--By Monika Maheshwari & Ashish Naulakha
Remittance is a multi-million dollar industry and remittance intermediation is one of the emerging attractive businesses in Nepal. Almost half of all Nepali households have at least one migrant family member abroad or a returnee. There are a number of different types of remittance service providers inside and outside the country’s formal financial sector. Traditionally, money transfer companies are the most common formal means of receiving remittances and lately some banks and other financial institutions have entered the remittance market. As more remittance providers enter the market, the range of products has also expanded for customers such as mobile banking, e-banking, plastic cards etc.
The massive unemployment inside the country is one of the main reasons behind the upsurge in workers venturing out to distant lands. In Nepal, the pace of the foreign employment increased dramatically after 1996 and the consequent of shrinking economic conditions and decreasing employment opportunities back home compelled Nepali youth to look for alternatives elsewhere. Presently, around 1400 to 1600 people, mostly rural youths (mostly men and increasing number of women), are migrating to the Gulf and Malaysia everyday through different recruiting agencies located in the country.
Current Scenario
According to Nepal Living Standard Survey 2010/11, the two most reported uses of remittance are ‘for daily consumption’ and ‘for repaying loans’. Other uses are – to acquire household property, for education, and only a small percentage of the remittance is used for capital formation. Remittance has a broad positive impact on the economy of Nepal and has become an important source of revenue for government through tax and fees. It has not only generated employment opportunity at home country through banks, money transfer companies and different agencies but also has helped to reduce poverty.
Remittance has been crucial in reducing poverty and inequality in the last decade as it has boosted expenditure capacities of poor households and widened their consumption basket. It has also boosted foreign exchange reserves, and significantly contributed to keeping balance of payments in surplus, and increased gross national savings. But remittance has also been responsible for the Dutch Disease effect, which is the loss of competitiveness of non-resource tradable sector - exports sector - due to the appreciation of the exchange rate after substantial inflow of resources from one particular sector i.e. remittance.
The number of workers going abroad for foreign employment has almost increased by 5 per cent in 2012/2013 as compared to 2011/2012. At the same time, remittance rose from Rs. 359.6 billion in 2011/2012 to Rs. 430 billion in 2012/2013. This upsurge in remittances has led to the strengthening of the balance of payment situation. The remittance to GDP ratio has increased from 11 per cent in 2002/03 to 22.4 percent in 2012/13. This clearly indicates that remittance plays a very big role in the GDP and any decline in receipts of remittance could disturb the structure of the economy.
Top international destinations for remittance, looking at the trend of Nepalis seeking jobs abroad, include Malaysia, Qatar, Saudi Arabia, UAE and Kuwait. Looking at the migration data from 2060/61 to 2069/70 BS, Malaysia (38 per cent) is the top destination followed by Qatar (24 per cent), Saudi Arabia (22 per cent), United Arab Emirates (12 per cent) and Kuwait (2 per cent). For the past five years i.e. from 2065/66 to 2069/70, Kuwait has the highest average growth rate of 95 per cent followed by Malaysia (82 per cent), Qatar (50 per cent), UAE (36 per cent), Saudi Arabia (19 per cent), South Korea (15 per cent), Bahrain (15 per cent), Oman (13 per cent) and Japan (4 per cent).
Impact of Remittance on Banking Sector
Remittance has effects on two dimensions of the financial sector: size and efficiency. Many literature reviews have shown that remittance has contributed to an increase in the financial sector size and its efficiency. Different studies have tried to examine the impact of remittance on financial development of banks.
The dependent variable in the study is the financial sector size measured by Commercial Bank Deposit, Domestic Credit and Liquid Assets. Domestic credit includes financial resources provided to the private sector, such as through loans, purchases of non-equity securities, and trade credits and other accounts receivable that establish a claim for repayment. The other factor is liquid assets that includes cash in hand, balances with NRB, foreign currency in hand, balance held abroad, cash in transit and government securities other than those pledged with NRB and NRB bonds.
