Remittances have become a top issue for the IDB’s Multilateral Investment Fund in the past three years. How did an agency tasked with promoting private sector development in Latin America and the Caribbean get involved in this area?
MIF Manager Don Terry points to the enormous amounts of money that migrant workers in countries such as the United States, Japan and Spain send back to their homelands: about US$20 billion to a dozen countries in the Western Hemisphere last year. Such sums easily exceed the foreign aid granted to the region or the financing approved by multilateral lending institutions.
Terry argues that many benefits could be reaped if more of that money flowed through formal financial institutions—particularly credit unions and microfinance institutions—rather than money transfer companies. First, increased competition among providers of remittance services would drive down the cost of wiring money, putting more resources into the pockets of beneficiaries, who tend to be poor. Second, Latin American and Caribbean credit unions and microfinance institutions would have more chances to tap a potential client base of millions of people who have no access to formal financial services.
MicroEnterprise Americas talked to Terry about how this might happen in a not too distant future.
MicroEnterprise Americas: How did you make the link between microfinance and remittances?
Don Terry: The link comes from the idea that the profiles of the recipients of the billions of dollars in remittances that flow into Latin America are typically similar to the socioeconomic profiles of the people who are clients of microfinance institutions. At the same time, in discussions we have had with U.S. and Spanish officials, we’ve found that they are looking for ways to increase the level of financial services available to immigrants living in their countries. The additional prospect is to figure out ways to link microfinance institutions in Latin America with regulated financial institutions in the countries where the money that fuels remittances is earned. We have a first demonstration of that type of program in a project that has linked a microfinance institution in Ecuador, Banco Solidario, with Caja de Ahorro de Madrid and Caja de Ahorro de Murcia, two leading credit unions in Spain .
The reason why we think this is so important is not only that these links can help reduce the cost of remittances by moving them through regulated financial institutions, but also that if we can build those channels, we can open up all kinds of financial services for both the senders and the receivers of remittances, giving them access to loans, savings accounts, and opportunities to build credit histories.
So when we look for ways to tie microfinance institutions to remittances coming into Latin America, we see significant possibilities for growth of their asset base and their client base.
Micro: You often point to Spain’s experience with remittances and the development of its savings banks. What happened there?
Terry: One of the most amazing statistics that has come out of this whole process, at least from our perspective, is not just the huge amounts of money flowing into Latin America but the amounts of money that flowed into Spain during the 1950s, 1960s and 1970s, when millions of Spaniards left their country to work abroad and sent money back home. The Spanish banking industry is well known throughout Latin America, especially the largest banks, but the surprising fact is that 52 percent of Spain’s financial assets are held in cajas de ahorro, which are relatively small popular savings institutions. In large part, the growth of those institutions was financed by remittances sent by Spanish migrants. That provides a historical perspective of what the potential is for these types of resources going back home. They helped build up institutions that now comprise the majority of financial assets in Spain.
Micro: How replicable is that experience in present-day Latin America?
Terry: The cajas de ahorro system was in place in Spain in a more significant way than microfinance institutions are in Latin America today. But the potential is there, particularly since a good portion of remittances are sent back to people living in rural areas where it has been a problem for microfinance institutions to get enough traction, enough of a client base. In countries where microfinance has the proper enabling environment—and that includes some countries that have high levels of remittances, such as El Salvador and Ecuador—I think the system can expand significantly by tapping this pool of resources.
In countries like Mexico, we need to help build that system. In fact, Mexico recently changed its laws to allow rural financial institutions to receive remittances. Previously they couldn’t; remittances could go to large commercial banks in cities and even retail stores, but in rural areas the existing financial institutions were not authorized to receive remittances. We are particularly pleased to have helped Bansefi, a new Mexican regulatory agency, change regulations and build the technological platform necessary to allow a network of about 1,000 rural financial institutions—and in the future, hopefully, many thousands—to receive remittances. That will increase competition, and we presume it will lower the cost of sending money. But it will also give many people an opportunity, for the first time in their lives, to open savings accounts and gain access to other financial services.
So we need to help build a system in Latin America for popular savings institutions and microfinance institutions in rural areas to be able to do that. We are also very pleased that the largest network of microfinance institutions in the region, ACCION International, has decided to pursue this policy and is going to be developing an outreach effort. We also hope that the IDB will be able to assist in brokering relationships between financial institutions in Latin America and in remittance-sending countries, just as it did between Spain and Ecuador.
