Ethiopian Business Review

Fixing the Leaks: Ethiopia Benefits from Remittance Boom Through Formal Channels Featured

Many Ethiopian migrants, who send money for their relatives and families from abroad, previously paid an average of 12 Pct of the remitted amount for the money transferring agents.  Sending remittances to Ethiopia, which is one of the top 10 remittance receiving countries in Sub-Saharan Africa, has been costly though the amount varies depending on the remitted amount, the service chosen and the destination. The cost of a money transfer for an average transaction in Ethiopia ranges from as low as around 1 Pct to a maximum of 20 Pct of the amount remitted. The most expensive are the services of global money transferring companies. 

The cost of remittance is one of the major factors in a migrant’s choice of using formal or informal money transfer channels. This is particularly pertinent to African migrants, where the average cost of sending money to the continent has been around 12 Pct which is higher than the global average of 8.96 Pct, according to the World Bank 2012 report.  South East Asia has had the lowest cost of sending money with 6.54 Pct of the remitted amount of money. 

The effect of this high transaction fee has cost Africa close to 10 billion USD in 2012 alone. These high costs of remittances have also been to blame for the relatively small size of remittances flowing in to Ethiopia in the past. According to World Bank, remittances averaged 1.3 Pct of the country’s GDP over the last 30 years. The remittance flow of the country has steadily grown from USD 4 million in 1977 to USD 47 million in 2003. Figures obtained from the National Bank of Ethiopia (NBE) revealed that the inflow of remittances have grown sharply after 2007 reaching USD 790.3 million in 2009/10 Ethiopian Fiscal Year (EFY). By the end of 2012/13, the total remittance inflow through banks in Ethiopia has gone up to  USD1.9 billion, which is an increase by more than 127Pct as compared to the figure in 2009/10. 

One of the reasons for the remittance boom is attributed mainly to the encouragement of remittances transferred through formal channels due to an intentional substantial decrease of transfer fees by commercial banks in Ethiopia. 

Cost of moneyThe International Monetary Fund (IMF) estimates remittances transferred through the informal channels to be at around half of the officially registered remittance flows in Sub Saharan African countries. However, this seems to be quite an underestimation that previously, remittances transferred through informal sectors were significant in Ethiopia as shown by the survey conducted by the World Bank entitled “Demographics and Characteristics of Remittance Recipients” in 2010. The survey approximates the amount of potential remittances through formal and informal channels to be USD3.2 billion a year, which was four fold of the amount of remittances channelled through formal ways in 2009/10. This gap, however, started to narrow in the consecutive three years mainly due to the approach followed by some commercial banks in Ethiopia that managed to employ strategies to bring the cost of remittances down all the way to zero.

Necessary swing

Commercial Bank of Ethiopia (CBE) has pioneered a strategy to decrease transfer fees dramatically to benefit from huge amount of foreign currency channelled through its network. To this end, in 2010, CBE had stopped charging commissions on Western Union transfers that are sent through its branches. This brought a great opportunity to people like Meseret Kidane, 43, a mother of two, whose daughters live and work abroad. Meseret’s two daughters who live and work in Qatar and Dubai send money to their mother regularly. Previously, their mother used to receive money through both formal and informal channels. However, a year ago, she stared to use Western Union through one of the branches of CBE located around her neighbourhood around Saris, in Akaki Kality District. Although she enjoyed the decline of transfer fee as opposed to the previous trend, she usually encounters a problem when she goes to CBE’s branches due to Internet failures. “Sometimes, I received money after a week,” Meseret told EBR. 

To date close to 40 money transfer operators work with the 17 commercial banks in Ethiopia. Out of the total, 20 money transfer companies are working with the CBE. Western Union, Money Gram and Dahabshil are the most dominant players in money transfer through a partnership agreement with almost all commercial banks in the country. Stakeholders partially attribute the decline of transfer fees to the increase in the number of operators since 2010, which created more competition. This led to the lowering of transfer fees which benefited banks as well as clients like Meseret. “Before CBE agreed with operators, the bank negotiated  to settle for the lowest possible transfer fee in order increase the remittance flow,” Ephrem Mekuria Corporate Communication director at CBE told EBR. 

