Chapter

Understanding Remittances:
2 Demography, Transaction
Channels, and Regulatory Aspects

2.1. Cross-border remittances are a challenge to mea- regulated institutions or channels (e.g., banks, nonbank
sure because they are heterogeneous, with numerous financial institutions, and money transfer operators) to
small transactions conducted by individuals through “semi-formal” and “informal” channels (e.g., hawala,
a large variety of channels. Prerequisites to improv- cash carried in person, in-kind transfers).
ing data on remittances are an understanding of the
transaction channels that are available and an ability 2.5. The RCG does not strictly identify which
to compile or estimate data that cover all channels that transaction channels qualify as formal or informal,
are heavily used. The transaction channels used may recognizing that such judgments are subject to country-
depend on the financial system, the overall institutional specific legal, regulatory, and institutional factors and
environment of the sending and receiving countries, therefore may vary from country to country. The RCG
the convenience and costs associated with use of these also emphasizes that all international transactions, no
channels, and the demographic characteristic of the matter whether they are informal or formal, legal or
senders and receivers. illegal, should be covered by balance of payments sta-
tistics. However, at various points the RCG refers to the
2.2. Remittances are often linked to migration. difficulties in obtaining data on informal remittance
Migration is the movement of persons from one econ- transactions. It has been argued that, because of such
omy to another. As used in the RCG and in the bal- difficulties, the remittance transactions undertaken
ance of payments more generally, “migrant” refers to a through informal channels are sometimes not well cov-
person who emigrates from an economy of origin and ered in current balance of payments data.
becomes a resident in another economy. It should be
noted, however, that migration status is not relevant to 2.6. Section A of this chapter provides a demo-
the definitions of standard components in BPM6. graphic perspective on remittances, looking at the rela-
tionship between movement of persons for short-term
2.3. A person may move from one economy to another or long-term employment purposes and remittances.
for the purpose of short-term employment. In the RCG, Section B develops an inventory of transaction chan-
a “short-term worker” refers to a person who moves to nels and their institutional environment, which is vital
another economy for the purpose of employment on a for understanding remittance flows and potential data
short-term (less than one year) basis. Short-term work- sources. Section C draws attention to the divergent
ers and migrants supporting relatives in their country legal and regulatory environments of remittance trans-
of origin are a major source of cross-border remittance actions by individual countries and the widespread use
flows. This chapter discusses the link between different of informal channels.
types of workers and their associated remittance flows.

2.4. The identification of transaction channels for A. Demographic Perspective on

remittances can help compilers assess the extent to
Remittances
which their existing data sources cover remittance
transactions. Remittances can take various forms, 2.7. International labor migration has attracted
ranging from funds transferred through “formal” or attention in the discussions of reasons for increasing
international trade in services and demographic shifts
Also includes border workers. observable in many parts of the world. The roots of


 Chapter 2 ♦ Understanding Remittances

cross-border labor migration are related to, among other 2.10. Although the motivation of migrants to remit
factors, divergences in economic performance between declines with the duration of stay, their capacity to
countries and regions, uneven technological change, remit often increases because their income tends to rise
and the integration of markets and societies. over time. Such statistics are useful for understanding
the dynamics underlying remittance flows, but they
2.8. Following the skill content of labor, migrants are scarcely available in most countries. The migration
and short-term workers can be categorized as unskilled, statistics are generally collected through a population
low-skilled, and skilled. Because the migration of register or population census. The immigration data of
low-skilled workers is generally associated with stiff countries with population registers are generally more
immigration restrictions, there is a tendency for illegal accurate than those of countries without a register or
or unregulated migration of unskilled or low-skilled census, because registration with the authorities is
workers. The extent of the informal economy in the often necessary for migrants and short-term workers to
host country affects the demand for illegal labor. In a obtain, for instance, a job, a dwelling, or health insur-
comparative sense, a deficit of skilled workers in the ance. However, the issue of whether the emigration data
host countries results in a less restrictive regime for of register countries are more accurate than those of
skilled workers and as a result skilled migrants and census countries is not settled.
short-term workers tend to flow through the legal chan-
nel. Because skilled migrants and short-term workers 2.11. The problems in obtaining data arise in con-
are more likely to migrate through legal channels, they tiguous countries where the percentage of seasonal or
reduce the administrative burden of the destination illegal workers tends to be high. Because the illegal
countries in enforcing migration regulations. There has workers stay away from either the population census
been a steady increase in the migration of skilled work- or the network of the formal modes of transfer out of
ers from developing to developed countries since the fear of apprehension by the authorities (associated with
1970s. It is argued that although skilled migrants and the fact they are in the country illegally), it becomes
short-term workers tend to have opportunities under challenging to correctly gauge the size of the stock of
unilateral visa programs, unskilled migrants and short- migrants and short-term workers. Depending on cir-
term workers usually depend on bilateral or regional cumstances in individual countries, it may be important
agreements such as seasonal and other work programs. to develop an integrated approach to estimation that
involves coordinated efforts of migration authorities,
2.9. Numerous demographic characteristics are immigration offices, enumerators for the population
thought to be associated with remittances, and there is census, and compilers of remittances statistics (migra-
general agreement on the effect of many of these vari- tion data are further discussed in Box 2.1).
ables on the amounts remitted. These characteristics
include size of the stock of migrants and short-term 2.12. A worker may travel for either short-term or
workers, country of origin and work, ethnic back- long-term employment, partly depending on the socio-
ground, duration of stay, average income level, gender, economic and political conditions in the host and the
legal status, and the presence of children in the house- source countries. In most instances, short-term work-
hold. Income is recognized as the primary determi- ers consume less of their income than do migrants,
nant of the capacity to remit. and therefore more of their income or compensation
is available to support family members in their home
country. Short-term workers maintain strong ties with
their country of origin because of their permanent
Migration is, of course, not a recent phenomenon. However, the
past 50 years saw rapid improvements in transportation and financial
interest in their home countries. Among migrants,
infrastructure that allowed short-term workers to travel even longer remittance senders tend to be more concentrated among
distances in search of work and migrants to remain in touch with their more recently arrived immigrants, and at least half the
country of origin, such as through visits and lower-cost communica-
tion, and to more easily transfer funds such as remittances.
More specifically, gender affects the level of income of the
migrants and short-term workers because females often have lower
average incomes than males. The presence of children in the house- Countries with population registers require residents to reg-
hold increases household expenditures and changes the nature of ister their primary residence, and to provide administrative data
economic interest, and therefore reduces the propensity to remit. on demographic variables. Some countries maintain a registration
Research conducted by Statistics Canada showed that the propor- requirement but also carry out a population census; such countries
tion of migrants and short-term workers remitting and the amounts often rely primarily on registration for understanding demographic
remitted were different depending on place of birth. change. Other countries rely solely on population censuses.


