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Remittances With a Future

By Peter Bate, Charo Quesada and Dianela Urdaneta


At least once a month, Lidia Rivera goes downtown in San Salvador to pick up the money sent by her husband, Florentín Chicas, from Manassas, a suburb in northern Virginia. These remittances, which average $800, help her cover basic expenses—food, clothing, medicines, utilities—and school tuition for the two youngest of the couple’s five children. Something similar happens in millions of homes throughout Latin America and the Caribbean, a region that receives more than $38 billion a year from its migrants working abroad. But unlike most people who send and receive remittances, Florentín and Lidia are taking better advantage of their money transfers. This humble Salvadoran family is at the forefront of a phenomenon that could change radically this region’s persistent gap between the haves and the have-nots. Instead of picking up the money at a supermarket, a gas station or a pharmacy, Lidia goes straight to the microfinance institution that gave them a mortgage loan to buy their house.

Florentín, a stocky bricklayer who works practically every day of the week, sends his remittances from a Latino mini-market that acts as a subagent for money transfer companies. From there, the transfer goes to Financiera Calpiá, a leading microfinance institution in El Salvador. When Lidia collects the money at one of Calpiá’s branches, she simply moves from one teller’s window to another to pay her mortgage. Unless she has to buy merchandise for her tiny convenience store, the rest of the money sent by Florentín goes into a savings account.

Using the capital flow of remittances to gain access to the formal financial system, this family has opened doors to opportunities that are usually available only to better-off people in many Latin American countries. As Don Terry, manager of the Multilateral Investment Fund (MIF) of the Inter-American Development Bank (IDB), points out, Florentín’s remittances go from a non-financial institution to a financial one, from cash into an account. Each transaction builds up his family’s financial history—a record that allows any bank, credit union or microfinance institution to gauge their solvency and their ability to repay a loan.

Regional Tendency

A similar process is under way in Ecuador, where Banco Solidario offers home loans and microcredit to people who send or receive remittances. Laura Villagómez, a young woman who migrated to Spain six years ago, bought a house for her parents in Quito using a loan she repaid with her remittances. Her brother Raúl, who moved to Spain more recently, is also using a loan to buy a house in their homeland.

In the not too distant future, this could happen in many Latin American countries. Two leading microfinance networks, ACCION International and Women’s World Banking, plan to involve their member institutions in pilot projects to test money transfer services. Calpiá’s main shareholder, the German concern Internationale Micro Investitionen Aktiengesellschaft (IMI), hopes to introduce these services in their affiliates in Ecuador, Haiti and Nicaragua.

The case of the Salvadoran family shows how microfinance institutions and credit unions are increasingly becoming interested in a market dominated by money transfer companies. Lidia Rivera had some experience with Calpiá, which had given her microcredit for her business. When the owner of the house she was renting decided to sell the property, Lidia didn’t have enough money to buy it. She went to Calpiá to find out whether she could get a mortgage. After reviewing the property title, a credit officer went to evaluate the house and Lidia’s store. “I told him there was more than met the eye because I planned to pay the loan with the money my husband sends,” Lidia says. “That’s how we were able to buy our home.”

Calpiá moved into the remittances market relatively recently. In 2001 it won an MIF competition to promote innovation in microfinance. The Salvadoran financial company, which is in the process of becoming a bank, proposed three pilot experiments: implementing a costing system on its operations, launching long-term loans for housing and agricultural investments and introducing remittance services.

Better Customer Service

Calpiá’s president, Gabriel Schor, credits his customers with the idea of providing remittances services. Some of them used to grouse about having to go to one part of town to pick up the money sent by their relatives and then trek to Calpiá to take care of other business. Why couldn’t they do it all in one place?

After finding that nearly one-third of its 60,000 customers received remittances, Calpiá negotiated with Western Union to join their network of subagents. It also acquired the technological platform needed to receive and send international money transfers. The experiment has borne fruit: by early 2004, about 10,000 of Calpiá’s customers were receiving remittances at one of its 20 branches.

