Remittances and development: Its impact on U.S./Latin American banking/financial institutions Manuel Orozco, Senior Fellow & Project coordinator MIF-IFAD.

Remittances and development: Its impact on U.S./Latin American banking/financial institutions

Manuel Orozco, Senior Fellow & Project coordinator MIF-IFAD Remittances and Development

ProgramWashington, DC

International Payments Systems, October 7th, 2004Federal Reserve Bank of AtlantaAtlanta, Georgia

Policy dimensions of remittancesDynamics of remittances1. Benefit to households2. Distributive nature

1. Rural Sector2. Country

3. Macro-economico Impact1. FC source2. Counter-cyclical role3. Multiplying effect

4. Tied to finance5. Part of a broader process:The 5Ts

Problems• Transaction Costs• Limited competition• Limited participation of

S&C institutions• Security• No economic policy

United States1. Expand the acceptable forms of identity used by banks:2. Expand financial services that banks and CUs offer to immigrants 3. Partnerships with community based organizations to create social bridges.4. Enhance the role of the Community Reinvestment Act (CRA) 5. Link financial literacy to the value of remittances. 6. Promote strategic alliances among U.S. and

Latin American banks and money transfer businesses.7. Disclosure

Latin America• Monitor money transfers, particularly the exchange rate• Motivate banks through tax and

other rewards to reach out to remittance senders and recipients. • Open low-maintenance banking facilities in areas

near remittance receiving households• Offer first time deposit accounts with

varying financial incentives;• Attract remittance senders into the home country’s banking system;• Allow and enable credit unions, micro-finance institutions,

and popular banks as remittance agents and deposit holders. • Promote the adoption of new technologies for the poor.

Opciones o soluciones

GDP: (X-M) + I + G + C

-DOMESTIC SAVINGS - INVESTMENT-FOREIGN SAVINGS - INVESTMENT

-FDI: Transnational capital, migrant capital investment-TECHNOLOGY TRANSFER-UNILATERAL TRANSFERS

-ODA- BILATERAL & MULTILATERAL-PRIVATE DONATIONS

FOUNDATIONS, PPOs, HTAs-WORKER REMITTANCES

-Maquila, Tourism, Non-traditional exports-Transportation, Telecommunication, Nostalgic Trade

The national income equation in Latin America: a rent seeking and courtesan state?

Immigrant economic practices (annual expenses)

ConsumptionDonationsFamily remittancesCapital investment

Household economy (US$270)

Community(US$10,000 year)

Trade and services retail(US$3,000) Property

and other I(US$5,000)

Benefit to familiesAverage amount sent and number of remittance dependents

166.73

189.02

235.48

150

160

170

180

190

200

210

220

230

240

One to two Three to four Five or more

Average amount sent and length of time living in U.S.

170

190

210

230

250

270

290

Less than one year One to three Four to six Seven to nine Over ten

Years living in U.S. Years sending money

Average amount sent and length of time living in U.S. (by country)

100

150

200

250

300

350

400

450

500

Menos de un año Entre uno y tresaños

Entre cuatro y seisaños

Entre siete ynueve años

Entre diez y doceaños

Entre trece yquince años

Más de quinceaños

Colombia Cuba Ecuador El Salvador Guatemala Guyana Honduras

Mexico Nicaragua Dom. Rep. Bolivia

Remittances and income distribution

Linear Regression

0.0200 0.0400 0.0600 0.0800 0.1000

Lowest 20%

0.00

100.00

200.00

300.00

RE

MIT

(PC

)

Belize

BoliviaBrazil

Colombia CR

DR

Ecuador

ELS

GUA

Guyana

Haiti

Honduras

Jamaica

MEX

NICAR

Parag Peru

T&T

Venez

REMIT(PC) = -8.11 + 2961.76 * low20R-Square = 0.25

Anti-cyclical nature: Quarterly flows to selected Latin American countries

20

70

120

170

220

Jan-

99

Mar

-99

May

-99

Jul-9

9

Sep-9

9

Nov-99

Jan-

00

Mar

-00

May

-00

Jul-0

0

Sep-0

0

Nov-00

1-Ja

n

1-Mar

1-May

1-Ju

l

1-Sep

1-Nov

2-Ja

n

2-Mar

2-May

Jul.

2002

Sept.