 international transactions in remittances: guide for compilers and users

Box 2.1. Data on Migration

Data sources for compiling migration statistics include population censuses, surveys,
border surveys, and other administrative records. However, reliable statistics on migration
are difficult to collect and are often incomplete. Annual data on bilateral migrant stocks
(migrants and short-term workers), for instance, are available for only a few Organization
for Economic Cooperation and Development (OECD) countries. Many countries collect
data on migrant stocks using population censuses, which are usually infrequent, and esti-
mates of growth rates are needed to produce time-series data. A further problem is that
individual countries may apply different definitions to classify the data, leading to data that
are incomparable. For example, differences occur in the way countries classify migrants and
short-term workers according to their duration of stay and the purpose of their visit. Also,
many countries use the place of birth of a migrant or short-term worker as a key variable in
migration statistics, but some countries use the concept of nationality, and a small number of
countries use a combination of the two. These definitions are not compatible with the concept
of residence as it is used in balance of payments and national accounts statistics.
­—————
Sources: World Bank (2008a and 2008b).

migrants who have stayed for up to 10 years may be B. Inventory of Transaction Channels
regular remitters. and Institutional Environment
2.13. Compared with migrants, short-term workers 2.16. This section provides an inventory of transac-
are associated with lower fiscal burden on the host tion channels used for remittances and briefly discusses
country, less social conflict, and greater flexibility of the impact the institutional environment has on the
host countries to adjust labor inflows in accordance availability of transaction channels and their selection.
with the domestic labor market conditions. It considers both formal and informal channels and
attempts to identify new channels, such as Internet and
2.14. Migration programs for labor may promote cell phone-based transactions.
more legal flows of labor. Bilateral labor agreements
have proved to be important in facilitating the migra- 2.17. The channels are not strictly identified as for-
tion of low-skilled and seasonal workers (these agree- mal or informal. The reason is that a particular chan-
ments often encourage migration by reducing the nel may be viewed differently based on the regulatory
regulatory burden; high-skilled labor often is mobile regime, institutional structure, and legal system in dif-
independently of bilateral agreements). ferent countries. A specific channel may be formal in
one country but informal in another, given its regu-
2.15. Whereas employment of short-term workers latory treatment. Also, the inventory presented here
may not involve movement of families, migration is should not be considered complete because remittance
often associated with movement of families along with service providers innovate quickly and new transaction
workers, perhaps with some time lag. Migration may channels may be developed.
also entail some degree of reduction in labor participa-
tion rates because the families (spouse and children) 2.18. As noted, money remittance transaction may
of migrants may not fully participate in the labor force involve a sender, a recipient, intermediaries in both
in the host country, depending on their skill and age countries, and the payment interface used by the inter-
characteristics. mediaries; together, these comprise the remittance
channel (see Figure 2.1). Most remittances are of rela-
tively low value, are regular or frequent, and mainly
involve persons at both ends because they are generally
Although remittances are related to migrations, an important
targeted at family maintenance. Remittances assume
distinction must be made between the immigrants and the remitters.
Remitters are, in part, a subset of immigrants; also, some nonmi- the form of cash or credit transfers and transfers in
grants remit. kind (involving transfers of goods). Cash transfers are


 Chapter 2 ♦ Understanding Remittances

Figure 2.1. Remittance Channels

Migrant/Short-Term Recipient/Beneficiary
Worker/Sender Family in the
in the Host Country Home Country

Point of Remittance Transfer Network Linkage/ Transfer Point of Remittance Transfer

(Intermediary in the Host Country) Interface (Intermediary in the Home Country)
• Commercial Bank • Messaging and Settlement • Commercial Bank
• Money Transfer Company Infrastructure • Money Transfer Company
• Credit Union • SWIFT • Credit Union
• Post Office • Telegraphic Transfers • Post Office
• Bus/Courier Company • Telephonic Message • Bus/Courier Company
• Collection Agen(t)(cy) • Web-enabled Instructions • Collection Agency's Operator
• Hawala Operator's Point • Physical Transport of Cash and • Hawala Agent
• Friends/Relatives Goods • Recipient's Location

Note: Not all funds transferred through these channels are remittances.