Although this new line of business does not have a big impact on Calpiá’s bottom line, it creates opportunities to attract new customers and offer more services to existing ones, who suddenly achieved a different profile. “We can lend 500 dollars to someone who in the past we would have lent only 250 dollars, because now we know this person receives remittances regularly,” Schor says.

When clients pick up their remittances, Calpiá’s representative can offer them other services, such as savings accounts, fixed-term deposits, scheduled savings, credit for microenterprises and small businesses or home loans. Silke Maria Müffelman, Calpiá’s manager, points out that they already know how many clients who receive remittances are interested in savings accounts or in loans for business or housing. “We are already offering these services,” she says. “The challenge for the future is to perfect them.” One possibility is to offer customers ATM cards that will allow them to access their money at any time and at many places.

Despite these encouraging examples, big obstacles remain: Almost 80 percent of the Latin Americans working in the United States who send remittances use non-financial companies to transfer money to their homelands. The money quickly and reliably arrives but adds nothing to the families’ financial record. Even when transfers arrive at some Latin American commercial banks, people who receive remittances are often not seen as desirable customers.Nonetheless, remittances continue to have a huge economic impact on the region: Last year they surpassed the sum of all foreign direct investment and official development assistance to the region. These money transfers play a crucial social role in covering the basic needs and raising the living standards of millions of Latin American families.

Financial Democracy

For the MIF’s Terry, remittances can also promote “financial democracy” in Latin America, giving low-income people access to all kinds of financial services and more opportunities to accumulate economic assets. According to MIF estimates, in this region, barely one in 10 adults is a bank customer. In the United States, the ratio is nine out of 10 adults.Terry is quick to remark that neither the MIF nor the IDB intend to determine how the money sent by migrants is spent. “Nobody knows their needs better than the immigrants and their families,” he says. “This is all about offering them more options and opportunities.”


Box:
FIRST, DO NO HARM
 

Remittances have come out of the shadows, but much remains to be done to take advantage of their full potential as vehicles for development. The Multilateral Investment Fund, in consultation with 25 other organizations working in the field, has drafted the following core principles to spotlight the most pressing tasks and guide decision makers. The principles are grouped into three categories: for institutions that provide remittance services, for public authorities and for civil society organizations. 

Core principles for remittance institutions 

Improve transparency    
?Remittance institutions should fully disclose information on total costs and transfer conditions, including all commissions and fees, foreign exchange rates applied and execution time.

Promote fair competition and pricing             
-Remittance institutions should compete on the basis of fair, nondiscriminatory contractual arrangements. They should limit exclusivity contracts and refrain from unfair and high pricing exchange-rate margins.

Apply appropriate technology
-Remittance institutions should apply cost-effective technology and use innovative platforms to cut costs, improve speed and security and create new products. Such systems can also help reduce money-laundering and other illicit activities.

Seek partnerships and alliances    
-Remittance institutions should seek partnerships and alliances, including linkages between money transfer companies and financial institutions, in order to leverage capabilities and promote “cash to accounts” services and other forms of financial intermediation. 

Expand financial services           
-Financial institutions should deepen financial markets through inclusive and integrated services for remittance customers, such as current account services, savings, credit and mortgage products.

Core remittance principles for public authorities

Do no harm     
-Public authorities should facilitate remittance markets and avoid attempts to tax, over-regulate or take other actions that impede the flow of remittances.

Improve data   
?Public authorities should improve systems for collecting and reporting remittance market data, and help to develop international standards for measuring such data. 

Encourage financial intermediation  
-Public authorities should facilitate mainstreaming remittances into financial institutions by improving regulatory and financial sector frameworks. 

Promote financial literacy                       
-Public authorities should raise awareness of the benefits of savings and other financial products, and inform consumers of their rights involving remittance transactions. 

Core remittance principles for civil society organizations 

Leverage development impact             
-Civil society and private sector organizations should identify obstacles to leveraging the development impact of remittances, and work with stakeholders to remove such obstacles.

Support social and financial inclusion
-Civil society and private sector organizations should support the social and financial inclusion of transnational families into their communities, and develop partnerships to promote training and local productive opportunities.

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