Remittances and MFIs: Issues and lessons from latin america

Abstract

Remittance flows to Latin American and the Caribbean reached $45 billion in 2004. For countries such as El Salvador, Nicaragua, Jamaica and others, remittances represent 10 percent or more of GDP and are one of the most important sources of foreign currency (IAD 2004). At the household level, remittances are a critical source of income for families living in poverty. Poor households receiving remittances have significant purchasing power relative to peer households that do not receive them (Orozco 2004). However, recipient households have limited access to financial institutions that provide financial services such as secure remittance delivery, safe interest-earning savings instruments, and loans. The recent entry of microfinance institutions (MFIs) into the remittance market has increasingly been advocated as a mechanism for leveraging remittance flows in ways that would achieve development goals. Donors have begun to provide technical assistance to help MFIs develop linkages with formal money transfer organisations (MTOs) and have enthusiastically supported such partnerships. Donors' underlying assumption is that, due to their close proximity to recipient communities and experience in serving low-income households, MFIs are in a unique position to reach recipients with low-cost transfer services and other financial products. Moreover, by providing these services - often through partnerships with MTOs - MFIs can expand their operations and increase their revenues. Despite these assumptions, little empirical evidence has been collected on the practices and performance of MFIs in the remittance market. Are MFIs located in areas where current or potential remittance recipients reside? Can they effectively compete with MTOs? Do remittance recipients obtain a broader range of financial services? To begin answering questions such as these, we present a framework for assessing the development impact of MFI entry into the remittance market. We then propose a series of indicators linked to that framework and provide an initial analysis of the performance of the 27 MFIs and two credit union federations we studied.2 We conclude with suggestions for further research. The findings presented here are based on interviews with 27 MFIs and 2 credit union federations operating in Latin America and the Caribbean. The institutions were asked approximately 25 questions relating to their presence in communities receiving remittances, their remittance transfer services, cross-selling efforts, information technology, and management information systems. The information gathered was quantified to get a sense of overall trends, and to serve as a basis for future research and identification of best practices. Due to the sample size, comparisons and conclusions are tentative. © 2009 Springer-Verlag Berlin Heidelberg.