Volume 4 Remittances In Ethiopia - Cenfri

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Exploring barriers to remittances insub-Saharan Africa seriesVolume 4Remittances in EthiopiaNovember 2018

AuthorsBarry CooperAntonia EsserCentre for Financial Regulation & InclusionTel. 27 21 913 9510Email: [email protected] Vineyards Office EstateFarm 1, Block A99 Jip de Jager DriveBellville, 7530South AfricaPO Box 5966Tygervalley, 7535South Africawww.cenfri.orgi

Table of contentsTable of contents . iiAcronyms . iii1. Introduction .12. Remittance sector overview .22.1. Remittance market er realities.8Market barriers and enablers .93.1. Business case/commercial.93.2.Regulation. 113.3.Infrastructure. 123.4.Consumer-related challenges . 144. Conclusion and recommendations . 15Bibliography . 18List of figuresFigure 1. Ethiopian documented migrant stocks abroad and top 10 countries sendingformal remittances to Ethiopia .3ii

FTUSDautomated clearing houseanti-money laundering and the combating the financing of terrorismautomated teller machinecustomer due diligencecentralised online real-time and electronicEthiopian automated transfer systemelectronic funds transferEastern and Southern Africa anti-money laundering groupfinancial action task forceinternational monetary fundknow your customerministry of communications and information technologymicrofinance institutionmobile money operatormobile network operatormoney transfer operatornational bank of Ethiopianational financial inclusion strategynational IDover-the-counterpoint of saleremittance service providerreal-time gross settlementsustainable development goalssub-Saharan Africasociety for worldwide interbank financial telecommunicationUS DollarKey definitionsMobile money operator (MMO):A licensed mobile money service provider that develops anddeploys financial services through mobile phones andmobile telephone networks.Mobile network operator (MNO):A company that has a government-issued licence to providetelecommunications services through mobile devices.Remittance service provider (RSP):An entity providing services that enable the transfer ofremittance funds.Source: Authors’ own based on AFI (2013)iii

About the barriers to remittances in SSAseriesAt the time of writing, the average cost of remittances to sub-Saharan Africa (SSA) was 9% ofthe value of the transaction, compared to the global average of 6.9% (World Bank, 2018).Informal flows are rife, especially in SSA, and the trend is increasing in many corridors. Highamounts of informal remittances, coupled with the high cost of formal remittances areindicative of a formal market that is not functioning optimally to serve people’s needs. TheG20 and the Sustainable Development Goals (SDGs) made it an explicit target to reduce theprice to between three and five percent of the transaction value. However, a fine balanceneeds to be struck between lowering the cost and keeping remittance business profitable forproviders, especially in hard to reach areas, so that access for rural consumers is notcompromised. To do so, there needs to be an understanding of the market impedimentspreventing formal costs from decreasing and hindering access for consumers.This note is the fourth in a series of seven notes that explores the barriers to remittances inSSA to conclude on what is required to enable the formal market to fulfil its true potential.The series is organised as follows: Volume 1 provides an overview of key remittance corridors in SSA, from the perspectiveof both the receiving and sending countries. It analyses the correlation betweenmigration and remittances and introduces a categorisation of countries. Volume 2 outlines and ranks the market barriers to the efficient flow of remittances inSSA, drawn from existing literature and in-depth stakeholder interviews. Volumes 3 to 6 explore how the barriers manifest in the region by presenting fourcountry case studies from SSA: Uganda, Ethiopia, Nigeria and Côte d’Ivoire. Volume 7 draws conclusions and recommendations for SSA on how to overcome thebarriers to reduce informality and costs without compromising access in the region.This note explores the state of the remittance sector in Ethiopia and unpacks the keybarriers and enablers to the development of the formal remittances market, drawing on incountry stakeholder consultations from October 2017 and desktop research.iv

1. IntroductionA lifeline for households. Remittances are non-reciprocal transfers of money from an individualor household in one place to another individual or household in another place1 (Hougaard,2008). They can take many forms but are typically associated with working migrants that sendregular amounts of money to support their families and communities back home. Theadvantage of these payments is that they usually flow directly into the hands of households,which increases household income and reduces the likelihood of households falling intopoverty (International Organisation for Migration, 2005). This monetary support has positiveeffects on both education and health outcomes, and it has been shown to support humancapital development particularly in children (Gupta and Pattillo, 2009; Hassan, et al., 2017).Loyal diaspora ensures steady, largely informal, remittance inflows. Volume 1 of this series(“Where are the flows?”) revealed the array of countries Ethiopia receives remittances from.The diaspora remains closely tied to home even after many years abroad and sends anincreasing number of funds to support families and friends. Data estimates of both the formaland informal remittance sector vary immensely yet all state that the majority of remittancesenter the country informally. While formal remittance prices are below the average for SSA,they remain above the SDG target (the average cost is 6.7% from the most prominent countriesin terms of flows). This report is therefore aimed at understanding the market conditions forremittances: what drives the high rate of informality and what are the cost drivers forproviders?Case study outline. This case study outlines the barriers and enablers of remittances inEthiopia. It is organised as follows: Section 2 introduces the remittance sector in the country, including remittance flows, theactors, the regulatory framework, and the infrastructure underpinning money transfers. Section 3 discusses the country-specific remittance barriers and enablers in terms ofbusiness case, regulation, infrastructure and consumer-facing elements. Section 4 offers recommendations and conclusions for actors already active in the marketand for those who wish to enter.1Remittances can be “domestic”, meaning the sender and receiver of the remittances are within the same country (but still indisparate locations), or “international”, meaning that the sender transfers money from one country to a recipient in anothercountry (Hougaard, 2008).1

