Worker’s Remittances and Microfinance: the neglected nexus
The purpose of this note is to highlight the nexus between workers’ remittances and microfinance and thereby encourage microfinance institutions (MFIs) and those who support microfinance development to explore business opportunities that would contribute to both the social mission and sustainability of MFIs.
While workers’ remittances have been widely discussed by development economists, policymakers and others interested in economic and social development, the significance of workers’ remittances for microfinance development and poverty reduction has received only scant attention. The author has compiled a list of recent developments that seem to be changing the way remittances are viewed in the face of microfinance. These include:
- The increase in the flow of migration and recognition of the low-income level of the families who receive remittances;
- The increase in use of formal rather than informal channels due to international efforts to curb money laundering;
- The increasing involvement of formal financial institutions in microfinance;
- and an increased number of studies by international development organisations that examine that linkages between microfinance and remittances.
The author provides examples of MFIs that have already begun to perform money transfers, to mobilise savings on the basis of remittances and to provide microcredit based on remittances. The International Remittance Network (IRnet), developed by WOCCU and the New York-based VIGO Remittance Corporation, is highlighted for its innovative service, efficiency and competitive pricing. Some of the credit unions involved in the network have found that those who receive remittances through these credit unions often open accounts with them for the first time.
The author sees a win-win situation for remittance business by MFIs. For example, encouraging remittance recipients to invest a portion of their inflow in financial assets provides them with safety, reasonable returns, liquidity and a greater capacity to leverage funds. MFIs themselves can use remittances to leverage more funds in the commercial markets to finance their growing lending operations. This will enable the MFIs to not only diversify their funding sources but also increase the breadth and depth of their outreach, thus contributing to both their social mission and sustainability.