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Inter-American Development BankMultilateral Investment Fund

Sending Money HomeSending Money Home Remittances As a Development Remittances As a Development

Tool in Tool in Latin America and the Latin America and the

CaribbeanCaribbean

May, 2007

The MIF was created in 1992 with the goal of promoting and strengthening the private sector in LAC.

The MIF provides grants for Technical Assistance in the following areas: • Regulatory Framework for the private

sector• Human Resources Development• Micro-SMES enhancementMIF also invests in SMES through its

investment Fund facility.

Origin and MissionOrigin and Mission

The Multilateral Investment Fund

Remittances as a Development Tool in Remittances as a Development Tool in LACLAC

Background on Remittances1

Challenges Ahead and MIF Strategy2

MIF Projects and Initiatives3

I - Background

It is estimated that annual worldwide remittance flows in 2006 reached $300 billion, primarily sent from the industrial to the developing world.

Latin America is among the largest remittance markets in the world, receiving $US62.5 billion in 2006.

75% of remittances to LAC come from the United States. There are 20 million LAC born individuals in the U.S.

An additional 20% come from Spain, Italy, Portugal, Japan, and other parts of Western Europe. Intra-regional flows account for the rest.

Background: Volume of Remittances


Remittances to LAC

3845.8

53.662.5

010203040506070

2003 2004 2005 2006

$US

Billi

ons

If migration patterns continue at current levels, the importance of remittances to the region will also grow significantly.

At current growth rates, the projected cumulative remittances to Latin America and the Caribbean for the decade (2001-2010) will approach

US$ 500 billion


Total Money Sent

Market Failure?

Undocumented status of a significant percentage of migrants

Market dominance by a few large

companies and limited information and transparency

Economic, legal, and technical barriers to entry in the remittance market, both in the sender and recipient countries

Low negotiating power among fragmented migrant communities

Limited formal banking and/or

microfinance institutions in

recipient countries

A less developed banking culture in

the migrant community

Background: Market Context

• In recent years, the remittance industry has become more transparent and competitive.

• As a result, transfer costs continue to decline. In May 2005, the average cost was 5.6 percent or $11 for sending $200, compared with 15.6% five years ago.This reduced cost is mostly due to the fact that charges have decreased with greater competition and use of technology.

• However, not all remittance corridors or countries in the region have seen large drops in remittance cost.

Cost of Transfer

Cost of Transfer

15%

7.80%

6%5.60%

0%

2%

4%

6%

8%

10%

12%

14%

16%

Pre-2000 2002 2004 2006

Year

Ave

rage

cos

t to

send

US$

200

(exc

ludi

ng C

uba)

US$30

US $15

US$12US$11

Cost of TransferAverage Cost to Send US$200 in 2006

3.9

4.6

5

5.2

5.2

5.2

5.6

5.6

5.6

5.8

6

6.4

6.7

8.2

12

0 2 4 6 8 10 12 14

Ecuador

Peru

Colombia

Nicaragua

Venezuela

El Salvador

Guatemala

Bolivia

LAC w/o Cuba

Honduras

Mexico

Dominican Rep

Haiti

Jamaica

Cuba

Percent cost

Wire transfer companies such as Western Union or Money Gram remain by far the most common means of dispatching remittances with 63% of senders reporting that they use such firms. This is down from 70% in 2004.

Background: Transfer Mechanisms

63%

19%

10%

8%

International moneytransfer companies

Bank / Credit union

Mail / Courier

Person traveling tothe country

Background: Payment of TransfersRemittance payers by type

II. Challenges Ahead and MIF Strategy

1 2

Lower transaction

costs by promoting

competition, and encouraging innovative

technologies;

3

Leverage the development

impact of remittances,

once received

Document the increasing

importance of remittances to

the Region

Because of the recent growth of remittances to LAC, the MIF of the IDB began four years ago to commission studies, sponsor conferences, and finance projects in order to help:

Challenges Ahead and MIF Strategy

Increase Financial Resources for Remittances Recipients

reduce the costs of transferring remittances

mobilize savings through involvement of formal financial institutions

increase and easeaccessibility

of transmission

channel migrant capital into productive investment


Investment

Financial Inclusion

Cost

Data

Surveys and Surveys and ConferencesConferences

Projects promoting Projects promoting inclusion of microfinaceinclusion of microfinace

Studies, Conferences Studies, Conferences and innovative and innovative solutionssolutions

Projects: Productive investment,Projects: Productive investment,Housing, securitizationHousing, securitization

Strengthen data collection for private sector

Promote competition and best practices

Financial Intermediation and banking for the unbaked

Provide more option for senders and recipients

Levels of activitiesChallenges Ahead and MIF Strategy

IMPROVE TRANSPARENCY

PROMOTE FAIR COMPETITION AND PRICING

SEEK PARTNERSHIPS AND ALLIANCES

IMPROVE DATA

ENCOURAGE FINANCIAL INTERMEDIATION

PROMOTE FINANCIAL LITERACY

APPLY APPROPRIATE TECHNOLOGY

LEVERAGE DEVELOPMENT IMPACT

SUPPORT SOCIAL AND FINANCIAL INCLUSION

DO NO HARM

EXPAND FINANCIAL SERVICES

MIF Core Recommendations

Governments, International organizations and other institutions must design their programs in order to develop and support policies and programs to help increase the multiplier effect of remittances. However one central principle should be in mind:

“It’s their money”. If these efforts are successful, transnational families will have more money available for their own purposes, and they will be empowered with more options in using those resources.