sent in either the foreign currency or the local currency financial regulation and supervision but often legal; the
by means of physical transfer of cash. Credit transfers least official and formal channels for transfer of funds
are based on payment instructions from providers in may involve intermediaries who do not operate as for-
the sending country to providers in the receiving coun- mal businesses. The remitter’s choice between the vari-
try. The payment instructions using messaging services ous channels of fund transfers may be influenced by a
enable contact between the entities operating at the host of factors, such as the kind of institutional infra-
sending and the receiving ends, and the settlement pro- structure available in the host and the home countries,
cess enables actual transfer of funds between these ease of access to formal financial institutions, speed of
entities. Noncash or in-kind transfers, which comprise funds transfer through alternate channels, differential
mainly consumer goods, involve physical delivery pre- cost of funds transfer, government regulations, incen-
dominantly through informal routes. However, before tives offered by the home country in the form of tax
a look at the microstructure of the channels used for concessions and interest rates, identification require-
cross-border transfer of funds by migrants and short- ments, and procedural burdens embedded in the formal
term workers, it would be appropriate to understand channels. These issues are discussed in later sections.
broadly how the remittance transactions take place. A
remittance transaction typically requires some type of 2.20. The relative attractiveness of the various chan-
network to connect senders and receivers for the pur- nels of transfers is determined by a multitude of factors.
pose of messaging and settlement of funds. A high level of penetration of the formal banking sector
in the sending and receiving countries may encour-
2.19. Cross-border remittance flows can take place age migrants and short-term workers to use account-to-
through various channels, depending on the avail- account transfers. However, despite the availability of
ability of services, preference of the remitter, and the bank services, fixed transaction costs and burdensome
institutional environment. Formal remittance channels documentation requirements to meet regulatory obliga-
are those officially authorized to operate in the money tions may render small-value transactions unattractive
transfer business, such as banks, money transfer opera- for the banks and clients. Thus, the cost of sending
tors, or other officially registered institutions. Semi- money abroad may significantly influence the choice
formal remittance channels include formal institutions between formal and informal channels.
providing money transfer services outside the regu-
latory mechanisms of the country authorities. These 2.21. In addition to costs, speed of delivery may
institutions are well organized in transferring money strongly influence the decision of the sender to choose
but not controlled by any financial services regulatory a particular channel. Although online methods offered
authority. Informal remittance channels are outside of by formal channels are relatively more efficient in terms


 international transactions in remittances: guide for compilers and users

of delivery speed, their usage is constrained by the lack providing fund transfer facilities to be transferred to
of information technology infrastructure at the sender’s any other bank across the globe.
or the receiver’s location. Informal channels also can
be efficient in delivery speed; it is often reported that 2.25. The payment formats used by banks include
transfer through hawala takes less than 12 hours to electronic fund transfers and transfers by telegram, fax,
reach the recipient. and telephone. Types of fund transfers through banks
may be cash transfers, account-to-account transfers,
2.22. Apart from explicit costs, hidden costs in for- prepaid funds (prepaid cards, money orders, bankers’
eign exchange transactions may significantly influence drafts), and credit (credit cards). The type of transfer
decisions regarding a particular channel. For instance, most often used is telegraphic or other wire transfers
exchange rates offered may significantly change the that operate on the basis of the branch network or the
final payout to the recipient and hence the attractive- correspondent relationship. The remittance is sent by
ness of a particular mode of transfer. In particular, a bank via wire transfer to its branch or correspondent
under exchange control regimes, unofficial operators bank in the beneficiary country, which forwards the
may offer a currency exchange rate that is more favor- remittance electronically or by draft to the beneficiary
able than the official exchange rate, attracting senders bank. Checks can be deposited for credit to a beneficia-
to informal channels. Risk of losing money in transit ry’s account. Drafts can be purchased from exchange
may also influence the choice of a particular channel. companies or the correspondent bank and mailed to the
Where migrants and short-term workers are able to branch where the beneficiary has an account.
frequently visit their home country, they may prefer to
carry cash or deliver goods themselves or have their 2.26. Online money transfer services offered by
friends make delivery. Migration status may also sig- banks are an efficient means of fund transfers and enable
nificantly affect the attractiveness of a particular chan- cross-border transfers from the sender’s bank account to
nel. Illegal migrants and short-term workers may prefer the beneficiary’s account in the receiving country. These
to remit money through informal channels because they are more often used in remittance corridors where a
may not meet identification requirements to open bank banking network is well developed and correspondent
accounts and remit money. Furthermore, formal chan- relationships are widely used. Innovations in informa-
nels are also more likely to be used when the geo- tion technology and the introduction of increasingly
graphical distance between the sending and receiving sophisticated methods of fund transfers, such as dual
countries is high, causing difficulty in physically trans- debit cards, stored value cards, and other variants of
ferring remittances in cash or kind. However, some card-based online transfers, also are now being used
informal channels are effective and popular in making with increasing frequency in many countries.
long-distance payments.
2.27. The automated teller machine (ATM) card is
2.23. The various formats of fund transfer that may widely used as a remittance channel. A credit or debit
be used by the migrants and short-term workers are set card product uses credit and debit card payment sys-
out below. tems for transferring money from one card account to
another. Such transfers often involve the deposit of the
funds into a card account with a given bank branch and
Banking channel subsequent transfer of the funds to another card issued
2.24. Commercial banks are traditionally important by the same branch held by persons in the receiving
vehicles for effecting cross-border remittance transac- country. This two-ATM model is used in Latin Amer-
tions, in light of their extensive networks in both the ica, with a remitter based in the United States sending
sending and the receiving countries, and participation a second card with full rights to withdraw funds to a
in the international payments and settlement systems.
Some banks with a global presence may use their own  In some countries there exist bilateral agreements for the set-

network for money transfers, whereas others with lim- tlement of transactions channeled through the banking system
with the involvement of central banks. For example, the program
ited networks may use a franchise transfer service pro- Directo Mexico transfers funds between the United States and
vided by a global operator, join a cooperative network, Mexico with the involvement of the Bank of Mexico and the United
or utilize a correspondent banking relationship. The States Federal Reserve.
A remittance corridor is the path connecting a specific pair of
international banking network—interlinking national countries or a specific pair of cities between which international
payment systems—enables remittances from a bank remittances flow (CEMLA).


 Chapter 2 ♦ Understanding Remittances

family member who can use the card at ATMs abroad. high-frequency transactions. To send or receive money
These products are also available in South Africa but at an agent’s location does not require credit cards, bank
have not been widely promoted. They require a rela- accounts, memberships, or citizenship papers. The pay-
tively strong level of cooperation and trust between ments, in the large majority of cases, are carried out by
both parties. Also, limited ATM infrastructure in many collecting cash from a sending party and delivering cash
countries restricts the availability of this method. to a receiving party (cash-to-cash).

