Migrant savingS and alternative investment

1. Migrant savingS and alternative investment Juan Buchenau February, 2008 Microfinance Summit Nepal, 2008

2. Financial services for migrants and their families, some considerations

3. Nepal • Population: 27.7 million • GDP / capita: USD 290 • About 19% of households receive remittances • Volume of remittances USD 1,200 million • Remittances contribute 14% of GDP • Number of registered Nepalese abroad: about 1 million (according to DRC) • Remitters and their families are an interesting client segment

4. Main forms of remittance transfer into Nepal • “The main reasons for not using a commercial bank is the lack of banks, limited knowledge about commercial banking and the slow transfer process. (Hand carriage and hundi are much faster.)”(Wyss,2003) • An additional constraint for the use of banks is lack of acceptable ID Source: Ferrari et. al, 2007

5. Nepalese migration and remittances • Main countries of migrant destination and forms of remittance:

6. Use of remittances in Nepal Source: Ferrari et. al, 2007

7. Characteristics migrant families Migrant in host country Family in home country • Smaller part of family income • Usually own house & land • High stability of residence, income varies • Lower cost of living • No credit history , usually low level of financial education • Larger part of family income • Almost no assets • Stability of residence and income varies • Higher cost of living than in home country • No credit history, usually low level of financial education

8. Stages in the temporary migration cycle

9. Household cash-flow in different stages of the migration process

10. Segmentation of migrants • Permanent documented migrants (e.g. to US) • Temporary documented migrants • Permanent undocumented migrants • Temporary undocumented migrants Income of migrant Stability Certainty

11. Demand for financial services • Investments in bonds, etc • Asset building (Investment in home / real estate, business. etc): Especially important for migrant - reliable • Savings / loans for education of children • Life insurance (insuring migrant’s life) • Health insurance for family • Home repair / improvement • Loans to migrate (documented migrants) • Remittance: safe, reliable, fast Services can be provided In home country Demanded with increasing income and stability, and time abroad

12. Main issues to consider by MFIs and other financial institutions in Nepal • Partially diverging interests of migrants / family at home: migrant more “investment”; family more “consumption” • Carefully project incomes and expenses, fees from remittances may be very small • Elements of a strategy to introduce remittance – related products: • Know the market ; learn about the characteristics of migration / remittances / income: level of income, stability, seasonality, risks (through research / focus groups) • Set up a partnership with a suitable MTO to deliver remittances (consider the “local and regional corridors”) • Start delivering remittances, learn about your customers in real life and design appropriate accounts • Test the products before introducing at all branches

13. Experiences: Deposit into accounts,“People’s network” in Mexico

14. Mexico & “People’s network” (La Red de la Gente) • Mexico: • Number of inhabitants102 million • GDP / capitaUSD 7,500 • Volume of remittances USD 25 billion • Volume of remittances as % of GDP3% • “People’s Network”: • 122 institutions, mostly cooperatives (ranging from a few thousand members to more than 500,000) • Over 1,300 points of delivery • Over 2,5 million members

15. Description of the scheme and benefits for account holders • Under this scheme, migrants can directly deposit money into accounts which are operated by a bank or deposit taking financial institution in their home country • The accounts are offered by a network of regulated MFIs and cooperatives, who use a platform run by BANSEFI (a public bank). BANSEFI also offers these accounts • Main benefits for account holders: • Account holders build a relationship with the account holding institution which can facilitate access to loans • Deposits into account are available overnight, fees are significantly lower and exchange rate better than for cash to cash remittances • Convenience of withdrawal, especially in the case of institutions offering debit cards. If cards can be used internationally, then both, sender and recipients can have access