2002

Nov. 200

2

3-Ja

n

3-Mar

3-May

3-Ju

l

3-Sep

11/1/

2003

5

5.5

6

6.5

7

7.5

8

8.5

9

Jamaica

Guatemala

El Salvador

Dominican Republic

Latino Unemployment

Guatemala and the coffee crisis

0

50

100

150

200

250

-

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

Remesas

Café valor millon

Dominican Republic: Remittances, prices, interest and exchange rates

90

110

130

150

170

190

210

230

1/1/

1999

3/1/

1999

5/1/

1999

7/1/

1999

9/1/

1999

11/1/

1999

1/1/

2000

3/1/

2000

5/1/

2000

7/1/

2000

9/1/

2000

11/1/

2000

1/1/

2001

3/1/

2001

5/1/

2001

7/1/

2001

9/1/

2001

11/1/

2001

1/1/

2002

3/1/

2002

5/1/

2002

Jul. 2

002

Sept.

2002

Nov. 200

2

1/1/

2003

3/1/

2003

5/1/

2003

7/1/

2003

9/1/

2003

11/1/

2003

1/1/

2004

3/1/

2004

15

20

25

30

35

Remittances (left axis)

Consumer Prices (left axis)

FX (right axis)

Lending Rate (right axis)

Minutes in phone calls from the U.S. to Central America and the D.R. (1996-2002)

0

200,000,000

400,000,000

600,000,000

800,000,000

1,000,000,000

1,200,000,000

1,400,000,000

1996 1997 1998 1999 2000 2001 2002

Cuba Dom. Rep. El Salvador Guatemala Honduras Nicaragua

Globalization: Percent of people who send remittances and buy home country goods, call regularly home,

donate, travel and spend money in their home country

Tourism

Transp Transfer

Trade

Telecomm

5Ts

Spends up to US$1,000Cuba 79Colombia 46Ecuador 7El Salvador 34Guatemala 50Guyana 33Honduras 55Mexico 22Nicaragua 66Dominican Rep. 32

Purchase home country goodsCuba 81Colombia 29Ecuador 95El Salvador 56Guatemala 50Guyana 82Honduras 74Mexico 76Nicaragua 83Dominican Rep. 65

Calls over 30 minutes a weekCuba 40Colombia 10Ecuador 13El Salvador 59Guatemala 64Guyana 38Honduras 29Mexico 56Nicaragua 26Dominican Rep. 44

Remittances

Visits home countryCuba 22Colombia 13Ecuador 38El Salvador 26Guatemala 9Guyana 39Honduras 12Mexico 23Nicaragua 19Dominican Rep. 68

DonationsCuba 5ColombiaEcuador 10El Salvador 3Guatemala 3Guyana 27Honduras 7Mexico 4Nicaragua 4Dominican Republic 3

Annual Remittance Transfers to Latin America

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

U.S. Billions

$0.00

$2.00

$4.00

$6.00

$8.00

$10.00

$12.00

$14.00

$16.00Mexico, US Billions

Colombia

Dominican Rep.

Ecuador

El Salvador

Guatemala

Honduras

Jamaica

Nicaragua

Cuba

Haiti

Mexico (right axis)

Source: Central Bank of each country. Estimates for Cuba, Haiti and Nicaragua

Crisis bancaria en RD

Crisis ec. en Ecuador

Crisis del café en Guatemala

Percent of remittance senders who say they visit home country (%)

0

5

10

15

20

25

30

35

Tres o más vecesal año

Dos veces al año Una vez al año Una vez cada dosaños

Una vez cada tresaños

Viajo poco

Mexico

El Salvador

Dominican Rep.

Ecuador

Guyana

Colombia

Datos recogidos de la encuesta e inmigrantes enNew York conducida por el autor, administrada por Emmanuel Sylvestre & Assoc. Resultados presentados en Orozco, Manuel (2004), Distant but close: Guyanese transnational communities and their remittances from the United States Inter-American Dialogue, Informe encargado por la U.S. Agency for International Development. Washington, DC. Enero..

Tourism: one of the 5Ts. . .

Dominicans living abroad who visit the Dominican Republic

300,000

350,000

400,000

450,000

500,000

550,000

1996 1997 1998 1999 2000 2001 2002 2003

14.00%

14.50%

15.00%

15.50%

16.00%

16.50%

17.00%

Dominican tourists (#)

Dominican tourists (%)

Remittance senders: frequency of calls to relatives (%)

0

10

20

30

40

50

60

70

Dos o mas vecespor semana

Una ves a lasemana

Una vez cada dossemanas

Una vez al mes Llamo poco

Mexico

El Salvador

Dominican Rep.

