Picture: THINKSTOCK
Picture: THINKSTOCK

JOHANNESBURG — In his 2009 album Troubadour, Somali rapper K'naan dedicates the song 15 Minutes Away to "everybody that's had to wait on a money transfer" and complains, "it's kind of wack when they charge you like 10% on the dollar."

The need to reduce the cost of remittances to Africa may be one of the few issues to have rappers, economists and policy makers nodding in agreement.

Now, with official remittance flows to the continent growing to a record $60.4bn in 2012 — overtaking foreign direct investment and official development assistance as the largest external financial source for the first time, according to the African Development Bank — it is likely to gain more urgency.

Africa is the most expensive continent to send money to, with transfers costing an average of 11.67% of the amount being sent, compared with about 8.35% for Asia. The global average cost is slightly more than 9%.

An average transaction cost of 11.67% would have deprived some of the world's poorest people of more than $7bn in 2012, the World Bank says.

There are other expenses besides the transaction fees.

Africa has the least payout locations in the world, which means recipients who live in rural areas face the prospect of travelling for a day or more to collect their money.

"It's expensive to be poor," said Donald Terry, a financial inclusion expert at the Boston University Law School. "There are more payout locations in one country, Mexico, which receives $24bn a year, than in the entire continent of Africa. Not only is it expensive, it's extremely inconvenient."

Intra-African transfers are even more costly — in South Africa and Tanzania average remittance prices are 20.7% and 19.7% respectively.

The high costs force migrants to send money through informal channels so the true size of remittance flows to Africa could be more than double the official figure, some experts believe.

Limited competition

Lack of competition and transparency in Africa's remittance market and regulatory hurdles are responsible for the high fees.

Many countries, whose legal and regulatory frameworks are set up to deal with large cross-border transactions between corporations rather than flows of a few hundred dollars, only allow banks to pay out remittances.

Once a wider range of institutions are permitted to offer remittance services, such as post offices and retail outlets, competition and demand will increase, said Richard Malcolm, Western Union's vice-president for Southern and East Africa.

"As more and more entities start offering the service, competition increases and the laws of supply and demand kick in and that will regulate the market," he said.

Exclusivity agreements between money transfer companies and banks are also common in Africa, restricting banks to paying money out from only one company.

"In the early stages of the African remittances market one or two companies signed up pretty much every single place that was legally allowed to pay out so it basically stopped competition," said Leon Isaacs, MD of the International Association of Money Transfer Networks.

But countries such as Ghana and Nigeria have now banned these types of clauses, said Mr Isaacs, a sign that governments are waking up to the importance of these flows. Remittances are equivalent to nearly 10% of Nigeria's gross domestic product.

The World Bank's Send Money Africa database, which allows users to compare the prices charged by different remittance service providers, should also bring more transparency.

Money transfer companies are looking at applying new technology and Western Union is partnering with lenders such as Ecobank and Kenya Commercial Bank to provide an internet-based service.

In the future, mobile phone payments could help to bring costs down given that cell phone penetration exceeds bank penetration in Africa.

But, with the exception of Kenya, which has embraced Vodacom's M-Pesa and other mobile payment services, many African countries need to develop a strong domestic market for mobile payments before they can have a strong international market, Mr Isaacs said.

African banks, such as Kenyan lenders KCB and Equity Bank, are taking a greater interest in migrants and offer diaspora accounts. James Agin, KCB's chief business officer, international, said the bank is "coming up with solutions to substantially reduce the cost of money transmission."

In 2009, the Group of Eight and Group of 20 endorsed the 5x5 Objective to bring global remittance prices down to 5% within five years, or by 2014. Lower prices would allow families in Africa that rely on them to save or invest in education or small businesses, according to World Bank remittance expert Massimo Cirasino.

"The idea of the reduction is to free resources of up to $20bn a year, which will go directly to migrants or their families," he said. "There is a clear economic impact."