MEFMI > AboutMEFMI > Programmes > Financial Sector Management > Investigating The Impact Of Transaction Costs On The Demand For Official Remittances From South Africa To Countries In The MEFMI Region: Evidence From Malawi, Zambia, Mozambique, Botswana, Swaziland And Lesotho

Investigating The Impact Of Transaction Costs On The Demand For Official Remittances From South Africa To Countries In The MEFMI Region: Evidence From Malawi, Zambia, Mozambique, Botswana, Swaziland And Lesotho

  • June 7, 2016
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  • Category: Financial Sector Management
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By Patrick Ibrahim
May 2015
Remittances play an important role in poverty alleviation. They offer a stable source of income, which is a lifeline, to millions of vulnerable recipient households across the developing world. Circumstances permitting, remittances can also be a source of broader economic development.

However the cost of remittances sent through official channels, especially to developing countries, has been observed to be relatively high in comparison to the principal amount being sent. Based on World Bank statistics, the most expensive remittance corridors in the world are currently between South Africa and four of the six MEFMI member states included in the study, namely: Malawi, Zambia, Mozambique and Botswana. The primary motivation of the study is therefore to empirically establish and quantify the relationship between remittances sent through the regulated channels from South Africa to MEFMI countries and the fees charged for such services.

The study employs econometric tools for panel data analysis to investigate the relationship between demand for official remittance flows in MEFMI countries and transaction fees, among other determinants. To supplement findings from the econometric estimation, a survey was carried out to establish the remittance market situation in selected MEFMI countries. This was guided by the General Principles for International Remittances as published by the Committee on Payment and Settlement System (CPSS)1 and The World Bank in 2007.

Estimation results show an insignificant negative relationship between official remittance flows in MEFMI countries and fees. The transaction fees have effectively ceased to be an incentive to attract migrant remittances through the official channels. On the other hand developments in payments system infrastructure in both the host country and the remittance receiving countries have been observed to be one of the primary drivers of official remittances in these countries.

To increase remittances, there is need to urgently review current policies aimed at using fees as an incentive tool to attract increased demand for official remittance services. In addition, focus should also be on policy interventions that promote access to remittances through modern and innovative systems, simplified processes, less restrictive regulatory requirements and linking of remittances to rural financial services and products.