The Malaysia-The Malaysia-Indonesia Remittance Indonesia Remittance CorridorCorridor

The Malaysia-The Malaysia-Indonesia Remittance Indonesia Remittance CorridorCorridorMaking formal transfers the best option for Making formal transfers the best option for women and undocumented migrantswomen and undocumented migrantsMaking formal transfers the best option for Making formal transfers the best option for women and undocumented migrantswomen and undocumented migrants

East Asia Social Development UnitFinancial Market Integrity Unit (FPDFI)

The World Bank

22

Content

Global Remittance Trends

Indonesian Migrants: Vulnerability and Use of Remittances

The Malaysia-Indonesia Migration and Remittance Corridor

Transfer of Remittances

Implications for Policy

33

Global Migration Migration Trends: The number of migrants continues to increase

More than 190 million people – or about 3% of the world’s population are living in countries in which they were not born

IOM (2005) notes that:– There is a shift in destination countries

– A rise in undocumented labor flows

– An increasing feminization of migrant workers

In 2005, East Asia and Pacific Region accounted for $45 billion, or 17% of global recorded remittance inflows

Indonesia has 4.3 million citizens working overseas mostly in Middle East and Asia Pacific. Migration is increasingly feminized and increasingly undocumented.

44

Global Remittance Trends: Recorded remittance flows continues to increase

Private debt and portfolio equity

FDI

ODA

Recordedremittances

-25

25

75

125

175

225

275

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

e

2005

e

$ billion

55

Global Remittance Trends: Poverty Reduction

Evidence from a few household surveys shows that remittances reduce poverty

Cross-country evidence shows that a 10% increase in per capita remittances leads to a 3.5% decline in the share of poor people

Remittances also finance education and health expenditures, and ease credit constraints on small businesses

However, qualitative evidence suggests this may not be the case in Indonesia

66

Indonesian Migration

In 2005, remittances were estimated at US$5.3 billion, making remittances the second highest forex earner after oil and around 1.5% of GDP

This is lower than China ($22 billion) or Philippines ($14 billion)

680,000 workers left on contracts in 2006, almost 80% were women, 88% of whom work in informal sector and come from poor rural areas

77

Map:Migration and Remittances in Indonesia

88

TKIs migrate primarily for financial reasons, but migration is risky for several reasons:

Indonesian laws and regulations exacerbate migrant vulnerability (concentrate power in recruitment companies)

Malaysian laws and regulations weaken position of migrants (e.g. employers retain passports)

The cost of migration is high and migrants must borrow to finance migration

Lack of institutional framework and capacity for effective monitoring

Little or no accountability mechanisms

Weak support mechanisms for migrants in sending villages and destination places of work

Vulnerability of Tenaga Kerja Indonesia (TKI)

99

Estimated 45% of wages earned are sent back as remittances to families

Remittances used to pay debts, and for day-to-day living and consumption expenses of family left behind, for house building and improvement, and luxury consumer goods

Fewer migrants invest in health and education, or in productive activities

There is rarely a plan for investment of remittances and migrants have little control over the use of remittances while they are away (although they regain control when they return)

Families become dependent on remittances, and with few sustainable livelihood improvements, migrants get trapped in a cycle of migration

Indonesian Migrants: Use of Remittances

Main Challenge: How can the impact on poverty reduction be improved and sustained?

1010

The Corridor: Major Destinations for Indonesian Migrants

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

num

ber

of m

igra

nts

Taiwan

Saudi Arabia

Malaysia

Hong KongKuwaitUAE

1111

The Corridor:Indonesian migrants in Malaysia

Malaysia is second highest recipient of Indonesian migrant workers after Saudi Arabia and the number is increasing

17% of Malaysia’s workforce are from overseas: more than 60% of these are from Indonesia

Approximately 1.3 million documented and 700,000 undocumented Indonesian migrants worked in Malaysia in 2006

60% of documented Indonesian migrants in Malaysia are women

Undocumented workers travel without visas, overstay visa/work permit, change jobs without necessary procedures

They have no legal protection and are often exploited by Malaysian employers due to their illegal immigration status

1212

The Corridor:Remittance Characteristics

Fees to secure jobs can be several hundred dollars

Other formal costs borne by domestic workers migrating from Indonesia to Malaysia total about $340

Monthly salary between $145 and 200 for domestic workers

Average remittance amount is estimated at $115-$150 per transaction

In 2005, Indonesia received about $5.3 billion (IMF) in remittances of which about $2.7 billion was from Malaysia

Only about 20% total remittances arrive in Indonesia through formal channels, and even less - about 10% of remittances arrive in formal channels from Malaysia

1313

The Corridor:Remittance Trend While the number of documented TKI in Malaysia have been

increasing, the remittances sent to Indonesia through the formal system decreased both in real terms and as a percentage of total remittances

Outflows to Indonesia as a percentage of the total decreased from 35 percent in 1997 to 13 percent in 2006

