CFA: Digital Markets: Absa CIB
Cross-border remittances now outweigh foreign direct investment into Africa. What does the future hold for this key market?
Vast amounts of money cross international borders every day – not through trade or aid, but through remittances. These cross-border payments have continued through the COVID-19 crisis, despite borders closing and economies shrinking. What does the future hold?
To answer that question, one has to understand the source of these payments. “Remittance, also known as diaspora, is cross-border flow where an individual has emigrated to another country and sends money back home for a variety of reasons,” says Paul Fenwick, CFA: Digital Markets at Absa CIB.
Fenwick says that remittances are important because of the sheer size of the global market. “According to data from the World Bank, this market has grown from USD285 billion a year in 2005 to an estimated USD666 billion in 2020,” he says. “Of that USD666 billion, about USD77 billion is flowing into African countries. Here, Egypt and Nigeria are the two biggest recipients, with about USD24 billion and USD20 billion respectively.”
Those flows go both ways. Remittances flowing out of South Africa are recorded as just over USD1 billion in 2019. “However,” Fenwick points out, “it must be remembered that this figure only covers money flowing through official channels. If we incorporate the unofficial channels, this number is estimated to be as high as USD2 billion. The biggest recipients of this flow from South Africa are Southern African Development Community (SADC) countries, making it the biggest intra-Africa flow. Zimbabwe accounts for the biggest flow from South Africa.”
The individual transactions may be small – a few hundred rand sent home to Harare here, a few more sent to relatives in Bulawayo there – but those small sums add up significantly. “The size of the remittance market is now larger than foreign direct investment, making it one of the most significant sources of funds for African markets,” says Fenwick.
Growth, despite COVID-19 concerns
Many analysts and observers expected remittance flows to decline significantly when borders closed during the COVID-19 crisis. However, the World Bank’s officially recorded remittance flows to low- and middle-income countries reached USD540 billion in 2020, just 1.6% below 2019’s total of USD548 billion. Flows to sub-Saharan Africa declined by 12.5%.
However, that global decline in recorded remittance flows was much smaller than the 4.8% drop seen during the 2009 global financial crisis. And, interestingly, according to the World Bank the decline was also “far lower than the fall in foreign direct investment flows to low- and middle-income countries, which, excluding flows to China, fell by [more than] 30% in 2020”.
Again, though, it’s the personal, familial aspect that made all the difference. “Foremost among the drivers of remittance flows and reasons behind their resilience during the [COVID-19] crisis was migrants’ desire to help their families, to send money home by cutting consumption or drawing on savings,” the World Bank noted.
Tech fuels future growth
Fenwick expects African remittance flows to recover and grow in the coming years, driven by regional adoption of digital technologies.
“The biggest complaint regarding remittances is the cost and time to send money back home, with fees as high as 20% in some cases,” he says. “For years the market was dominated by money transfer operators (MTOs) who relied on their physical footprint to be effective. This resulted in fixed costs being quite high to maintain. In recent years, however, digital innovation has seen a number of competitors come into this space, with fintechs, mobile operators, banks, technology companies and MTOs all vying to offer cheaper, more transparent, real-time payments that solve those customer pain points.”
Added to that, the World Bank has set a target of limiting the charges on remittances to no more than 5% by the year 2030.
“Digital innovation and tougher competition have brought about massive improvements in this space over the past 10 years,” says Fenwick. “In the coming five to 10 years we expect to see exponential growth in the range of apps and platforms that remittance senders will have at their disposal. They will also have more options to disperse to, from bank accounts to mobile wallets, virtual wallets and so on. This will take remittances into markets that have very little coverage today, fuelling even further growth.”