The main independent variables in the study are Migrant Remittance, Consumer Price Index, Total Export, Total Import and GDP per Capita. Remittance includes the migrant transfers and workers compensation. Inflation is measured as the annual percentage change in the consumer price index. GDP per capita is gross domestic product divided by midyear population. It is often considered an indicator of a country’s standard of living.
The Newey Regression done for the model shows that the model is significant for deposit and domestic credit. However, the model was not significant for liquid assets, as there may be other factors that may affect liquid assets of financial institution. There can be other various factors which can have significant impact on deposit and credit of the bank. The result indicates that remittance has a positive impact on commercial bank deposit and domestic credit. Although the results are not statistically significant, still the major findings are: one percent increase in remittance leads to an increase in bank deposits by 0.02 per cent; one percent increase in remittance leads to an increase in domestic credit by 0.063 per cent; and one percent increase in remittance leads to a decrease in liquid assets by 0.15 per cent.
As the results suggest, the impact of remittance on various variables is very low and statistically insignificant. One major reason for this could be that the remittance money coming to Nepal is mostly spent on consumption (78.9 per cent) according to Nepal Living Standard Survey 2010/11. In addition, the analysis from customer survey shows that customers prefer cash rather than depositing in their bank accounts. Thus, this may be one reason why remittance does not have much impact on financial development. However, ultimately one can say that the use of remittance money for consumption of goods, which are imported from other countries, will make the money again flow back through the banking channel. The use of banking channel has positive effects on savings, and then banks should create lasting relationships with migrants who use remittance products. Remittance could also serve as collateral for future credits as they have proved to be more stable when compared to other capital inflows.
Industry Analysis
The transfer of remittance money occurs through two channels: formal and informal. The formal channel includes banks and money transfer companies (MTCs) whereas the informal channel includes the transfer through friends, hundi. The process of money transfer to Nepal is becoming easier through the formal channel. The formal channel is considered more reliable and secured while transferring the remittance money as compared to the informal channel.
Although the remittance service may not be a core banking product, still most of the commercial banks are catering to the remittance market. The major players in the field of remittance are Nabil Bank, Himalayan Bank, Everest Bank and Nepal Investment Bank Limited (NIBL). The banks also tie up with various money transfer agents like Western Union, Samsara, IME, Prabhu Money Transfer to provide remittance service. Spokespersons for NIBL and Nabil Bank both had similar views on remittance stating that “remittance helps the banking sector by increasing profits both through the commission for acting as an agent and also from the fluctuations in the foreign exchange rates.”
Today, the process of money transfer to Nepal from abroad has become much easier and hassle free due to the services provided by the money transfer agencies. Till date there are 47 MTCs in operations along with other leading players like banks.
Remittance has been growing at a rate of 33 per cent for the past 24 years, and so is the competition among the remittance players in the industry. This study has tried to identify the five forces as defined by Porter to analyze the level of the competitive environment in Nepal for remittance industry. The first force - threat of new entrants in the market - has a medium impact on the competition. This analysis is supported by the facts that the government barrier is low for the banks to enter the remittance market. However, new entrants will require good agent networking in the domestic and international markets; they also need to have favourable locations to have a high customer flow.
The second force- threat of substitute product - refers to various informal channels like hundi that can be used to remit money. The threat can be considered at a medium level, as people prefer formal channels due to reliability of service. The third force- bargaining power of buyers - refers to the customers receiving remittance service. The switching cost for the customers is low and with so many agent locations in every part of the country, it is not difficult for the customers to switch. The customers thus have a high bargaining power. The fourth force- threat of suppliers - refers to various banks and subagents. They are considered to have a medium bargaining power. The fifth force- competitive rivalry within the group - is high with 47 MTCs and various banks. The competition among the payout agencies is based on the service, charge, commission, schemes and agent networking.
An agent from Western Union which serves as one of the major remittance agencies expressed the view that “agent networking is one of the most important factors that contributes to increase the number of remittance transactions. But it is not possible for the payout agencies to have a branch at each corner of the country, as it is costly as well as not feasible.” Agent networking is a cheap way to connect with customers as the cost associated with agent networking is variable and depends on the number of transactions. Some of the remittance companies use intermediaries often known as super agents who are responsible for providing remittance services. Agent networking is thus considered as one of the unique selling points by the payout agencies.
