The Potential of the remittance market

Manila Times
August 20, 2005

FROM THE SIDELINES
By Alfredo G. Rosario

The potential of the remittance market

OVERSEAS Filipino workers may not know it but they have been paying through the nose for their remittances to their families back home.

A report of the International Monetary fund (IMF) says that banks and other official channels have been charging 13.5 percent per money transfer transaction. If, for instance, an OFW sends $200 to his family, he is charged $27 as remittance fee.

In a larger context, let us assume that by this year, the total remittance figure from OFWs will hit the $10-billion mark. This will indicate an increase from last year's remittance of $8 billion, considering the rise in the deployment of both land-based and sea-based workers.

Under the prevailing rate of 13.5 percent, the banks and other remittance channels will have earned a hefty profit of $1.35 billion.

The profitability of the remittance market has lured commercial banks to engage in the remittance business. These banks have been looking for ways to interject themselves in the flow of funds between OFWs and their families in the Philippines.

At present 12 of the country's commercial banks are in the lucrative remittance business, offering various products and services. The major players are Philippine National Bank, Rizal Commercial and Banking Corp., Equitable-PCI bank, Bank of the Philippine Islands and Metrobank.

According to the World Bank, the Philippines is the largest destination country for remittances across international borders, next to Mexico and India. Official figures show that OFWs remitted $7.6 billion in 2003, but this declined slightly in 2004.

The decline was attributed to several factors, primarily the weakness of the peso during the period and the restrictions in the documentation of money transfers arising from the strict enforcement of the antimoney laundering and counterterrorist financing regulations.

These factors had compelled migrant workers to send their money to their families through nonofficial channels. It is predicted, however, that the remittance figure will rise again and probably hit US$10 billion this year and increase annually by six per cent hence.

Major sources of our workers' remittances are the US, United Arab Emirates, Saudi Arabia, Italy, Hong Kong and Japan.

The PNB got a 30-percent share of the remittances, or the equivalent of $2.3 billion. The other banks will not disclose the volume of their shares. However, it is mentioned that the two other top receiving banks are the Metrobank and BPI.

The excessive remittance fees have prompted the Group of Eight-the US, Great Britain, Canada, France, Germany, Italy, Japan and Russia-to take action in lowering them as part of their efforts to eradicate poverty worldwide.

They have taken note that the cost of money transfers ranges from 10 percent to 15 percent, which is too heavy for migrant workers to bear. They have asked the World Bank and the IMF to update remittance flows and set standard remittance rates affordable to workers.

Their action plan is designed to encourage cooperation between banks in developed countries offering remittance services to workers and the financial institutions in their home countries. It also involves greater competition among banks and the use of innovative payment instruments.

Our own legislators have expressed concern over the excessive remittance costs and sought legislative action to reduce them. Rep. Eduardo Gullas of the First District of Cebu was alarmed by the IMF report that 13.5 percent was being charged on remittances by our overseas workers.

He called on the Bangko Sentral ng Pilipinas to promote a healthy competition among banks engaged in the remittance business, saying this could lead to the reduction of their remittance fees. For her part, Rep. Judy Syjuco of the Second District of Iloilo filed a bill providing for the creation of a bank for OFWs whose major objective is to help them in their money transfer transactions at reasonable cost.

The OFW bank, according to Syjuco, will establish branches in countries with large OFW population, to serve as their remittance channels. The bill could face rough sailing in Congress because of an expected lobby by big banks to derail it.

But Congress should see the merit of this proposed bank, which will make OFWs part owners and its main clients.

I did a little arithmetic drawing comparison between how much commercial banks will earn from remittance fees compared with their income from loan interests. I came to the conclusion that they earn much more from money transfer transactions.

It stands to reason that big banks will exert efforts to corner a larger remittance volume, which will bring them greater profits. It behooves the government to do its best to reduce remittance fees as proof of its support for the OFWs whose remittances have underpinned the country's economy over the years.