2.28. Technology support providers offer their Inter- 2.31. The remittance process through an MTO often
net interface to banks, which may then be integrated begins with a sender delivering cash to a subagent of
to the bank’s website. A customer subsequently wish- the MTO in the host country. Second, the subagent
ing to transfer funds would log on to the bank website transfers funds to the MTO agent through the domestic
and interactively direct a transfer of funds. The system payments system. In the third step, the MTO agent
debits the customer’s overseas bank account and credits orders its bank to transfer funds from its domestic
the account of the receiving bank/service provider for account to the overseas account of a partner, nonresi-
credits to the beneficiary’s account, as per instructions dent MTO agent. Once the funds are credited to its
given by the customer. account, the partner MTO agent requests that funds be
credited to its subagent. The subagent in the receiving
2.29. Banks may also undertake money transfer country then, in a final step, delivers cash to the final
through a variety of innovative arrangements with beneficiary. This chain involves somewhat fewer steps
the financial entities in the host country. For instance, when banks operate as MTO subagents.
Indian banks have entered into special arrangements
with private exchange houses in the Middle East, Sin- 2.32. MTOs are quite varied in their size, organiza-
gapore, and Hong Kong SAR for channeling inward tional structure, and procedures. Global MTOs work
remittances. Under this arrangement, an exchange mainly on the principle of franchised services.10 Such
house issues drafts (in Indian currency) to the benefi- MTOs rely on a proprietary network, representing the
ciary and at the end of each day calculates total draw- infrastructure of their payment systems, which allows
ings. On the next working day, daily collections are a cost-effective interconnection of a large number of
deposited in a designated account opened in the name offices spread worldwide. A global MTO network
of the drawee bank by the exchange house with a bank includes agents, subagents, and clearing centers.
acceptable to the drawee bank.
2.33. Subagents represent the operational front office
Money transfer operators or the access point or “physical counter” that migrants,
short-term workers, and other clients approach to send
2.30. Money transfer operators (MTOs) are financial or receive funds internationally. A large number of sub-
companies (but usually not banks) engaged in cross- agents all over the world provide MTOs with a strong
border transfer of funds using either their internal sys- presence in almost all countries. The subagents settle
tem or access to another cross-border banking network. with their parent agent the net balance of amounts they
MTOs may use their own outlets or numerous transfer received from sender clients and amounts they paid
agents, such as banks, exchange bureaus, post offices, to recipient clients. This first level of clearing occurs
and other intermediaries like retail outlets, cell phone frequently, such as on a daily basis, and is normally
centers, travel agencies, drug stores, and gas stations, to carried out through a (domestic) bank transfer.
deliver remittances in the destination country, because
MTOs and associated activities usually address the 2.34. The agents, under varied legal arrangements,
same target clients. Funds are delivered through cash, work on behalf of the MTO’s parent company. They
checks, or drafts. MTOs have wide networks in the send- can be considered the operational back-office units,
ing and receiving countries, have less stringent iden-
tification requirements, and often focus on low-value,
10 CPSS and World Bank (2006) defines a franchised service
where a central provider, without necessarily having any access
In some countries, MTOs are required to be registered with points of its own, provides a proprietary service: the central provider
monetary authorities as nonbank financial institutions, whereas in creates infrastructure to support the service (e.g., messaging and
others they operate as companies outside the financial sector. Very settlement, advertising) and obtains the necessary access points by
few countries allow only banks to operate as MTOs (in these cases, inviting institutions in both sending and receiving countries to offer
domestic banks acquire franchises of international MTO chains). the service or act as franchisees on essentially standardized terms.


 international transactions in remittances: guide for compilers and users

because they carry out a relevant part of the administra- between small MTOs and the settlement bank used to
tive work—in particular, collecting details on outgoing transfer funds abroad.
payments from subagents and transmitting the details
on incoming payments to subagents. Therefore, agent 2.38. In the case of large MTOs, transfers are made
information systems must store and maintain detailed virtually everywhere, even the most remote locations,
administrative records on payments, such as the sub- almost through a “door-to-door” delivery of money.
agent involved, amount transferred, fees, date of trans- The persons operating MTO subagencies are often of
action, and country and address of the sender and the the same nationality as potential customers and speak
beneficiary. As a consequence, agents may be a poten- the same language. This situation involves some “eth-
tially valuable statistical data source. nic proximity,” which potential customers would find
attractive.12 Newly arrived immigrants are character-
2.35. The agent is engaged in a second level of clearing, ized by a relatively low rate of financial participation
perhaps once a week or bimonthly, to settle the aggregate in the host country and, for this reason, by a relatively
net balance of remittance activities—that is, the sum of high propensity to use MTO services. This explains the
balances of the agent vis-à-vis its subagents—with the higher success of this channel in countries that repre-
international clearing center. In addition to sending or sent relatively new migration destinations. The share
receiving funds, agents also exchange with the clearing of MTOs is also high when the banks and the informal
center all information needed to identify outbound and channels, for any reason, are less popular. The useful-
inward payments. The clearing center may be located in ness of the MTO data as a statistical source varies
a country that is not the sending or receiving country, nor across countries depending on volume of transactions,
the country of the MTO’s parent company. quality of data, and other factors.

