The Remittance Boom
At an estimated USD 66 billion in 2015, formal remittances to Africa are three times larger than overseas development assistance and more stable than most other sources of finance. Remittance flows have become one of the largest sources of external finance to African countries after foreign direct investment and are attracting increasing attention because of their rising volume and impact on the receiving countries. Yet, despite the ever-increasing attention on them as a potential development tool, sending money to Africa is more expensive than sending to any other region in the world.
The increasing focus on remittances to Africa is seen in a growing body of literature that analyses their development impact along various dimensions including: financial development, poverty, inequality, economic growth, the Dutch disease effect, how they support democracy and whether they improve political institutions. The author criticizes these studies for lacking focus on transaction costs and on scaling technologies to make sending money to Africa fully digital.
The Case for Digital Remittances
New research indicates that digitizing the remittance value chain and eliminating dependency on counter staff will reduce costs. Mobile technology, mobile money, digital currencies, blockchain, biometrics and cloud technology can make cross-border payments nearly costless, instant and auditable.
Currently, over £400 million yearly goes toward transaction costs for Africans in the UK sending money home. Nine of ten use agents rather than digital methods. The average cost of sending £120 from the UK to Africa is 9.4%, versus the 7.5% global average. Cash-to-cash transfers cost 10.7% compared to 7.8% for digital transactions. Switching to digital methods could save £100 million annually, and meeting UN Sustainable Development Goals targets of 3% by 2030 would save over £300 million yearly.
Kenya's Cost Advantage
Kenya has the cheapest remittance costs in East Africa due to mobile platforms like M-Pesa and PesaLink. Tanzania ranks second-most expensive in Africa after Eritrea, costing twice Kenya’s rate. Kenya’s 58% mobile money ownership rate in sub-Saharan Africa demonstrates how digital infrastructure reduces costs.
Closing the Interoperability Gap
Regional automated clearing houses in Africa could improve efficiency for low-value transfers. Extending infrastructure to include mobile wallets and UK-based providers would enhance interoperability. However, greater trust in digital money is necessary before technology reaches full potential.