III. MIF Projects and Initiatives

Ratings of Financial ProductsFinancial Product Senders’

scoreRecipients’ score

Insurance Investments 9.1 8.9Banking Investments 8.3 9.0Housing Investments 8.0 8.6Educational Investments 7.3 8.4Microfinance Institution Loans 6.0 8.0

Direct Payments 7.7 6.2Agriculture Credits 4.4 6.2

To date MIF has implemented 23 projects for a total of US$225 million (US$62 in Technical assistance). Projects are classified in 3 categories.

MIF Projects and Initiatives

1 2

Financial Intermediation /

Banking & Housing• AR- DR – EC –

GU – JA – ME – PE

• Reg. Programs

3

Productive Investment of

migrant Capital• Brazil• Peru• Mexico

Regulatory Framework

(Public Sector)Regional Initiatives

Regional Program Improvement of Remittance DataObjective: Standardize remittance data collection and reporting in the region.Partner: Center for Latin American Monetary Studies (CEMLA)Activities: Examine best practices for data collection in the region. Harmonize regional practices. Provide recommendations to Central Banks for improvements in data collection.

MIF Projects: Examples

Regional Program Implementation of the WB/BIS General Principles for International Remittance ServicesObjective: Analyze the remittance market and payment system in individual countries in the region. Implement the general principles.Partner: World Bank and the Center for Latin American Monetary Studies (CEMLA)Activities: Fund missions to examine the remittance market in countries. Evaluate the degree of compliance with the General Principles. Provide recommendations to further implement the principles.


Regional Program Strengthening Microfinance Institutions through Remittance Transfers

Objective: link remittances sent from the U.S. with microfinance institutions in LAC. Partner: Centro Acción / Acción Internacional Activities: promote the participation of microfinance institutions (MFIs) in the delivery of remittances as a way to reduce transfer costs and increase the access of recipient household to financial services.


Ecuador Promoting Migrant Remittances from

Spain

Objective: Support Banco Solidario, a leading regulated microfinance institution that entered the remittances market, to receive remittances from Spanish Credit Unions.

Partners: Banco Solidario (Ecuador) CECA (SPAIN)Activities: finance technical infrastructure, training and marketing support needed to establish partnership with Spanish Credit Unions.


Brazil

Venture Capital Fund for Returning Entrepreneurs from Japan

Objective: Creation of the Brazilian Remittance Fund project to promote entrepreneurial activities by those Brazilian temporary workers overseas – or dekassegui -who desire to start businesses upon their return to Brazil. Partner: SEBRAE – Banco do Brasil


Mexico Working with Hometown Associations to Promote Investment of Remittances Objective: Promote productive activities of mostly agribusiness-related economic groups established primarily by female workforce in the migration-affected rural areas of MexicoPartner: Fundación de Productividad en el Campo (FDPC)Activities: Address the lack of business skills, market and information access, and critical seed capital financing in rural communities in the states of Guerrero, Oaxaca, and Michoacán.



New Frontiers: Housing Mi Casita, Perú. Help increase access to

martgage financing for middle to lower income households and help promote, in the long run, a secondary mortgage market through securitization of mortgage loans.

Su Casita, México. Help develop US dollar based mortgage loans and enhance the development of workers’remittances from the US to México by enabling remittance flows to be used to purchase houses.

Housing projects

Sociedad Hipotecaria Federal (SHF), México. Help increase the efficiency of the Mexican mortgage system and facilitate its expansion in the medium income segment of the population, particularly in areas affected by migration.

Caja de Compensación Familiar de Antioquia, COMFAMA, Colombia. Aims at channeling remittances to investment in low-income housing through several strategic alliances with banks, developers, “ferias de la construcción” and migrants’ organizations.

Housing projects

Banco Agrícola, El Salvador. Create a housing finance market for transnational families, through transnational mortgage loan for the purchase of homes in El Salvador and to leverage the development impact of remittance flows from US to El Salvador.

Housing projects

Our pipeline: Mutualista Pichincha, Ecuador. Channel

remittances to medium-low income housing. CIPAE, Paraguay. Housing microfinance for

community based housing cooperatives. FUPROVI, Costa Rica. Development of Economic

Indicators for Hosuing projects. PRODEL, Nicaragua. Facilitate the access of

medium and long term financing to low income families, through loan and Technical Cooperation.

Inter-American Development BankMultilateral Investment Fund

Inter-American Development Bank

Gregory WatsonRemittance Program Coordinator

(202) [email protected]

Documents

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