There is also an increasing interest in the United States in these kinds of links. The credit union leagues of Texas and California are looking at opportunities to link up with similar institutions in Mexico and other Latin American countries. At the same time, U.S. credit unions are expanding their definition of what constitutes their field of membership, which will allow credit unions to offer check-cashing and remittances services to people who cannot be full-fledged members. So it would be possible for, say, the IDB employees’ credit union to open a storefront office in one of the Latino neighborhoods in the Washington area to offer such services.
Micro: When you make a presentation on remittances, you usually pull out your own bank cards…
Terry: I flash my plastic…
Micro: …to illustrate how easy it is for someone with a bank account to get financial services at literally any ATM in the world. How long do you think it will take for Latin Americans who now lack access to those kinds of services to be able to do that?
Terry: Someday, the same information technology that is almost universally available in the United States will also be widely available in Latin America. The technology exists and is being used. Since our conference, we have received about a call a week from some technology company that is looking to provide such services. Now, the IDB is not in the business of picking and choosing, but the word is out there. Organizations throughout Latin America are contacting us—credit card issuers and others—to tell us that they have ideas about how this technology can be used.
Regarding its applicability to microfinance, let me point out that a few years ago if you talked about microfinance institutions getting into bond offerings, leasing or smart cards, people thought that was some kind of a dream. But it has all happened, and as the demonstration effect starts to build, our goal would be that within five years this would be a significant factor. And this, again, would increase competition for the traditional methods of wiring money and help drive costs down, because this technology is the most cost-effective. It does require links between formal financial institutions on both sides of the border, but I think it is going to happen. And I think we have a role to play.
As for those who think that it won’t happen in rural areas of Latin America, the reality is that ATM machines are finding their way to places where it is not feasible to have a bank branch office. For instance, the Mexican state with the highest number of ATMs is Chiapas. So although it may sound counterintuitive, you will be likely to find ATMs in the places where you have people who receive remittances.
Box:
A Better Way
Small flyers pasted on utility poles in Quito by self-styled travel and employment agencies invite passers-by to “travel and work abroad.” Since the 1990s, thousands upon thousands of Ecuadorans have taken that route in a bid to escape poverty and a dearth of opportunities for economic progress. Massive migration has turned remittances into one of Ecuador’s biggest sources of capital inflows: nearly $1.2 billion last year, sent home by its citizens working in countries such as Spain.
However, invitations to migrate for a job have often turned out to be very expensive. According to migrant defense organizations, many Ecuadorans became mired in debt with loan sharks who financed their travel expenses at exorbitant interest rates. Those who managed to avoid usurers and found work in Spain still faced stiff fees when they sent money home through telephone call centers known as locutorios.
Recognizing these problems, Banco Solidario, an innovative Ecuadoran commercial bank that caters to small businesses and microentrepreneurs, launched a program tailored for migrants called Mi Familia, Mi País, Mi Regreso (My Family, My Country, My Return). At a conference on remittances organized by the IDB’s Multilateral Investment Fund, Banco Solidario President Santiago Rivadeneira explained that the program offers travel loans to people who are moving abroad, or in some cases helps them pay off ruinous debts to loan sharks.
With support from the IDB and MIF, Banco Solidario has established links with two major savings banks in Spain, Caja de Ahorro de Madrid and Caja de Ahorro de Murcia, to set up wire transfer services for Ecuadoran migrants. These institutions charge moderate fees (4 percent of the amount remitted) to send money to Ecuador. Some locutorios, according to Rivadeneira, charge more than 20 percent in fees and foreign exchange charges. Banco Solidario has also reached strategic agreements with Ecuadoran credit unions and a courier service to distribute remittances in hundreds of locations throughout their Andean nation.
Finally, Banco Solidario issues a smart card known as la chauchera (the coin purse) to families who receive remittances. The card, which also works as a debit card at hundreds of ATMs in Ecuador, allows migrants to decide where their money should g for ordinary expenses, such as food, utility bills, health insurance and school tuition; to pay off loans; or into savings accounts to buy homes or start businesses when they return. “Our research tells us that migrants expect to achieve something more than sending money home for their hard work abroad,” says Rivadeneira. “They want something that will give them control over their money.”