2. Remittance sector overview2.1. Remittance marketEthiopia is a net recipient of remittances; high informality. Remittance estimates for Ethiopiavary substantially: net remittance flows in Ethiopia according to World Bank remittance figuresfor 2016 stood at USD742 million, with USD772 flowing into the country and only USD 30million flowing out (World Bank, 2017).The National Bank of Ethiopia (NBE), however,estimated private individual transfers into Ethiopia to be over USD4.4 billion in the 2016/2017financial year, a nearly six-fold difference. Outflows were estimated to be around USD60million (NBE, 2017a)2. Despite the large discrepancy between sources, it is clear that Ethiopia’sremittance inflows are a significant contributor to the economy. Outflows are subject to tightcapital controls, making Ethiopia a clear net recipient of remittances. Inflows would besubstantially higher, should it be possible to count informal flows. Informal inflows into thecountry are estimated to be as high as 78% in some corridors (Isaacs, 2017). They mainlyinvolve sending cash with family and friends or happen on the back of trade payments that areoffset without money ever crossing borders (Stakeholder interviews, 2017).Dispersed diaspora requires multitude of operational corridors. Ethiopia has a large diasporaabroad3. The World Bank estimates that there are Ethiopians living in 85 different countries4.Given the widespread diaspora, many corridors need to be operational and need to cater for adiverse set of needs, payment channels and instruments.Figure 1 shows the distribution of Ethiopian migrants5 as well the top ten countries that sentremittance to Ethiopia in 2017:2Part of the irregularity in reported data may stem from the vast informal market, which NBE includes in their estimates. Inaddition, however, the NBE measures the inflows differently to the World Bank, which highlights the difficulty of finding onereliable data source (Isaacs, 2017).3 Ethiopians in the diaspora have strong ties to their home country, which has suffered a range of political and economic crises. Thefirst wave of migrants was exiled in the US while studying after the Ethiopian Revolution in 1974; they refused to give up citizenshipin the hope that this status would be temporary. The second wave of migration occurred between 1980 and 1991 where many leftdue to the tumultuous political regime. A large proportion of skilled Ethiopians is estimated to have migrated to the US and othereconomically attractive destinations during that time; many refugees crossed the border into Sudan. The third wave of migrationoccurred post 1991 until today, due to the ongoing conflict with Eritrea and the continuously difficult economic and politicalsituation. Many relatively unskilled Ethiopians settled in the Middle East (a large percentage of which are women who are taking updomestic work) but migration continues to the Western developed world as well (Lencho, 2017).4 Such diverse migration from the continent is currently only topped by the diaspora of Nigeria, South Africa and Ghana.5 The graph only captures countries with at least 1,000 documented Ethiopian migrants.2

Figure 1. Ethiopian documented migrant stocks abroad and top 10 countries sending formalremittances to EthiopiaSource: World Bank, 2017Most formal remittances come from outside Africa. The USA, Saudi Arabia, Israel andneighbouring Sudan account for most Ethiopians abroad. With the exception of Sudan, thesecountries also account for the majority of formal inflows into Ethiopia. Around 82% ofEthiopian migrants lived outside of Africa in 2017 and only 9% of formal inflows were receivedfrom Africa. Yet, there is anecdotal evidence of large informal flows from African and MiddleEastern countries that are not reflected here. Estimates suggest that there are currently around750,000 undocumented Ethiopians in Saudi Arabia and around 250,000 undocumentedEthiopians living in South Africa. Given the money transfer laws that only allow documentedmigrants access to formal money transfer services in those countries, informality remains theonly available channel for many (Stakeholder interviews, 2017).Major host of refugees. Ethiopia hosted close to 900,000 refugees at the start of 2018 - thesecond largest host in Africa after Uganda. Most refugees come from South Sudan, Eritrea andSomalia and the trend is increasing given Ethiopia’s continued open door policy for refugeesand the ongoing conflict in the region (UNHCR, 2018). Many refugees rely on remittances fromtheir home countries and tend to have to travel far distances to access the remittances withinEthiopia (Vargas-Silva, 2016). The rising number of refugees requires suitable remittancesolutions to serve this vulnerable yet economically active customer segment.Virtually all formal remittances are handled OTC by banks, MTOs and MFIs. Banks and moneytransfer operators (MTOs) facilitate the bulk of formal remittance inflows into Ethiopia. MTOsare legally required to handle foreign exchange transactions through commercial banks, whichare required to pay out cash to the recipients in local currency. In 2016, 40 MTOs operated inthe country, yet the market is dominated by just five of them. The MTOs operate in partnershipwith two state-owned and 16 private banks via over-the counter (OTC) services (Gaukler,2016). I