Enhancing the Potential Development Impact of Remittance Flows:

The Public Sector’s Role

Presented by

Wilbur Monroe

Deputy Director, International Banking and Securities Markets

UA Treasury Department

November 14, 2006

Thank you for this opportunity to share with you some insights the US Treasury has gained through numerous remittance initiatives that we have lead over the past five years. When we launched our first remittance initiative, there was little interest in the subject outside of a few countries and institutions. Now the field is crowded with remittance-related initiatives. In order to reap the greatest benefit, it is important that this work be carefully designed.

Based on our experience, the key issues for public sector institutions should include: (1) specifying the objectives; (2) thinking about what we bring to the table that is unique; (3) analyzing what others are doing; (4) selecting the best opportunities for working with various parties involved; and (5) avoiding potential pitfalls.

Before I go further, let me give you a flavor of the pitfalls that are particularly relevant for the public sector. Public sector involvement in the provision of remittance services runs the risk of crowding out the private sector. Public sector assistance to specific providers of remittance services could have a negative impact on competition. A surge in remittance-related deposits into poorly run or poorly supervised financial institutions could prove destabilizing. Attempts to channel remittances into specific sectors or projects could result in the loss of control over the funds by the households that own them. Potential pitfalls such as these mean that care needs to be exercised in the design of the projects or initiatives.

Now let me go back to the beginning of my remarks. The first challenge for the public sector is to specify its objectives.

Like most of our counterparts, the overriding goal of the US Treasury has been to enhance the development impact of remittance flows. But significant care needs to be taken in identifying what will enhance the development impact. One should not assume that consumption is a waste of resources from a development perspective; or that investment in fixed assets means that development is occurring.

For example, a recipient household may choose to spend 100% of its remittance income on food, clothing or immediate medical needs. That consumption expenditure may enable the children in the household to return to good health or attend school rather than remain sick or work in a factory or field – all being important for development.

Similarly, some migrants choose to build houses in their home communities in anticipation of their eventual return migration. Statistically, this activity would be considered an investment. But if these homes stand empty, and if a considerable number of such empty homes were to beconstructed, it could raise the local cost of investment in more immediate development-enhancing projects, and thus have a negative impact on development.

In the Treasury’s view, the decision on how to use remittance funds should remain in the hands of their senders and recipients. This is a fundamental premise behind our remittance work.

That said, there is still much that the public sector can and should do to enhance the potential development impact of remittance flows.

First, the public sector can work to lower the cost of remittance services, increase access to them, and improve their quality and efficiency.

Second, the public sector can work to expand the options available for the use of the funds. For most recipients, if they wish to save the money, the only option they have is to carry it home and put it under the mattress.

Third, the public sector can work to enhance the ability of the senders and recipients to use financial services and make informed financial decisions by expanding and deepening financial literacy.

Fourth, the public sector can work to ensure the integrity of the financial system so that senders and recipients can trust it to preserve the value of their funds. You may ask whether this is really vital to enhancing the development impact of remittances. The answer we believe is a clear yes. Senders must feel that the remittance service they use can be trusted. Otherwise, they will use alternative informal channels.

We believe the integrity of the financial sector is all the more important if the recipient household is encouraged to deposit a proportion of its funds in a savings account. The institution which holds these deposits, such as a rural bank, credit union, or credit cooperative, must be financially sound. These financial institutions must have the capacity to make informed management decisions. Any institution that accepts deposits must be supervised as a deposit taking institution.

I have identified four broad targets for public sector work to enhance the development impact of remittance flows:

  • First, cost, efficiency, accessibility and quality of remittance services;
  • second, access to the full range of financial services;
  • third, financial literacy;
  • and fourth, financial soundness and integrity.

All are based on the premise that decisions on how to use these funds must remain in the hands of the senders and recipients of the funds.

What can governments do to achieve these targets?

First, the single most effective way governments can affect the cost, efficiency and quality of remittance services is to enhance competition in the marketplace by stimulating greater private sector interest in providing remittance services. This was in fact a key component of early US Treasury work on remittances. For example, in our Partnership for Prosperity initiative with Mexico and in our remittance initiative in APEC, a significant part of our work involved outreach to the private sector.

Effective private sector outreach can include:

  • Educating the private sector on the size of the market
  • Providing opportunities for the private sector to learn about innovative approaches to providing remittance services
  • Networking opportunities.

