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LCCU, which in just over one year of operations has signed up 2,400 members, provides checking and savings accounts, ATM services, consumer loans and wire transfers. The fledgling credit union charges $6.50 to wire money to El Salvador or Guatemala and $10 to Mexico. Other Durham-area check cashing and money wire businesses used by the Latino community charge a substantial 10 percent fee on the wired amount.

While price is an important factor when migrants decide how to transfer money, there is also the question of trust and tradition. Many newcomers to the United States have had no experience with the banking system. LCCU estimates that less than 50 percent of Latinos living here have bank accounts. Those who do not have access to banking services must pay higher fees to cash their paychecks or wire money.

Some immigrants still prefer to deal with viajeros (“travelers”), a peculiar cross between a courier and a banker. Lucas Zelaya has relied for years on a man who travels once or twice a month between Washington and San Alejo, his hometown in El Salvador. For a 5 percent fee, the viajero hand-delivers money to Zelaya’s mother in San Alejo, which has no banks. Even though Western Union has an office across the road from his workplace in Washington and an agent two blocks away from his mother’s home in El Salvador, Zelaya stands by his compatriot. In an emergency, this viajero will even advance cash to relatives of his regular clients. “I don’t think Western Union would do that for me,” says Zelaya.

Formal financial institutions, however, are not sitting on their hands. From modest credit unions to banking behemoths, they are reaching out to Latin Americans living in the United States. LCCU, for example, is run by a fully bilingual staff. One of them works full-time teaching the basics of financial literacy to new and potential members. Its business hours are tailored to accommodate the schedules of a largely working-class clientele.

Major U.S. financial institutions are also stepping up their efforts to woo Hispanics. Wells Fargo, a bank with a strong presence in western and southwestern states, has launched a pilot program offering simple money transfer accounts to undocumented Mexican migrants. Citigroup, one of the world’s largest financial concerns, recently purchased Grupo Financiero Banamex-Accival, Mexico’s second-biggest bank. On announcing that deal, Citigroup Chairman Sanford I. Weill said the two companies would team up to serve “the rapidly growing Hispanic market across North America.”

As more and more Latin American and Caribbean immigrants gain access to banking services and U.S. financial institutions develop ties with their counterparts in the Western Hemisphere, the cost of sending money back home should continue to drop. In fact, nowadays many migrant workers simply obtain additional bank cards for their relatives back home, allowing them to draw funds from U.S.-based accounts at any automatic teller machine connected to a major electronic banking network. Technology is also making it easier to offer financial services even in the most remote locations.

A role for multilaterals. If competition and technology are already working to lower the cost of remittances, and U.S. banks and credit unions are welcoming even undocumented immigrants as customers, what can a multilateral institution add? According to the MIF’s Terry, the growth of remittances over the past decade reflects the increased globalization of the world economy. It is very important for international development institutions to help find ways to leverage the impact of these critical resources, he said. In this regard, he says, institutions such as the IDB and the MIF could play an important role, especially in the countries that receive remittances.

The MIF is establishing programs to help regulated banking institutions in countries like the Dominican Republic, El Salvador, Jamaica, and Mexico to put in place the electronic platforms required to work more productively with their counterparts in industrialized nations. The MIF will also support regulatory reforms that will enable popular savings and microcredit institutions to become formal regulated institutions, a step that would allow them to accept money deposits and offer other financial services.

Such changes would serve several purposes. First, they would strengthen Latin American and Caribbean credit unions and other small financial institutions that cater to middle- and low-income clients, the people most likely to receive remittances from relatives abroad. Second, they would enable them to acquire the technologies needed to extend their services to underbanked rural areas and towns. And third, they would build up a steady flow of capital into the kind of institutions that provide financial services in areas with high levels of poverty. At present, most remittances reach their destination through convenience stores and other nonfinancial businesses.

One of the most interesting examples is a venture undertaken by FIE, a successful Bolivian microfinance institution. With support from the MIF and the Argentine government, FIE this year opened a branch in Buenos Aires, home to nearly one million Bolivian migrants. Among them are tens of thousands of entrepreneurs who have little or no access to the sort of financial services FIE offers its customers in La Paz and other Bolivian cities. FIE’s president, Pilar Ramírez, plans to offer microcredit on a massive scale to the Bolivian migrant community in Argentina.

Besides the small loans that help low-income people start tiny businesses, especially during economic crises, migrants need secure ways to send money to their families. According to Argentina’s tax authorities, Bolivian migrants remit nearly $100 million home every year. However, according to Ramírez, until now they have tended to use more costly, informal channels to transfer their money because they do not trust or do not feel welcome in regular banks.

While remittances play an important role in FIE’s plans in Buenos Aires, Ramírez points out that FIE also caters to other needs. One of the most pressing is to make small loans to help Bolivian migrants pay the fees for becoming legal residents. Legal status paves the way towards formalization, allowing entrepreneurs to build their businesses on more solid foundations and boost their productivity. In time, FIE’s operations in Argentina will help build stronger financial links between Bolivian expatriates and their original communities. “What we are proposing is that the money of the poor go to the institutions of the poor,” says Ramírez.

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Date posted: October 2001

Conference: Remittances as a development tool

Publication: Remitance Flows and Impact, by Susan F. Martin (PDF document)