average of 6.8%, the average cost of remittances to Sub-Saharan Africa in 2020 was 8.9% of the transaction’s value. In Sub-Saharan Africa, informal flows are common, and the trend is rampant in several corridors.

A formal market that is not operating at its best to meet the needs of people, especially lower-income people, is indicated by records of relatively low formal transactions, the high cost of remittances, the lack of access to identity documentation, and the lack of trust in formal financial services.

Understanding the current market barriers that are preventing formal costs from declining is necessary to reduce the cost to between 3% and 5% of the transaction value, as agreed upon by the G20 and Sustainable Development Goals, without compromising the access of consumers in difficult-to-reach areas.

In this article, we will provide an overview of the remittances market in Sub-Saharan Africa, the gaps and the barriers, to conclude on what is required to enable the formal market to fulfil its true potential.

Remittances, Explained

The International Monetary Fund defines remittances as “personal transfers” and “migrant remittances.” All recent monetary or in-kind transfers made or received by resident households to or from non-resident households are referred to as personal transfers.

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Remittances made by employees to citizens of another economy are referred to as “current transfers”. The benefit of these payments is that they typically go straight to homes, increasing household income and deepening financial inclusion.

This financial support has been found to support the development of human capital, especially in children, and has positive implications for health and educational outcomes.

In Sub-Saharan Africa, cash is used for the majority of daily financial transactions between senders and recipients. The lack of convenient places for paying in or cashing out remittances increases the costs to the consumer.

Additionally, when sending or receiving remittances, Remittance Service Providers typically require formal verification, such as national identification documents (IDs) or proof of address. Particularly for consumers who reside in rural areas or immigrants who lack the necessary papers, these add to the expense and are frequently difficult to get.

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Since they limit the volume of flows that pass through their systems and raise the cost of doing business, consumer barriers translate into hurdles for RSPs.

Understanding The Barriers

Africa’s remittance flows have been growing at a faster rate over the years, with Nigeria receiving the largest portion of total remittance inflows into Sub-Saharan Africa.

However, due to a mismatch between migration stocks and formal remittance flows, we find that there is not always a clear correlation between where Sub-Saharan African migrants live and where remittances come from.

This is most likely attributed to inconsistent data but primarily due to the high informality in these markets. In 2020, studies showed that in Côte d’Ivoire, 62% of immigrants came from Burkina Faso, yet flows to Burkina Faso from Côte d’Ivoire only constituted 13% of remittance flows.

This trend was also evident in many other corridors involving Sub-Saharan African countries. Sixteen percent (16%) of Sub-Saharan African immigrants in the United States came from Nigeria, yet they sent a staggering 78% share of all remittance flows from the US back to Nigeria. One of the main challenges is the lack of using formal payment platforms.

Solutions Within

While the remittance flow correlation may not be too clear, digital solutions have proven to offer access to more consumers. Take mobile money transactions, for example, which have experienced exponential growth over the years due to offering access to more people, even those in remote areas within the Sub-Saharan African market.

Currently, Kenya (being one of the leaders in mobile money adoption) hit a record-breaking high of USD55.1 billion between January and November 2021 user transactions. A step up from 2020, when they achieved USD45.9 billion.

With more than 270 live mobile money deployments, it is becoming more and more accessible for people to send, receive, pay for, and donate money locally and globally, making the reach beyond borders matter less and less.

Final Words

Greater progress is being achieved with the use of technology and mobile devices, with the industry bolstering the Sub-Saharan African countries’ Gross Domestic Product (GDP).

Mobile phone and wallet transactions accounted for 82% of Ghana’s GDP compared to 87% in Kenya, despite lower smartphone penetration rates compared to China – the only geography whose overall mobile financial services market penetration is higher than in Africa. A clear indication that technology is helping break the barriers.

Sourced from Africa Feeds

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