In order to enhance competition in the market, it may also necessary to reduce pre-existing regulatory barriers. Remittance service provision does not involve the same systemic risk as deposit taking. Remittance service providers that do not offer deposit accounts should not necessarily be subject to the same regulations as deposit taking institutions.

However, the line between necessary and excessive regulation for remittance service providers is not easy to identify. For this reason, and as a key part of the G-7 Sea Island Remittance Initiative, we asked the World Bank and the Committee on Payment and Settlement Systems to lead a working group of payment systems experts to provide guidance on the appropriate regulation of remittance services. We look forward to the release of “General Principles for International Services” to provide this much needed guidance.

In order to enhance competition, it is also important to discourage exclusivity agreements. Exclusivity agreements bind remittance collection and distribution agents to a single remittance service company. It is particularly important to avoid such agreements in cases where the agent has a monopoly presence in the market, or where the agent has a competitive advantage due to government subsidization. (For example, remittance companies may want to partner with postal services to take advantage of their distribution networks. If this is done without exclusivity agreements, so that the postal service can act as the distribution network for several different remittance companies, then competition in the market is unlikely to be compromised.)

The second target pertains to public sector action to enhance access to the full range of financial services. Here it is important to note that a remittance service provider that is only authorized to act as a remittance service provider cannot, and should not provide the full range of financial services. Such remittance service providers have to partner with other financial service providers in order to make a broader range of financial services available to remittance senders and recipients.

In light of this, the public sector can:

  • Encourage authorized deposit taking institutions to partner with remittance service providers, or establish their own remittance services, to offer key financial services to remittance senders and recipients.
  • And strengthen the capacity of secondary deposit taking institutions, such as credit cooperatives, agriculture banks, and community banks, to offer remittance services.

USAID and Multilateral Investment Fund have both been deeply involved in efforts to strengthen secondary financial institutions. The objective of their work is to enhance access to safe and reliable financial services in rural and financially isolated communities.

The third target, Financial Education, is relatively straight forward. It is also an extremely important issue for all countries. The Department of the Treasury is a leader in promoting financial education in the United States. Treasury established the Office of Financial Education in May of 2002. The Office works to promote access to the financial education tools that can help all U.S. residents make wiser choices in all areas of personal financial management, with a special emphasis on saving, credit management, home ownership and retirement planning. The Office also coordinates the efforts of the Financial Literacy and Education Commission, a group chaired by the Secretary of Treasury and composed of representatives from 20 federal departments, agencies and commissions, which works to improve financial literacy and education for people throughout the United States.

Countries seeking to establish or expand financial education initiative need not start from scratch. A lot of useful material already exists. For example, the US Federal Deposit Insurance Corporation has a highly regarded program, Money Smart, which is available in several languages. Programs such as this can be modified to reflect the culture and language of specific communities, and the financial sector structure and regulations of specific countries. But financial education in the absence of access to financial services is of limited value. Financial education initiatives should be coordinated with financial access work.

The most challenging target is the fourth one, ensuring the integrity and soundness of financial services providers and the financial system. Unlike other targets, there are difficult decisions to be made regarding the trade-offs between regulation and efficiency, competition and cost.

In the US we require that money services businesses (MSBs), which include remittance service providers, register with FinCEN, the US financial intelligence unit, and that they have an anti-money laundering/counter-terrorist financing program that is in compliance with the US Bank Secrecy Act. The US Federal government imposes no prudential requirements on MSBs.

Other countries have chosen a different approach. In these countries, all remittance service providers must receive prior authorization to offer remittance services. Typically, the requirements for such an authorization include significant ‘prudential’ hurdles.

Both approaches face challenges. In the US, there are over 200,000 MSBs, many of whom are remittance service providers. Competition is robust, but a growing number of commercial banks in the US have dropped their MSB customers. Without a bank account, the MSBs cannot process remittances. We at the Federal level are working hard to address the issues that are contributing to the reluctance of banks to do business with MSBs.

In other jurisdictions, where remittance service providers must be authorized and where prudential authorization hurdles are high, competition in the marketplace is limited; remittance fees are high; and service tends to be poor. In such circumstances, demand for underground remittance services is greater.

In conclusion, let me leave you with a few main thoughts.

There is a great deal of work that the public sector can do to enhance the potential development impact of remittance flows. This work is, for the most part, centered on enabling markets to work better. Specifically, the work is centered on enabling the markets to provide remittance senders and recipients with more options on how to send and use their funds, and on providing remittance senders and recipients with the knowledge necessary to make good financial decisions.

Thank you.

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