Ecuador

Guyana

Colombia

Datos recogidos de la encuesta e inmigrantes enNew York conducida por el autor, administrada por Emmanuel Sylvestre & Assoc. Resultados presentados en Orozco, Manuel (2004), Distant but close: Guyanese transnational communities and their remittances from the United States Inter-American Dialogue, Informe encargado por la U.S. Agency for International Development. Washington, DC. Enero..

Phone calls to selected Latin American countries

539,316,583

350,246,482

1,212,642,419

791,181,750

$226,917,184$179,004,765

$221,321,077

$211,337,615

$96,976,445$86,694,102$120,278,239$124,506,131

492,510,153

305,441,973

660,806,085634,940,097

0

200,000,000

400,000,000

600,000,000

800,000,000

1,000,000,000

1,200,000,000

1,400,000,000

Total minutos(2000)

Ganancia en USA Pago a país Minutos de hogara hogar (2003)

El Salvador

Guatemala

Dominican Rep.

Colombia

Source: Encuesta de inmigrantes en New York; US Census Bureau; 2000 and 2001 International Telecommunications Data, Linda Blake and Jim Lande. Washington, FCC, December 2001, and January 2003. * calculo basedo en un promedio de 4 llamadas al mes por 5, 8, 15, 25 y 30 minutos por llamada Formula utilizada es ∑ de llamadas = minutos anuales * Porciento que llama * Porcentaje inmigrantes que remiten (Censo 2000 de pobl.)

Remittance senders who buy home country goods (%)

95.00% 93.00%

77.70%

65.30%

53.00%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

100.00%

Ecuador Mexico Guyana DominicanRep.

El Salvador

Data reported from survey of immigrants in New York conducted out by the author, administered by Emmanuel Sylvestre and Assoc. Results reported in Orozco, Manuel (2004), Distant but close: Guyanese transnational communities and their remittances from the United States Inter-American Dialogue, Report commissioned by the U.S. Agency for International Development. Washington, DC. January..

Purchase of nostalgic goods by Nicaraguan remittance senders

0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0%

Queso

Pan

Tamales

Te

Comida

Ron

Ropa

Cigarros

Café

Dulces

Artesanías

125,000 personas que gastan $100 anuales en queso: $12.5 millones. Exportación Nicaraguense de queso es aprox. $30 millones.

Goods bought by Guyanese diaspora

62%

58%

51%

49%

47%

46%

42%

38%

36%

32%

32%

29%

27%

25%

22%

21%

0% 10% 20% 30% 40% 50% 60% 70%

Spices (curry, )

Fresh Fish

Peppers

Salted Fish

Noodles

Fresh Fruits and vegetables

Rum

Peas

Processed fruit

Sugar

Other

Cook utensils

Pickles

Craft Items

Cigarettes

Confectioneries

Immigrants and bank accounts

3842

35

47

69

21

71 71

49

38

19

48

0

10

20

30

40

50

60

70

80

No Bank Account (%)

Colombia Cuba Ecuador El Salvador

Guatemala Guyana Honduras Mexico

Nicaragua Dom. Rep. Bolivia Latinos

Source: Data reported from survey of immigrants in Chicago, DC, New York, Los Angeles and Miami commissioned by the author, administered by Emmanuel Sylvestre, Protectora Inc. August 2003.

Why doesn’t have a bank account?

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

45.00%

Do not trust banks Doesn't have papers Doesn't need bank acc.

Colombia Cuba Ecuador El Salvador Guatemala Guyana Honduras Mexico Nicaragua Dominican Republic

Do you have debit, credit card, or both

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

I have both Credit Debit I have none

Colombia Cuba Ecuador El Salvador Guatemala Guyana Honduras Mexico Nicaragua Dominican Republic

Do you have financial obligations (loans)?

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

Colombia Cuba Ecuador El Salvador Guatemala Guyana Honduras Mexico Nicaragua Dominican Republic

Money TransferCompany

MTC’s bank

MTC’s rec. country Agent Distributor

AD’s bank

Data Transfer Report(customer’s sendingInformation)

Wire Transfer (cash transferAmount)

MTC’s AgentPOS

MTC’s AgentPOS

Remittance sender

Remittance

recip

ient

Regulatory EnvironmentComplianceMonitoring

International money transfer operation

MTC: Money transfer companyPOS: Point of saleAD: Agent distributor (on receiving side)

TWO DATASTREAMS

Players: MTO, agents at POS, distributing agents, banksType of MTO player: -Transfer: WT, MO, hand delivery-Scope: National, Regional/country; Financial; CU, unlicensed

Cost comparison between principal amount sent and sending $200

12.11%

11.32%

10.63%10.33%

8.88%

8.56%8.17%

7.57%

7.90%7.48%

6.93%

7.30%6.70%

7.26%6.69%

6.37%

5.56%5.56%

5.75%4.74%

5.36%4.53%

7.32%4.40%

0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00% 14.00%

Cuba

Dominican Rep.