2.36. The exchange of funds between subagents, Postal network

agents, and the clearing center requires the interme-
diation of banks. Whenever the settlement involves two 2.39. Post offices, traditionally the agents of domes-
different countries—this happens often for transfers tic money transfers, have also emerged as important
between agents and the clearing center—a cross-border carriers of cross-border funds and are generally regu-
bank transfer occurs, typically through correspondent lated by communications laws in most countries and
banking relationships. The clearing center takes care of not by the central banks. Post offices either provide
the multilateral clearing of flows in various directions, their own services for international money transfer or
ensuring appropriate funding of agents in receiving act as agents for other money transfer companies.13
countries. Settlements, even if on a net basis, are always International postal money order service is available to
channeled through the banking system.11 transfer funds to individuals or firms in countries that
have entered into agreements. Among the remittance
2.37. The money transfer industry is character- service providers, post offices have the largest out-
ized by the presence of small- to medium-sized MTO reach network including remote locations, particularly
firms, which do not rely on a proprietary network. in receiving developing countries where the financial
Usually such MTOs transact in cash with clients and infrastructure is inadequate to deliver remittances.
transfer or receive the corresponding amounts abroad
through the intermediation of the banking system. 2.40. Remittance can easily be made to a number
Although the global MTO subagent that anticipates of countries from post offices handling international
receiving money may grant a sort of short-term credit remittance services. International postal money orders
to beneficiaries before receiving the actual credit, for may be sent by letter mail or expedited mail service.
nonglobal MTOs cash is delivered to beneficiaries
mainly only after the bank transfers related to the pay-
12For example, in sender countries, MTO subagents are often
ment are completed. A special contractual arrange- located in ethnic stores selling goods originating from immigrants’
ment is usually in place to regulate the relationship home countries.
13The United States Post Office has its own transfer system, Dinero
Seguro (safe money), which began in 1997 and offers electronic
11It may therefore be incorrect to argue that traditional data collec- money transfer. In Europe, the Euro-Giro system operates in direct
tion systems based on bank reports completely miss covering remit- cooperation with European postal systems in international money
tances through MTOs. However, settlements may obscure flows transfers to more than 30 countries, including China, Israel, and
because they are routed through international settlement centers and Brazil. In Africa, PostSpeed is operated by post offices in Uganda,
typically are made on a net basis. Chapter 4 provides further detail. Tanzania, and Kenya for fund delivery within East Africa.

10
 Chapter 2 ♦ Understanding Remittances

However, money orders to some countries can be (or refunded). Therefore, these transfers are practical
mailed directly by the remitter. Usually there are limits only up to the amounts that the recipient would be
on the maximum amount for a single postal money required to pay for telephone usage. Stored value
order. Ordinary money orders, in which the remittance cards issued by mobile phone companies are one
amount and handling charges are paid at the post office means of transferring money by individuals using
in cash or via a transfer from the remitter’s account, are mobile phones. Under this arrangement, a telecom-
available for delivery to the payee’s address. munications service provider requires the subscriber
to register with the system.
2.41. Even though the postal network covers all
areas of the world, it has not been fully utilized in 2.45. An example of the use of telecommunications
cross-border transfer of remittances in many countries companies for remittances is the case of the Philip-
because of limits on transactions, liquidity problems in pines, where two mobile telephone companies have
the disbursing outlets in the receiving countries, and recently introduced mobile phone-based money trans-
delays. In some developing countries, money transfer fer services. The recipient receives a text message con-
agencies use a postal network to enhance their outreach firming the transfer and withdraws cash through any
in remittance transfer markets. authorized agent. This is a means to make a cash-to-
cash transfer when neither party holds a bank account.
Credit unions Similar transfer mechanisms are being planned in West
Africa and elsewhere.
2.42. Many credit unions facilitate international
payments by providing bank drafts and, in some cases, 2.46. Another variant is the mobile phone payment
immediate electronic money transfers through agency system based on Subscriber Identity Module (SIM)
arrangements with large international MTOs.14 Credit technology, available in Zambia and the Democratic
unions usually arrange money transfers through either Republic of the Congo. The sender can deposit funds
an existing network or the International Remittance into an account by using a cell phone to transfer funds
Network (IRnet), a remittance settlement platform from a bank account or deposit cash at a partner bank.
established by the World Council of Credit Unions.15 Purchases can be made through text messaging by
Through it, credit unions offer an electronic funds entering into the phone the amount to be paid and
transfer service providing credit union members with a authenticating the transaction using a personal identifi-
way to send money overseas or domestically. cation number. The service provider instantly transfers
the amount to the merchant’s account.
2.43. Under IRnet, transactions are processed through
an automated clearing house facility, whereby funds are
2.47. The rate of innovation in this field is high, and
transferred to an intermediary bank with whom the credit
new remittance services based on mobile phones are
union has an arrangement. The bank in turn transfers
announced regularly. An example of a mobile phone–
funds to its branch in the recipient country and credits
based system is outlined in Box 2.2.
the account of the credit union.
2.48. Money transfer services based on mobile
Telecommunications companies phones are gaining popularity because they transmit
2.44. Telephone companies have recently started money “at the speed of text” and are cheap and rela-
to offer remittance services in many countries, often tively secure. It is also worth noting that mobile remit-
using their mobile phone networks for making trans- tances draw a large portion of the informal remittances
actions. These services are designed so that the into the banking system as financial services become
recipient can receive credit for prepaid telecommuni- available to the unbanked community.
cation services (“air time credit”) for their relatives
or obtain cash. Prepaid credit is intended for pay- Internet
ment for telephone services and often cannot be sold
2.49. The Internet is also being used as a means to
transfer funds between households. Some “traditional”
14Credit unions have been active in funds transfer particularly in
MTOs offer Internet-based transactions in addition to
the United States-Latin American corridor.
15IRnet provides service to more than 40 countries in Latin Amer- transactions through their branches and agents. Other
ica, Asia, Africa, and Europe. companies are based on Internet-only business models.

11
 international transactions in remittances: guide for compilers and users

Box 2.2. An Example of the Flow of Information and Funds in a

Telephone-Based Remittance System

Information Flow
A sender visits a remittance company and fills out an information sheet. The remittance
company in the sender’s country submits to its partner bank in the recipient’s country all rel-
evant information provided by the sender. At the same time, the remittance company assigns
an account number to the beneficiary’s mobile phone and credits the number of the benefi-
ciary. The service sends a text message to both the sender and the recipient, notifying them
that the money has been transferred. The beneficiary can now get cash from the partnering
institutions or through an ATM at a participating bank.

Funds Flow
The remittance company in the sender’s country maintains a prefunded account at a
local bank in the receiving country. When a sender remits, the funds are transferred to the
beneficiary’s money card. Meanwhile, the beneficiary receives a notification through a text
message that the funds are credited to his or her money card. The beneficiary then claims
his or her cash at accredited encashment centers by showing the text message in his or her
mobile phone.