CBE is also aggressively using the Society for Worldwide Inter-bank Financial Telecommunication (SWIFT), a unique identification code for a particular bank, to boost the amount of remittance flowing through its network. The code is used when transferring money between banks, particularly for international wire transfers. Since CBE has a partnership with close to 750 banks all over the world, the bank is currently reaping the benefits more than most private banks in the country whose partnerships with foreign banks are limited. One of the benefits of using SWIFT codes is that the receiver will not be charged transfer fees and the cost for the sender will be closer to one percent of the remitted amount since it involves account – to – account transfers. 

Remittance flow ethiopia in millions of usdPrivate commercial banks, which are currently under a liquidity crunch because of the directive requiring them to buy government bonds worth 27Pct of their loan disbursement, are turning their attention towards remittances to support their deposit mobilization efforts and access to foreign currency. It is becoming normal to see bank employees convincing people who receive a remittance to open an account there in order to increase deposits. Most of the managers of private banks EBR interviewed agreed that they are taking remittance seriously in order to compensate from the loss of foreign exchange reserves during last fiscal year, due to poor export performances. “We are trying to increase the number of money transfer operators that charge reduced transfer fees in order to increase our foreign currency reserve, Worku Lemma, president of Debub Global Bank told EBR. Worku who was former vice president of Oromia International Bank (OIB) also told EBR that in the time liquidity crunch, remittance flows into the country are providing little relief for private banks. 

Tapping the potential

A visible increase in migrations in Ethiopia started during the 1970s as the result of political unrests. At that time, migration was limited to the urban areas, especially among the educated and young population who sought refuge abroad for political reasons. Slowly, however, migration has become an aspiration for most people even outside urban areas, largely for economic reasons. The latter was exacerbated starting from the 1980s, when farmers began flocking outside Ethiopia in search of better job opportunities. Nevertheless, until 2008, migration flows out of Ethiopia were relatively small compared with other Sub Saharan African countries. According to the World Bank estimates, the emigration rate was 0.6 Pct of the population in 2008, which amounts to close to 500,000 people. After 2008, however, the Middle East has become an important destination for Ethiopian migrants due to high unemployment rates in urban and rural areas. Before 2008, the main destinations of Ethiopians migrants were Sudan, the United States, and Israel.  The combined number of Ethiopians in these three countries was more than 60Pct of Ethiopians abroad, according to the report published by Centre for Migration and Refugee Studies. However, this trend has been reversed by Ethiopian workers moving to the Middle East in recent years. Currently more than three million Ethiopians are believed to live outside of Ethiopia.  

Despite its large migrant population, according to researchers and experts in the area, Ethiopia has not fully tapped its potential. They indicate that the current flow of remittance to Ethiopia is only half of what it could be. Currently remittance accounts for 6 Pct of the Growth Domestic Product (GDP) of the country. In addition, the average value of remittances received by each person in Ethiopia is about USD22, which is one of the lowest figures in Sub Saharan Africa. 

Judging from its 51 Pct average growth rate in the past eight years, remittances are becoming the nation’s major source of foreign currency. Experts argue that if its potential materializes quickly, it would generate a level that is higher than the current level of export revenue and Official Developmental Assistance (ODA). Comparing with the export earnings of the country and net ODA which stood at USD 3.1 and 3.5 billion respectively, remittance inflow can bring comparable foreign currency to Ethiopia. In addition, experts argue that the inflow of foreign exchange from migrants increases the credit worthiness of Ethiopia and allows the country to build a relatively better debt service system, since the World Bank revised its analysis of how much debt a country can carry at various levels of risk to include remittances since 2009.


2nd Year . February 2014 . No.12


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