16. Types of accounts • Individual deposit account, access only by migrant: • Especially important for migrants given the risks they face (e.g. with regards to their legal status) • Such accounts allow migrants to save for future investments • A constraint is that these accounts have to be opened in Mexico, they cannot be opened abroad • Individual deposit account access only by relative or friend in home country • The reception of remittances through this type of accounts reduces the risk faced by recipients as they can leave part of the money in the account • These accounts are usually only used by recipients to withdraw money, they do not accumulate larger balances • Joint deposit account which can be accessed by migrant and a relative or friend • Require a clear understanding of both about the handling of the account

17. Branch network delivering remittances through deposit accounts • Main account features: • Opening balance: USD 5 • Opening fees: none • Deposit or withdrawal fees at local branch: none

18. Benefits for one of the institutions handling “remittance – accounts” • Growth of customer base: institutions offering remittances and remittance – accounts have been able to increase the number of customers they serve • About 36% of remittance recipients have opened savings accounts (but save only a very small portion and not yet regularly) • Possibility to cross-sell other products which generate income for the institution: • About 7% of recipients at one institution have obtained loans for housing (which then had a good performance) • Some institutions have started to sell insurance products (health and life)

19. Requirements for the scheme to work • Accessible and appropriate locations for both, senders abroad and recipients in home country • Strong marketing campaigns combined with financial literacy programs for both, senders and recipients to help them set up and manage the accounts and any special features (e.g. debit cards) • Availability of a technological platform to manage transfers and deposits • Access to national / international debit – card network

20. Potential enhancements of the scheme • Use of mobile banking to: • Inform recipients / senders of the status of remittance transactions • Send or receive remittances (e.g. the “electronic wallet” run by G-Cash in Philippines or WIZZIT in South Africa) See hereto: http://technology.cgap.org/category/topic/mobile-banking/

21. Case 2: Loans for housing to Salvadorian immigrants in USA

22. El Salvador & transnational housing loans • El Salvador: • Number of inhabitants 7 million • GDP / capitaUSD 2,500 • Volume of remittances USD 3.3 billion • Volume of remittances as % of GDP18% • Institutional partnership: • In El Salvador: 1 MFI and 1 coop with a total of 33,000 customers • In USA: a Microfinance Company with 7 branches serving immigrants from Latin America

23. Description of the scheme (I) • Under this scheme, migrants can directly apply for loans in USA, which are then disbursed in El Salvador • The loans are granted by the institutions in El Salvador, backed by a mortgage in that country • The loans can be used to finance either investments in housing (acquisition / construction) or into businesses (the latter backed with existing propeties) • Investments into housing are an important way to increase a migrant’s households assets while improving the living conditions. Loans for housing are highly valued by migrants: • Low-income: loans for housing improvement, acquisition of land • Higher-income: loans for the acquisition of complete dwellings

24. Description of the scheme (II) • Loan appraisal is carried out in USA (mainly assessing migrant’s payment capacity and credit history) and in El Salvador (mainly assessing the credit history and the quality / value of the mortgaged property) • Such loans are expensive to grant • Loan conditions: • Appraisal fee: USD 100 • Disbursement fee: 1-2% of amount • Interest rate 11% - 18% p.a. • Minimum loan amount: USD 5,000 • Down-payment for home or land acquisition 10% - 20%

25. Main lessons learned with this scheme • Legal certainty for migrant: they insist in being included in the title of any acquired property • Risk factors for lenders: • Stability of employment and residence, especially for undocumented workers • Documented migrants: characteristics of work permit • Loans for construction may be very expensive to control • These loans are complex to coordinate, as many actors intervene: lender in El Salvador, broker in USA, migrant and relative or representative of migrant in El Salvador

26. Requirements for the scheme to work • Close coordination between lender in home country and broker in host country, streamlined procedures supported by IT to facilitate transactions • Possibility to follow up on migrants in host country in case of default (so far, the scheme had not experienced serious delinquency) • Well trained personnel in both countries • Availability of funds in host country • Legal infrastructure to sign contracts in host country which are binding in the migrant’s home country

27. Thank you! buchenau@msn.com