Remittance ‘losses’

According to one study I had just recently come across, about 21 percent of the remittance of a migrant worker is already “lost” even before the intended recipient could receive the transmitted amount. This puts a different side on one of my favorite mantras, i.e., the need for Filipinos migrant workers to put their remittances to better use.

While I still harp on the need and importance for our overseas Filipino workers to put a portion of their earnings to more productive uses in addition to just sending home to pay for living expenses and other family needs, it seems there is scope for the remittance system itself to be improved.

Limiting cost and risk

A study done by BSR, a global non-profit organization that has had extensive dealings with multinational companies working with migrants, has been advocating for a “fair” remittance system to limit cost and risks in remittance sending, and therefore contribute in strengthening the impact on these workers’ take-home pay.

Some interesting data collated and published in the BSR study showed that international migrant workers, or workers who cross borders for employment, total approximately 215 million people, thus making up a significant portion of the global workforce.

The study further states that such workers often leave their homelands for years, and send up to 40 percent of their wages home to their families and extended families on regular basis. As much as $300 billion yearly of these workers’ salaries crosses national boundaries, according to the World Bank.

Eroded value starts with employer

In the remittance process, the study points out instances when the value of the money being sent is eroded.

Surprisingly, the “deductions” start as early as the first paycheck when the employer withholds part of the original recruitment fee from the monthly pay check of the worker who has usually been recruited through the formal agency system.

BSR cites a research done by Verité that estimates these fees to be as much as $4,100 for an Indian worker migrating to the Gulf region. If the average monthly take-home pay of a newly recruited Indian construction worker to the United Arab Emirates (UAE) is approximately $299 per month, it will take him 8.5 years to pay back one percent of the original fee per month.

While the Verité research does not specifically mention what a Filipino migrant worker goes through, the figures presented are a fair representation of what some of our countrymen experience. The study continues to state that the monthly deduction reduces the gross pay of the migrant worker by 14 percent every month.

Financial service institutions join in

Unfortunately, the erosion of a migrant worker’s pay check does not stop with the employer. Financial services institutions charge monthly service fees for workers who choose to operate a checking account, including the use of ATM machines, specifically installed in the migrant worker camp.

The service fees, according to BSR, could be as much as five percent of the worker’s gross monthly salary.

The migrant worker could also use a money transfer operator (MTO) to move his remittance home. While MTOs charge a minimum fee to workers per transaction, which can be up to one percent of the worker’s gross monthly salary, this still can be regarded as another reduction in the worker’s salary.

Other costs

Finally, there are further losses to this remittance when the recipient in the home country travels to the money collection point or bank.

A migrant worker’s family member in the origin country expends valuable time and money traveling to a money collection point or bank in an urban center. Even if a collection fee is not charged to the recipient of the funds transferred, the transferred money is already “reduced” by such opportunity cost.

The study estimates that a two-hour return journey from a semi-rural setting to an urban center money collection point (which was specified in India) can cost the recipient family upward of $3. 70. In rural areas of Central America, on the other hand, it can be as high as $10.

The “lost” earnings mentioned above does not include fees levied on migrant workers for pre-departure medical checks, one-way airplane tickets from origin to destination countries, visa application charges, and other “service” fees.

These incidental costs do not also include what migrants usually incur for housing and food, which often are also deducted from their gross monthly paychecks.

Informal system cost more

Losses by migrant workers choosing the informal system could be greater, warns the BSR study. The informal system, which includes intermediaries and interfaces that are not legally authorized to handle financial transactions, are often riskier.

In 2005, a World Bank-IMF study approximated that migrants’ remittances going through this channel could be from anywhere between 35 to 70 percent of total global flows.

Reasons cited for a migrant worker to resort to the informal remittance system are low financial literacy, lack of a bank account, absence of a government-issued identification card, unregulated official remittance-sending industry, or simply because informal money changers are easier to deal with.

According to BSR estimates, a reduction in remittance commission fees charged by accredited institutions by two to five percent could increase the flow of remittances through formal channels by 50 to 70 percent.

Reducing losses

The huge amount of “losses” in a migrant worker’s remittance should be given further scrutiny in light of its significance to our country. The Philippines, after all, is the fourth largest remittance-sending country in the world.

Even if only a small part of the estimated 21 percent of the $20 billion “lost” by Filipino migrant workers through the remittance process can be saved, this could still be a significant amount that can be put to better use. –Rey Gamboa (The Philippine Star)