Participating in the recent USAID Diaspora Engagement Mini Series: Fostering Diaspora Investment in Developing Countries, AboutMicrofinance learned that in 2010, migrants sent back home $325 billion in recorded remittances.   Additionally, diaspora communities hold sizeable financial assets sometimes used to make investments in their country of origin. AboutMicrofinance set out to examine how remittances affect microfinance.

Traditionally remittances have been the purview of companies such as Western Union, but in recent years both MFIs and traditional banks have become increasingly involved in the business and its commercial relevance.  In addition to potential transfer fees, capturing this market provides an excellent opportunity to draw unbanked members of the population into the financial universe.  Studies have shown that 30-40% of remittances go to rural areas, and microfinance institutions (MFIs) serving such areas are uniquely positioned to meet the needs of their microfinance clients.  Furthermore, such microfinance institutions may generate surplus funds, which they can ‘invest’ in their local communities.  Some of these institutions have even been ‘encouraged’ to use remittances to create jobs that will help reduce the need to migrate.

While the majority of MFIs still do not offer remittance services (due to capability or regulation), others have entered the industry.  Accion, for example, is utilizing remittance services to promote the creation of savings accounts, increase the number of home insurance policies, and expand the general financial literacy of the recipient populations, among other things.  In addition, many MFIs have found that remittance histories provide a creative avenue to address issues of client credit worthiness, and the Nuevo Siglo Credit Union in El Salvador has even had remittance recipients purchase 60-day fixed term deposits.

Traditional banks, such as Citigroup, see this industry as a potentially important driver of various financial products, and thus a way to simultaneously empower low income populations and increase revenue levels. In 2005 the Citigroup Microfinance Group and Citibank North America formed a partnership with Banco Solidario, a microfinance organization in Ecuador, to create a program providing remittance transfers for as little as USD 5 between the two countries.  Upon receipt in Ecuador, the funds can be used for products such as housing loans, working capital loans, and savings accounts, and in the first year 11% of the remittances received were paid into a savings account; 5% of recipients opened their first ever bank account; and 85% started a banking relationship of some kind.

Yet, the remittance industry has not been immune to the global financial crisis.  According to the World Bank, remittance flows worldwide decreased by six percent from 2008 to 2009, but are nevertheless projected to grow by 6.2% in 2011.  Indeed, overall the remittance industry seems to have weathered the economic storm relatively well – and this has not gone unnoticed.   Increasingly aware of the import of these capital flows, developing countries are seeking ways to harness the diaspora for their capital needs through mechanisms such as diaspora bond.  This too brings challenges, however, as many members of the diaspora are hesitant to invest in their homelands due to concerns regarding the stability of the governmental and regulatory systems. But given the scope of the numbers involved, one can only expect the remittance industry to become an increasingly conspicuous aspect of the world financial system.