2.50. Personal money transfers from one virtual communications, and their own physical delivery of
account to another have recently entered the market and packages. At the remitting end, the transaction involves
are quite innovative. Although these payments are not the sender visiting the location of the courier company
widespread, they have become more popular. In order and tendering the money. The courier company receives
to make a transfer, a person opens a virtual account on information about both the sender and the receiver. At
the Internet. Money is put on the account usually using the receiving end, an employee or agent of the courier
express payment cards, cash dispensers, cash offices of company visits the recipient and delivers the money
credit organizations, or credit cards. Money on virtual after proper identification of the recipient.
account is electronic money (stored value or prepaid
product in which a record of the funds or value avail- Transport operators
able to the consumer for multipurpose use is stored on
an electronic device in the consumer’s possession).16 2.52. Cross-border transport operators (primarily
Cross-border money transfers can flow between virtual bus courier operators) are involved in carrying goods
personal accounts. If a person intends to make a pay- and money. Bus courier operators are not official
ment via the Internet, it will be sufficient to put money money transfer agents, but they may transport declared
on virtual account and transfer money to another or undeclared money as part of their legitimate courier
account through the electronic payment system. Recipi- business. The transaction involves the sender visiting
ents of transferred funds exchange electronic money for the bus company office and tendering the cash over the
national currency, or could put it on their account at a counter. The sender, in turn, is given a receipt and a
local bank. Electronic money systems are managed by password, which he or she shares with the beneficiary
firms that are considered credit organizations but that in the receiving country. To collect the money from the
operate under simplified rules compared with banks. bus company office, the beneficiary provides the pass-
word and personal identification, as required.
Courier companies
2.53. The use of cross-border transport operators as
2.51. The entry of courier services in the remittance a channel of sending both cash remittances and non-
transfer market has been attributed to the weaknesses cash remittances (in-kind transfers, mainly durable
of other formal institutions. Courier companies may consumer goods) is substantial in African countries,
deliver remittances through regular mail, electronic such as Kenya, Tanzania, and Uganda.17 They have

16For a more detailed description of electronic money, see CPSS 17Between South Africa and Zimbabwe, cross-border transport
(2004). (continued)

12
 Chapter 2 ♦ Understanding Remittances

Table 2.1. Informal Value Transfer Systems

Cash Flow Between

Countries at
Type of Transfer Transfer Mechanism Where It Is Popular Time of Transfer

Hawala “Transfer”: payment instruction Middle East, South Asia No

transmitted
Fei Ch’ien “Flying money”: payment Asia No
instruction transmitted
Hundi “Collect”: payment instruction Asia, Middle East No
transmitted
Chits and chops “Notes, seals”: payment Asia No
instruction transmitted
Black market peso exchange Asset exchange Latin America No
Cross-border transport Physical transfers Africa Yes
operators/drivers
Relatives, friends, migrants, and Physical transfers Middle East, Asia, Europe, Yes
short-term workers traveling Africa, Latin America
home

Sources: El Qorchi, Maimbo, and Wilson (2003); and U.K. Remittance Working Group (2005).
Note: Informal fund transfers are also known as hui kuan (Hong Kong SAR), padala (Philippines), and phei kwan (Thailand).

gained importance because of the inherent advantage 2.56. Exchange control restrictions create a wedge
of this mode in terms of speed and cost vis-à-vis formal between the official exchange rate and the black mar-
methods, and convenience in delivery. ket rate. These restrictions thereby essentially impose
a penalty on migrants and short-term workers who
remit funds through the official channel and contrib-
Other, often unregulated, channels
ute to the relative attractiveness of using informal
2.54. A large number of small money transfer busi- channels. However, timely delivery of funds vis-à-vis
nesses all over the world are often not subject to reg- the formal channels and in some cases delivery by
istration, licensing, or regulation, depending on local agents to the doorstep of the recipient make these
circumstances. Many of these businesses are part of channels attractive.
channels that are culturally embedded and have been
described as “alternative remittance systems,” “infor- 2.57. Illegal migrants and short-term workers (who
mal value transfer systems,” and “informal funds trans- in some countries do not have access to the regulated
fer systems” (see Table 2.1). money transfer system because of identification require-
ments) often prefer informal channels because these are
2.55. Initially developed to facilitate trade between unregulated. Nonetheless, the use of unregulated chan-
countries (and sometimes regions within countries), nels appears to have diminished in recent years as a
these channels later emerged as inexpensive and effec- result of the liberalization of foreign exchange controls,
tive methods to transfer money to remote locations. reforms in the payments infrastructure, and competition
They are popular for small-value transactions by in the remittance market.18 Reliable data and informa-
migrants and short-term workers, although they are not tion on unregulated remittances channels are lacking.
always as secure as more formal alternatives. Tighter
regulatory requirements (such as anti–money launder- 2.58. Among the informal value transfer channels
ing and combating the financing of terrorism legis- to developing countries, hawala is apparently the most
lation) have tended to increase the requirements for organized system in the Middle East and South Asia
opening accounts and thus discourage the use of banks (Figure 2.2). Hawala transactions go through a special-
by low-value remittance customers.
18However, in some countries, such as Haiti, Cuba, and Nica-
operators are the mode of channeling both cash and goods most ragua, unregulated remittance channels account for more than 50
preferred by migrants (Maphosa, 2005). percent of the total funds transferred (Orozco, 2004).