Jamaica

Haiti

Venezuela

Bolivia

Latin America

Nicaragua

Honduras

Guatemala

Colombia

Peru

El Salvador

Ecuador

Mexico

PrincipalUS200

Changes over time in costs to send principal amount

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

Mexico(380)

Ecuador(300)

El Salvador(290)

Bolivia(280)

Guatemala(270)

J amaica(260)

Honduras(260)

Colombia(260)

Venezuela(230)

Dom. Rep.(200)

Peru (200) Haiti (160) Nicaragua(150)

Cuba (150) Guyana(200)

LatinAmerica

(250)

2001 2002 2003 2004 banks

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

Dominican Republi Guatemala Mexico Colombia

Standard deviation among companies' foreign exchange differential

2001 2002 2003 2004

39.80%

32.70%

28.30%

28.30%

21.90%

20.80%

16.20%

15.50%

14.30%

13.20%

10.80%

7.80%

7.30%

7.30%

3.60%

1.70%

1.60%

0.40%

0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% 35.00% 40.00%

Venezuela

Brazil

Dominican Republic

Honduras

Jamaica

Mexico

Guatemala

Argentina

Trinidad and Tobago

Colombia

Nicaragua

Barbados

Guyana

Chile

Peru

Belize

Costa Rica

Uruguay

Comission in the exchange rate as percent of total costs

Cost of Remittances to Mexico, May 17-28(cost to send US$300)

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

17 18 19 20 21 24 25 26 27 28

FX Tarifa Costo total

0.050 0.075 0.100 0.125 0.150

percent

0.00

1000000000.00

2000000000.00

3000000000.00

volu

me

Cuba

Venezuel

NicaraguHaiti

Bolivia

Dom. Rep

JamaicaPeru

Colombia

Guatemal

Honduras

Mexico

El Salva

Ecuador

Cost of remittances and volume

Banks, Remittances and immigrants

•Identified 100 banks accepting consular ID•Building of pricing dataset of 60 banks•Qualitative Interviews to 22 banks and credit unions•RESULTS-

Banks and offers of remittance transfers

0

5

10

15

20

25

30

35

40

45

50

Type of r emit t ance ser vice by inst it ut ions

Bank as MTO Bank as BankCr edit Union Bank off er ing ATMs

0

10

20

30

40

50

60

70

80

Char acter ist ics of banks off er ing r emit tance r el ated ser vices

Remit t ance t r ansfer off er ed onl y t o inst itut ion’s member s

Issue an ATM car d for r el at ive in Mexico

Al l ow bank to bank deposit s

Charges made by banks and credit unions to transfer remittances to Mexico (by method used)

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

2003 2004

Debit Car d withdr awal at ATM (Community banks)US Bank as MT, pick up at Mexican Bank/AgencyCr edit UnionsTr adit ional wir e t r ansfer (SWIFT)

Observed ResultsInstitution Remittance Transfers Accounts among

remittance senders

• Commercial Banks

– Banco UNO, Central América <10,000 20%

– Banco Salvadoreño, El Salvador 12% market share 17,000

– Banco Industrial, Guatemala 20% market share 30%

– Citibank, Wells Fargo, Bank of America

<30,000 10,000-200,000

– U.S. Community/local banks [see next page]

• Government

– Red de la Gente, Mexico 25,000 month 5% (1200)

• Non-profit: MFIs and Credit Unions

– Fedecaces (Credit Union), El Salvador

15,000 (US$60M), 3% market share

>10%

– Santa Cruz, Mixtepec, Mexico US$250,000 >50%

– Banco Solidario, Ecuador 16,000 >30%

–Cajas Populares Mexicanas 21,000 >50%

Banking the unbanked: mainstreaming Latinos as financial agents

• The interest of financial institutions is not on the transfers, but on making a long term relationship with the sender.

• Two approaches: – Focusing on specific strategies to the Hispanic market – Use of the same marketing tools to bring Hispanics. – Result: mainstreaming Latinos as financial agents.

• Two premises: – Realistic approach about what to offer and how. – Accept Mexico’s Matricula Consular as a valid form of

identification to open a bank account.• Financial services offered• Marketing tools• Expected results