Customer Sentiments
The remittance market cannot only be analyzed from the industry perspective. One major analysis includes the analysis of the service from the customers point as well. Thus, the study also tried to analyze the market entirely from the beneficiaries’ side. The customer survey depicted that the customers who receive money from abroad have a low level of financial and technical literacy. Majority of the customers have confusions in filling the form. They face regular problems of mismatch of the ID, code that they are required to have while going to any payout agency to receive money.
For the selection of the payout agency for remittance, both sender and beneficiary play an important role, but the decision regarding the selection for particular payout agency is mostly sender initiated. It is the sender who initiates the selection of a particular remittance agency to send money.
The beneficiaries prefer the MTCs to banks to receive money. The branching distribution system of banks seems ill-suited to reach the recipients in remote areas in countries like Nepal where there is low financial development. This contrasts with MTC network, which has given them a comparative advantage. Also, remittance senders and beneficiaries take a skeptical view of banks and other financial institutions. Although both banks and MTCs have same procedure, which requires the beneficiaries to fill up a form and show their IDs as proof to get the money, the difference lies in the perception of the customers. The customers perceive that it is easy to receive money from MTCs. However, many also believe that banks provide them with more reliable and secure service. MTCs normally do not require remittance recipients to hold accounts. This no-account requirement is particularly important in terms of facilitating accessibility to formal remittance channel because in Nepal only 30 per cent of the total households have accounts with banks and other financial institutions.
Although the selection of the remittance agency is sender initiated, the top three preferences of the beneficiaries are those which provide easy accessibility, prompt service and reliability/security. In this context, easy accessibility refers to the proximity of the payout agency to the location of beneficiaries; prompt service refers to the swiftness in the delivery of the service and reliability refers to the dependency of the customers on particular agency to receive money.
Challenges and Opportunities
Countries like Kyrgyz Republic, Lesotho, and Tajikistan have a high contribution of remittance to their GDPs and have developed various remittance linked products. In addition, with the development of internet and mobile banking, transaction and the banking services are becoming much easier. However, has this development of mobile and internet banking penetrated the Nepali market? The answer to this question is doubtful. With a mobile penetration of 60 per cent, the Nepali market is still at its infant stage. IME spokesperson specifically stated that “many customers still have low level of literacy about the technical use of facilities which impedes the usage of the various services by them.” The migrant earners have different levels of capacity and knowledge of wisely managing their resources through planning, savings, and investment. Some of them are unable to access information on basic services that could help them make informed decisions on remittance use. This shows the urgent need for programmes, in addition to financial reform, on financial literacy and building the capacities of migrant workers and their families to acquire
skills and knowledge on how to leverage their earnings.
In this context, various organizations like DOFE (Department of Foreign Employment), NRB (Nepal Rastra Bank), banks and financial institutions, manpower agencies, among others, should come together to develop the financial literacy among the migrant workers and make them aware of the various financial aids available for them.
At the time of departure from Nepal, migrant workers can be provided with remittance linked lending from the banks and financial services which could be linked to the remittance being sent by them. In the absence of remittance linked lending services, most migrants are relying either on their own savings or selling of their productive assets such as land, building or animals, or borrowing from costly informal sources.
Besides remittance services, migrants can also be provided with other services such as access to finance to their family members, savings and cash management services, technical advice for productive use of remittance and business development services during their stay abroad. During their stay abroad, most of them expect that their economically active family members be engaged in income generating / micro-enterprise activities for income and employment generation. They have strong beliefs that their family members require access to finance for starting such activities. Along with remittance services, they can be provided with savings and cash management services from the banks and financial institutions. Ensuring productive use of remittance is a matter of great concern among the migrants and all of them look forward to ways to ensure that the remittance that they send are used properly and productively.
(The article is based on a research carried out by the management learners of MBA 6th term of KU School Of Management, specializing in finance as per the requirements of their course.)