13
 international transactions in remittances: guide for compilers and users

Figure 2.2. Structure of Hawala Value Chain

Amount of money transfer, collection code, and destination

Hawala Operator in communicated to the operator in country B Hawala Operator in
Country A Country B

Hawala operator provides money

Sender is given a collection code

Recipient presents identity card

Sender tenders cash to hawala

Settlement between the hawala operators

in the sending and receiving countries
is completed either through reciprocal
settlement for future transactions or reverse

and collection code

transactions between operators in different
countries.
operator

Sender in Recipient in
Country A Country B

Funds/money
Information

ist broker. Money itself does not regularly move across changeable terms in parts of South Asia, they differ.
borders, either electronically or physically, except to Hundi was one of the earliest and most important credit
settle net positions. That is, the system is based on trust instruments in India. Thus, unlike hawala, a hundi is a
and the brokers balance the transfers over time. physical document or financial instrument. It could be
used for transferring remittances (the confusion with
2.59. A typical transaction involves the sender visiting hawala arises from this point) or as a bill of exchange.
the hawala operator in the sending country (A). Hawala In simple terms, it was a popular bearer instrument.
operators may operate from locations such as grocery According to a study, hundis also could be used as
stores or travel companies. Basically, the hawala operator finance bills or trade bills. The hundi was payable
in country A receives money from the sender and advises either on sight or at a later date. In some countries, such
(through telephone call, fax, e-mail, and so forth) the as Pakistan and Bangladesh, the term used to describe
counterpart hawala operator in the receiving country (B) the practice of hawala is actually hundi.
to disburse the cash to the beneficiary in local currency
after proper identification and verifying the remittance 2.62. Technically, a hundi is an unconditional order
code (password) from the beneficiary. Subsequently the in writing made by a person directing another to pay a
transactions need to be settled between the hawala opera- certain sum of money to another person. In a typical
tors of countries A and B, bilaterally or multilaterally hundi transaction, the migrant or short-term worker
(involving a hawala operator in a third country). transfers a sum of foreign currency to a local agent
under the agreement that the overseas moneychanger
2.60. Networking among hawala operators is of that agent transfer the local currency equivalent at an
required for the smooth operation of the system. The agreed exchange rate to the sender’s family or nominee.
settlement may assume many variants of the reverse Hundi dealers offer door-to-door and same-day service,
transactions between hawala operators in different which is particularly welcome in remote areas.
countries. Operators in the hawala networks often rely
on modern telecommunication technologies and may 2.63. In the chit19 system, which was introduced by
use complex arrangements to settle transactions. the British colonialists in China during the nineteenth

2.61. Another informal value transfer channel is 19Chit is a diminutive of the Hindi word chitti and means a note,
hundi. Even though hawala and hundi are used as inter- pass, or certificate given to a servant.

14
 Chapter 2 ♦ Understanding Remittances

century, the salaries of workers employed by the British constraints in accessing formal financial institutions,
were deposited to an escrow account managed by a Chi- as well as in congruous regions where migrants and
nese comprador (an intermediary between a European short-term workers frequently travel back and forth to
firm and a local buyer). These foreign workers would their home country and thereby can reduce the risk
write chits to pay for food and other essentials that they of nondelivery of remittances to beneficiaries.20 Many
purchased from local merchants. In turn, the merchants migrants and short-term workers use a courier sys-
would present these chits for collection (payment) to tem, which involves a regularly driven van from the
the comprador, who would then deduct the correspond- host or home countries (and back) to move goods and
ing amounts from the accounts of the foreign workers. funds. Carrying cash (whether by friends, relatives, or
migrants/short-term workers themselves) while travel-
2.64. A system similar to the chit system is called ing between the host country and the home country is
chop; it works in the same way as the hawala system a popular mode of fund transfers in many African and
and is still in use today. A client in country A wishing Latin American countries.21
to remit money to a recipient in country B goes to a
broker at a store or outlet who will take the cash, make 2.67. Cash-intensive businesses, particularly outlets
an entry into a ledger book for the amount received, with good international communication facilities, often
and communicate the relevant information about the offer remittance transfer services as a sideline. Such
transaction (amount to be remitted, name and location businesses include foreign exchange outlets, unregu-
of recipient, and so forth) to his or her counterpart bro- lated financial houses, shipping companies, grocery
ker in country B. The broker also creates a chop (in this businesses, brokers, jewelers, gold dealers, clothing
situation, possibly a train ticket or playing card), tears it shops, guest houses, restaurants, travel agents, phone
into two pieces, gives one piece to the client, and sends cards, international telephone shops, bus companies,
the other piece to the overseas counterpart. The client and taxi firms. Country case studies show that churches
sends his or her half of the chop to the recipient. A and other religious organizations also often play a role
match of the two halves must be made before the broker in fund-raising or funds transfer to the place of origin.
releases the money to the recipient. Usually this is linked to community projects, but a
modest role in transferring individual remittances is
2.65. In some remittance transaction models, aggre- sometimes also reported. Nongovernmental organiza-
gated financial claims are offset (and settled) by transac- tions could also raise money and transport humanitar-
tions in goods. This model does not require cross-border ian aid to the home areas.
financial settlements and is therefore popular in countries
with foreign exchange restrictions. One example is the Trade-based systems
black market peso exchange, a form of asset swap used
2.68. In trade-based remittance systems, the remit-
in South American countries. A migrant or short-term
tance senders finance the purchases of imported goods
worker wishing to transfer money to his or her home
by traders who reside in the same country as the remit-
country submits funds to a broker, who agrees to pay out
tance recipient. The traders use earnings from the sales
an equivalent amount to the intended recipients in the
of these goods to pay remittances to the designated
remitter’s home country (the broker has offices or repre-
beneficiaries.
sentatives in both the remitter’s host country and home
country). In countries where foreign exchange restric-
2.69. One of the most common trade-based remit-
tions make access to foreign currency (and imported
tance methods is based on a credit system. The remit-
goods) scarce, this equivalent amount may be based on a
tance sender contacts an importer in the recipient
discount to the official rate. More specifically, the broker
country (typically the sender’s country of origin) with
uses funds from the remitter to purchase goods in the
the request to pay out funds to the beneficiary based
remitter’s host country, and ships these goods to import-
on credit. After the arrangement has been made, the
ers in the remitter’s home country. The importers pay
the broker representative for the imported goods using
20In-kind transfers are popular in many African countries, par-
local currency. The broker representative, in turn, pays ticularly among migrants and short-term workers from rural areas.
the intended recipient of the remittances. 21In Cuba, the informal system of mulas is widely used to carry
cash and goods by informal entrepreneurs from the United States,
who visit regularly as tourists. A survey of African migrants in the
2.66. The “cash-in-hand” mode of transfer is popu- United Kingdom conducted by Africarecruit in 2003 estimated that
lar particularly in remittance corridors where there are 36 percent made use of the cash-in-hand transfer method.

