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Sunday, May 03, 2009

Hawala Remittances Growing Despite Recession

Despite the global recession, the remittances from the developing countries and the Middle East and North Africa (Mena) region will continue to grow, even if moderately in 2010-2011.

According to a World Bank Migration and Development Brief titled "Revised Outlook for Remittance Flows 2009-2011", the remittances from the developing countries are projected to
  • Grow to 2.9 per cent in 2010 and 6.3 per cent in 2011.
  • In the same way, the Mena region is projected to see a growth of 2.9 per cent in 2010 and 5.6 per cent in 2011.
  • However, this is a far cry from the 13 per cent year-on-year growth the global remittance market has seen in the last decade.

But the economic crisis has brought many new challenges for this sector, like it has for the rest of the world.Emirates Business spoke to major players in the market to find out more about the business of remittances and what is in store for this sector during these tough times. Talking about the international remittance market YS Shetty, COO, Global Operations, UAE Exchange, said:

  • "The global remittance market is estimated at approximately $317.7 billion (Dh1.16 trillion), according to the World Bank 2008 Migration and Remittance Yearbook.
  • This market is driven by 125 million people living abroad, who remit money to their home countries. The market has grown consistently over the past 15 years, sustained by significant movements of people across borders.Dubai, Riyadh, Istanbul, Hong Kong, Miami, Moscow and London are regions that have attracted large number of migrant workers and professionals from countries such as India, Philippines, Indonesia and Mexico.
  • On an analysis of the remittance flows, it is seen that the remittances are growing at an average rate of 13 per cent since 2000.

The major recipient country in terms of inward remittance is India, which received $27 billion in 2007.

According to Shetty, with an expatriate population of 80 per cent, the UAE is a huge remittance market.

Being a major oil-producing nation, the size of the economy attracts a large number of foreign workers especially to the financial hub of the region – Dubai.

  • Even though there are no accurate numbers available for the size, according to certain reports in the regional media the market size is estimated at $6.5 Billion .

According to Jean Claude Farah, Senior Vice-President, Middle East, Pakistan and Afghanistan for Western Union Financial Services:

"The Kingdom of Saudi Arabia and the UAE remain the top sending markets and the top receive markets are India and Pakistan."

Going into the factors that influence remittances Farah told Emirates Business:

"There are a number of factors that influence the frequency and amount sent – including need, employment, and currency movements in the global market. "For example, when the currency in which money is earned strengthens against the currency to which it is sent, there has been continued growth," said Farah. Shetty added:

"The profitability of the market varies from region to region.

  • The fewer the number of players in the market more is the profitability. Remittances have always been a live and growing market since the post WTO era and year-on-year growth on an average has been 13 per cent since 2000.
  • "However, the global downturn has taken its toll on this vibrant sector as well and a few months ago the World Bank predicted that the remittance business globally would fall by about four per cent to eight per cent as the economic crisis has resulted in job cuts everywhere especially in the developed countries.
  • Traditionally there has always been a major flow of transaction from the West ie United States and Europe to the other parts of the world, but due to the current recession, remittances from the West fell due to a slump in job markets. For instance, as per the statistics published by Mexican Central Bank, there has been a drop of nearly four per cent in remittances to Mexico.
  • The US to Mexico remittance corridor is the largest in the world in terms of volume remitted.
  • However, there is still hope for the sector as after the initial gloomy outlook the World Bank revised its findings in March and said that the remittances to developing nations would see a growth in 2010.

Farah said: "The revised World Bank report issued in March forecasts that remittances to developing countries will return to modest growth in 2010 as the mobile work force continues to seek employment throughout the globe.

And recently, the Philippines Central Bank reported that remittances from Filipinos working overseas are unlikely to decline this year.

"According to Shetty remittances to Asian countries, especially South Asia has been increasing over the past few years, though the rate of growth has come down now.

Talking about what the future looks like for the business, Farah said: "It is important to keep in mind that migrant workers, the majority of customers who use money transfer services, need to send money home to support families for basic services.

Remittances are not a discretionary spend. So despite the economic slowdown, remittances continue to be sent."

Talking about what the market is doing to boost business in the current scenario, Farah said:

"The industry comprises global money transfer providers like Western Union, small corridor specialists that serve limited countries and banks that offer their own money transfer products.

It is difficult to generalise in terms of strategy, however, signing up new agents and expanding the network continue to be priorities.

"We, for our part, are constantly getting feedback from our customers and co-operation partners, and proactively restructuring our services and rates to provide the customer a value-added experience through flexible solutions at competitive prices."

The experts also touched upon the challenges faced by the sector like the informal channel of remittance called Hawala that is practiced globally and the fact that banks have also entered the fray.

Farah said: "Hawala has always been a reality in the money transfer industry.

  • Recently, we have seen many countries change rules in this area to formalise and regulate this system of money transfer.
  • We welcome all initiatives by the local authorities in managing this.
  • "The experts however seemed unfazed by the banks' fishing in the same waters as them.

Farah said: "It is estimated that the world remittances market is over $37 Billion.

  • This is a huge market and as such there is room for many more players.
  • We as Western Union have nearly 17 per cent of the market share and I am sure there is room for many. "
  • Also, remittances is an added revenue stream for a bank and is not their core competency. We do not see them as competition and in-fact partner with banks to extend our services through their branch locations.

In the end its all about empowering the customer with a full bouquet of services and options, and with a proven product, reach and brand recognition as ours, we stand clear ahead of the competition," added Farah.

Shetty said: "All banking institutions have been hit by the economic downturn. Probably, they are looking into other avenues of business as additional sources of revenue, including money transfer.

These banks are further boosted by the launch of money transfer models by Visa and MasterCard, which enable card-to-card transfers.

"If we compare them with money transfer companies with respect to the transaction fees or charges, I don't think there is any particular value added for the customer. The nature of the service remains the same. However, in defence of money transfer firms, they have the added value of customised services for its customers."

"Regarding the question of the banks eating into our profits the definite answer is 'no'. This is because, most money transfer companies and particularly companies such as the UAE Exchange, who have been around for years and who have numerous very conveniently located outlets, have a committed customer base and will continue to provide the best services to them.

We are confident that our customers will continue to be loyal to us," said Shetty.

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