RP, US agree to strengthen OFWs remittance channels

November 7, 2006

RP, US agree to strengthen OFWs remittance channels

A three-pronged approach to improve OFW remittances to the Philippines and lower the cost of sending money is being firmed up as a result of a Memorandum of Understanding between the United States and the Philippines to cooperate in strengthening remittance channels to the Philippines.

A study prepared by the Asian Development Bank (ADB), conducted shortly after the MOU was signed during President Gloria Macapagal-Arroyo’s visit to the US last May revealed that most countries course OFW remittances through U.S. correspondent banks, making the US to appear as the main source of the $6.9 billion remitted to the Philippines in 2002. Official Bangko Sentral data show that less than half the OFW remittances actually came from the US and Canada.

The Philippines is expected to take up with the U.S. Government and the private sector several priority areas in improving the remittance system. This includes enhancing private sector competition and improving OFW access to banking services in the U.S.; building Philippine capacities and financial infrastructure for receiving remittances and linking these flows to small-and-medium enterprise (SME) development and microfinance; and cooperation of international financial institutions in establishing a database on remittance flows and formulating a strategy in implementing programs and projects for utilizing remittances as a development tool.

The ADB study indicated that the Philippines “represents an ideal context for developing and refining a template for effective remittance optimization programs across the (Asian) region.”

Global remittances from individuals amounted to US $100 billion in 2001 alone, an amount far exceeding capital market and official aid flows and more than half of foreign direct investment flows worldwide. The Philippines is the leading receiving country in South Asia, accounting for $7 billion or 43 percent of the $16 billion remitted to the region.

A considerable share of Filipino remittances was coursed through formal banking channels due to the long-standing involvement of the Philippine National Bank (PNB) whose charges, ranging from $5 to $16 are considered competitive under US rates. However, remittance business of non-banks and informal channels like the express padala services remains brisk because of their accessibility, simple processes and customer awareness.

Western Union has been cited by ADB as an example of a non-bank channel which cornered about 20% of remittances to the Philippines in 2002 and steadily growing in volume in spite of its service fees of $20 or more in most US cities. LBC and other small courier companies are concentrated in Hongkong, Singapore and the Gulf states and offer much cheaper ($3) services.

RP-US cooperation on the strengthening of the remittance system is aimed to increase the use of the formal sector to lower the cost of sending money to the Philippines. It is expected that with lower remittance charges, total inward flow will increase by about $3.5 billion, to a total RP, US Agree to Strengthen … 2 of $10.5 billion. It has been pointed out that high transaction fees of non-bank and informal channels are a burden on a scarce resource considering that OFW remittances represent the major or even the sole income of poor families. Reducing these fees by 5% over a period of 3 to 5 years would increase formal sector remittances by about $500 million aside from generating an additional $500 million to $ 1 billion in net savings.

Strengthening the remittance system locally will address the need to improve the banking network and to involve the private sector especially in rural areas which have to be integrated into the national and international clearing and payments systems.

Other areas of RP-US cooperation being contemplated include the utilization of excess OFW remittances as a development tool, specifically for investment in SME ventures, micro-financing and other innovative applications.