15
 international transactions in remittances: guide for compilers and users

importer pays the agreed amount of money to the recip- (FATF) on money laundering and financing of terror-
ient. The arrangements could be made in person (if the ism. The FATF has issued recommendations that urge
importer visits the sending country) or by telephone, countries to implement a regulatory framework by reg-
fax, or Internet. The remittance sender will repay the istering or licensing money or value transfer provid-
loan when the importer next visits the country where ers. An important element of the framework in some
the sender lives. countries is encouraging entities providing remittance
transfer services to identify themselves. Registration
2.70. In another version of this system, remittance schemes have been adopted in countries with a large
senders make advance deposits with the importers, who number of informal remittance providers, where a pri-
will pay out funds to the recipients at a later point in mary goal is to identify the institutions involved. In
time. In this version, the importer will accept deposits contrast, in licensing regimes, providers are filtered, ex
from senders during a business trip to another country. ante, and must demonstrate their ability to comply with
During this trip, the importer may then use the funds regulatory directives. In both regimes, providers must
received to purchase goods. Subsequently, the goods are comply with certain information gathering and report-
imported to the country of the remittance recipients and ing requirements, in particular:
sold there; the revenue is used to pay cash remittances.
• C
 ustomer identification: Providers of financial ser-
2.71. Both versions of the trade-based remittance vices must ensure that their clients are identified
system are often used by migrants and short-term work- (e.g., by passport or national identification card);
ers from small countries that have a strong link with this could be particularly problematic in the remit-
another country (e.g., Swaziland imports many goods tance sector, where customers are often undocu-
from South Africa, and many Swazi nationals work in mented or illegal migrants and short-term workers.
South Africa on a temporary basis). • R
 ecord keeping: Providers have to maintain an
appropriate record of transactions and of customer
identification data; the records should be made
C. Legal and Regulatory Issues available to the authorities when needed.
2.72. An understanding of the legal and regulatory • S
 uspicious transactions reporting: Providers must
aspects of remittances is important for analyzing the report information to the authorities on transac-
use of formal and informal channels. Different channels tions that may be connected with illegal purposes.
pose different challenges to compilers, and obtaining
data on transactions depends on the menu of channels 2.74. Also common to both registration and licensing
used in a country and the institutional and legal envi- regimes is the ongoing monitoring of activities through
ronment governing remittance transactions and data reporting to the authorities. This aspect is obviously
compilation. In many, though not all, countries, banks important from a statistical compilation perspective.
and other financial institutions are required to report Reporting may consist of periodically (e.g., annually
their international transactions (including remittances) or quarterly) submitting to authorities information on
to central banks or other national financial authori- all transactions. The amount of detail provided varies
ties. However, the regulatory environment and practices from country to country, from only occasional reporting
substantially vary across countries in treatment of enti- of very aggregate information (e.g., annual turnover) to
ties engaged in funds transfer and the various modes full details for individual transactions, such as customer
of transfer used, which has significant implications on name, place of work, nationality, passport or other identi-
reporting and coverage of statistics on remittances. A fication number, transferred amount, beneficiary/sender
poor legal and communication technology infrastruc- name, partner country, and purpose of transfer.
ture may hinder the regulation of some kinds of entities
in some countries, thus posing challenges for reporting, 2.75. Although the FATF recommendations have
whereas in others, the entities may be regulated and increased the extent and uniformity of regulation of
supervised by a number of different agencies, creating the remittance industry, including of the MTO sector,
data overlaps and challenges to compilers who need to this industry is not homogeneously regulated across
integrate these different data sets. countries. This is partly due to the general nature of
the recommendations themselves, which provide wide
2.73. Recent emphasis on regulatory issues in remit- latitude to countries. Moreover, in cash-based and low-
tances has come from the Financial Action Task Force income countries, implementation and administration

16
 Chapter 2 ♦ Understanding Remittances

of an adequate regulatory framework is particularly tistical information on their operations, including cross-
problematic. A variety of public agencies (e.g., cen- border transactions, carried out on their own behalf or
tral banks, financial or money laundering supervisors, on behalf of clients. Consequently, in most countries
local authorities, and customs and tax authorities) share central banks are able to conduct indirect data collec-
the responsibility to supervise MTOs and other remit- tions on payments (i.e., reporting the information on
tance providers in some countries, whereas in other behalf of customers) through the information on cross-
countries MTOs are largely unregulated. Depending border settlement that banks undertake on behalf of
on the regulatory framework, regulatory data may MTO agents and other entities. In countries that have
be available for statistical purposes (and data being foreign exchange controls, recording, verification, and
collected for regulatory purposes can often also be reporting requirements are likely to apply. However, in
adapted for statistical purposes). In some countries, countries with less rigorous financial regulation and
regulatory information is used for statistical purposes, supervision, many types of entities undertaking money
and in other countries independent statistical data col- transfer activities may not be reporting data that are
lection activities are undertaken. adequate or useful for statistical compilation, thus pos-
ing a challenge to remittance compilation.
2.76. Countries often also adopt a regulatory frame-
work, with a set of statistical regulations, directly 2.77. Countries where central banks are at the same
addressing statistical activities. They define the institu- time balance of payments compilers and supervisors
tions responsible for the various broad statistical areas, are in a better position to impose the statistical obliga-
the type of information to be collected, the population of tion to report transactions directly (i.e., not via banks
respondents, and their statistical obligations. Sanctions used for settlements). If it does not contrast with any
are sometimes imposed for missing or incorrect report- legal provision, another possibility would be to use the
ing. Central banks typically have the power to require information reported for supervisory needs for statisti-
banks and other financial intermediaries to report sta- cal purposes as well.

17