Is there any hope of reducing informal cross border remittances – or are informal channels really that bad?

Much has been written about these informal remittances, what causes them and the potential there is for new innovative formal products that are cheaper and more convenient.

The current global remittance market is estimated to be in the region of USD 500 billion annually and is expected to grow in future due to increasing international migration population, decreasing remittance costs, increasing disposable income, improving economic growth, growing refugees population and growing urbanization. Over the last five to six years there has been an explosion of interest and focus on this market by financial service providers, donors, regulators and fintechs, and much has changed with many new formal products and innovations entering the market. What has not changed however, is the size of the informal market, which remains large. FinMark Trust estimates that 70% of all cross border remittances between SA to SADC remittance market are informal. Our current study of remittances in and out of the DRC estimates that 81% of the remittances sent and received are informal. These informal channels include – physical delivery of cash known as at the envelope system, Informal hawala-type remittance business models, and goods remittances.

Much has been written about these informal remittances, what causes them and the potential there is for new innovative formal products that are cheaper and more convenient. And of course the need to reduce the regulatory burden on financial service providers and consumers. Our current study reveals that DRC’s informal remittance market is well established and is currently much cheaper than its formal counterpart particularly for smaller remittances. The formal remittance cost from Belgium is in the region of 8,5% on a transaction of USD 175 and 16.17% from South Africa. By contrast our research found that the standard fee for the informal remittance market is in the region of 5%. There are many other reasons why remitters use informal channels but on price alone, it is clear that formal products still have a very long way go to particularly in the corridors from African countries into the DRC. Ensuring customer value needs to be at the centre of formal product development if it is to compete with the informal market.

The total remittances into DRC from these nine destination countries are found to be in the region of US$305 million per annum, of which 81% is estimated to flow via informal channels. The largest of these remittance markets is Angola, followed by France and Congo-Brazzaville. 58% of remittances come from other African countries, and 92% of African remittances travel informally.

Table 1: Remittances to DRC from nine migrant destinations

Total migrants % remitting Average amount remitted annually Total informal remittances (US$m) Total formal remittances (US$m) Total remittances (US$m) % informal
Angola 300 000 50% $500 $67.95 $1.80 $69.75 97%
Belgium 31 500 65% $1 000 $15.97 $6.55 $22.52 71%
Burundi 173 417 30% $425 $19.50 $1.06 $20.56 95%
Canada 30 000 60% $1 000 $9.72 $10.08 $19.80 49%
Congo (Brazzaville) 172 923 50% $500 $38.13 $2.08 $40.20 95%
France 90 000 65% $1 000 $45.63 $18.72 $64.35 71%
Rwanda 231 438 30% $450 $27.56 $1.50 $29.06 95%
South Africa 64 075 45% $550 $10.74 $7.07 $17.81 60%
United States 30 000 60% $1 050 $10.21 $10.58 $20.79 49%
Total 1 123 353 $245.40 $59.44 $304.84 81%

Source: own estimates

For more information contact

Nikki Kettles
Head of the SADC Financial Inclusion Programme
Email: nikkik@finmark.org.za
Telephone: +27 (0)11 315 9197