Source: Bank Negara Malaysia, based on bank and RSP reporting

0

500

1,000

1,500

2,000

2,500

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

mill

ions

of

US

$

Grand Total

Other

IndonesiaUnited StatesSingapore

1414

The Corridor: Disparity in formal and total remittance flows

0

1

2

3

4

5

6

Totalremittances

leaving Malaysia

Remittancesfrom Malaysia to

Indonesia

Remittancesreaching

Indonesia fromMalaysia

Totalremittances into

Indonesia

Bill

ion

s o

f U

S$

Calculated from migrant stock Recorded through formal channels

1515

Costs and risks of remitting funds are considerable in proportion to TKI salary

Bank channels make up 90 percent of formal channels, but represent a slim percentage of total remittance flows

An unregulated industry has arisen to facilitate remittances in situations where remitting funds through formal channels is difficult

This industry includes account mediators, migration agents or agencies, and informal channels that are part of formal enterprises (money changers)

Transfer Mechanisms

1616

Migrant workers – especially undocumented ones have more incentives to use informal remittance channels

Returned TKIs have a generally clearer understanding of the costs and benefits of the different channels of remitting funds

Financial literacy among TKIs is

low

Transfer Mechanisms – Cont’d

1717

Comparing Incentives of Remittance Channels

BankPostal (money order)

MTOMoney

ChangerInformal Channels

Access without ID

no no no yes yes

Geographic coverage in

Malaysialimited good limited unknown good

Relative price of fees

variable inexpensive expensive inexpensive unknown

Speed moderate-slow slow fast fast variable

Language Barrier

variable variable variable variable none

Minimal Paperwork

no no no yes yes

Source: World Bank

Ince

nti

ves

Remittance Channels

1818

Migration CostsAnnual Cost of Migrating and Remitting Funds for an Indonesian worker in Malaysia

 

construction plantation domestic

work

average monthly salary a 170 80 157.5

average salary for a year 2040 960 1890

average amount remitted in one year b 918 432 850.5

average migration cost c -475 -363 -343

yearly remittance cost (to send from Malaysia) d -7 -7 -7

yearly remittance cost (to receive in Indonesia) -20 -20 -20

total cost -502 -390 -370

a. Average salary for a year was found by taking the average monthly salary in US dollars (provided by the Malaysian Ministry of Home Affairs) and multiplying by 12

b. Average amount remitted is based on Bank Indonesia estimate that a TKI remits approximately 45% of his or her salary

c. Average migration cost and yearly remittance costs (in US dollars) are based upon World Bank primary interviews with TKI and RSPs

d. Salary yearly remittance cost is based upon the assumption that workers remit twice a year through bank channels

1919

The number of migrants to Malaysia is increasing, increasingly feminized, and many undocumented migrants

Migrant workers are increasingly choosing non-formal means to transfer remittances because:– Identification: they can’t meet the requirements

– Access: they ( or the recipients) can’t reach the banks easily

– Cost: High cost of remitting through banks

– Competition: other means of transfer are more responsive to their needs

However, qualitative evidence suggests that improvements are needed for remittances to have a greater impact on poverty reduction

Possible security implications of large flows of unrecorded remittances

In Summary

2020

I. Make the formal sector accessible and responsive to migrant workers, while recognizing the need to establish basic requirements for transparency and regulation, through:

– Enhancing Security and Reliability of Identification Strengthen the reliability of passports by ensuring the same

number is not issued and by assessing the use of biometric information (ie. fingerprints etc)

Issue new ID cards for migrants, recognized by both countries and financial institutions

– Promoting Customization of Products and Organizational Structures Encouraging banks and postal systems to develop financial

products tailored to TKIs New rules allowing Malaysian money changers to act as RSPs

should be tailored to their economic and institutional capacity

Avenues for Policy Consideration

2121

II. Facilitate migrant workers access into the formal sector, via: – Expanding Financial Education

Financial Literacy Programs could be implemented at the pre-departure stage in Indonesia, and when foreigner cards are issued in Malaysia

Awareness raising programs for female TKI, through employers of female TKI and leaders of TKI communities, to promote empowerment and financial literacy

– Ensuring Better Assessment Techniques of Data and Regulatory Changes Longer period of observation to comprehensively assess market

responses to recent regulations adopting new registration system for RSPs in Indonesia

Improved data quality, gathering and reporting procedures, to expand existing knowledge of available data to create better informed policy choices for TKI

Avenues for Policy Consideration

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– Involving Relevant Development Actors to Facilitate Migration MFIs and NGOs could be convinced to finance migration for formal

and informal TKIs, under the condition that only formal transfers are used for future remittance transfers

Collateral for Migration could be guaranteed by local communities

III. Formalize and regulate the informal providers, while maintaining their accessibility to migrant workers, through:– Enabling strategic partnerships between formal and informal

remittance service providers The enhanced private sector participation would reduce transfer

costs and expand remittance flows Account mediators should be part of the formal channel for

distribution because these informal operators access rural communities in Indonesia where no banks have a presence

Recent regulatory legislation allowing individuals and informal corporate entities in Indonesia to legally provide remittance services should be properly monitored and implemented

Avenues for Policy Consideration

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