Sending Money Home

1. Sending Money Home Remittances As a Development Tool in Latin America and the Caribbean May, 2007

2. The Multilateral Investment Fund Origin and Mission • 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 enhancement • MIF also invests in SMES through its investment Fund facility.

3. Remittances as a Development Tool in LAC Background on Remittances 1 Challenges Ahead and MIF Strategy 2 MIF Projects and Initiatives 3

4. I - Background

5. Background: Volume of Remittances 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.

6. Background: Volume of Remittances

8. Background: Volume of Remittances 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

9. Total Money Sent

10. Background: Market Context Market dominance by a few large companies and limited information and transparency Undocumented status of a significant percentage of migrants Limited formal banking and/or microfinance institutions in recipient countries Economic, legal, and technical barriers to entry in the remittance market, both in the sender and recipient countries Market Failure? Low negotiating power among fragmented migrant communities A less developed banking culture in the migrant community

11. Cost of Transfer • 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.

12. Cost of Transfer

13. Cost of Transfer

14. Background: Transfer Mechanisms 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.

15. Background: Payment of Transfers Remittance payers by type

16. II. Challenges Ahead and MIF Strategy

17. Challenges Ahead and MIF Strategy 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: 1 2 3 Lower transaction costs by promoting competition, and encouraging innovative technologies; Leverage the development impact of remittances, once received Document the increasing importance of remittances to the Region

18. Challenges Ahead and MIF Strategy increase and ease accessibility of transmission reduce the costs of transferring remittances mobilize savings through involvement of formal financial institutions channel migrant capital into productive investment Increase Financial Resources for Remittances Recipients

19. Challenges Ahead and MIF Strategy Levels of activities Provide more option for senders and recipients Projects: Productive investment, Housing, securitization Investment Financial Intermediation and banking for the unbaked Projects promoting inclusion of microfinace Financial Inclusion Studies, Conferences and innovative solutions Promote competition and best practices Cost Strengthen data collection for private sector Surveys and Conferences Data

20. MIF Core Recommendations IMPROVE TRANSPARENCY DO NO HARM PROMOTE FAIR COMPETITION AND PRICING IMPROVE DATA APPLY APPROPRIATE TECHNOLOGY ENCOURAGE FINANCIAL INTERMEDIATION SEEK PARTNERSHIPS AND ALLIANCES PROMOTE FINANCIAL LITERACY EXPAND FINANCIAL SERVICES LEVERAGE DEVELOPMENT IMPACT SUPPORT SOCIAL AND FINANCIAL INCLUSION

21. Challenges Ahead and MIF Strategy 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.

22. III. MIF Projects and Initiatives

23. Ratings of Financial Products

24. MIF Projects and Initiatives 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. 1 2 3 Regulatory Framework (Public Sector) Regional Initiatives • Financial Intermediation / Banking & Housing • AR- DR – EC – GU – JA – ME – PE • Reg. Programs • Productive Investment of migrant Capital • Brazil • Peru • Mexico

25. MIF Projects: Examples Regional Program Improvement of Remittance Data Objective: 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.

26. MIF Projects: Examples Regional Program Implementation of the WB/BIS General Principles for International Remittance Services Objective: 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.

27. MIF Projects: Examples 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.

28. MIF Projects: Examples 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.

29. MIF Projects: Examples 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

30. MIF Projects: Examples 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 Mexico Partner: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.

31. MIF Projects: Examples • 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.

32. 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.

33. 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.

34. Housingprojects • 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.

35. Inter-American Development Bank Gregory Watson Remittance Program Coordinator (202) 942-8112 Gregoryw@iadb.org