Remittances

Remittances have begun to play an increasingly important role in the economies of many countries, greatly exceeding flows of development aid. Remittances contribute to economic growth in the receiving country, and help support large bands of of the population.

The overall effect of these flows on the development and economies of the countries concerned is difficult to quantify. But they most certainly have a positive impact in reducing poverty and improving welfare provision. They also improve the receiving countries’ ability to attract investment, even if these investments take the form of transfers of private savings.

The graph, although referring to data from 2020, gives us an idea of ​​the size of remittances in relation to the gross domestic product (GDP) of the receiving country, giving us an indication of the economic relevance of the phenomenon. Excluding the two largest remittance recipients, Mexico and China, the graph highlights how for some countries remittances represent a significant share of GDP, with peaks exceeding 20% ​​(for example for Timor Leste). The crisis that has hit the world economy in recent months, due to Covid19, has also had an effect on international remittance flows, which have consistently seen double-digit growth rates in recent years. According to World Bank data, 2020 saw a reduction in global remittance flows of 14.6%. Naturally, the reduction was not the same for all countries, in some cases remittances grew despite Covid.

These are volumes characterized by constant growth that has been more than proportional to the growth of the resident immigrant population. While the presence of foreign citizens residing in Italy has in fact increased in the period 2003-2007 at an average rate of 17.4%, remittances sent from Italy have increased at a rate of 26.8%¹. The ABI-CeSPI survey (2009) on the financial needs of immigrants² has also confirmed that remittances are a component of the economic behavior that characterizes the migrant in all phases of their migration and integration path – responding to different needs and strategies – remaining substantially constant even 10 years after arriving in Italy. Looking at the main recipient countries of the flow of remittances leaving Italy, there is a general correspondence with the countries of origin of the largest migrant communities in Italy. In the case of Italy (see graph), remittances leaving our country have grown, despite Covid. Between 2019 and 2020, growth was 12.6% and between 2020 and 2021, 14.3%. ¹ Source: Cespi re-elaboration of ISTAT and World Bank data 2003 – 2007. ² ABI-CeSPI, “Banks and new Italians, the financial behavior of immigrants”, edited by J.L. Rhi-Sausi and M. Zupi, Bancaria Editrice, Rome, 2009.

The available data on remittance flows leaving Italy are only an estimate of the actual volumes. This is because Italy still lacks a specific detection system for these money flows and because the data, of course, do not take into account remittances that pass through informal channels, which still constitute a significant percentage of outgoing flows, although difficult to quantify. As regards the territorial distribution of remittances sent at a regional level (table 2), the market appears to be highly concentrated in Lazio and Lombardy. Only from Milan and Rome do 24% of money transfers by migrants resident in Italy depart.

At a global level, remittances are increasingly confirming the important role migrants can play in the development of their countries of origin. Strictly speaking, remittances are resources/funds transferred between private individuals with the help of intermediaries. The intermediaries provide the service of “transporting/transferring” money from one country to another.

We must not forget that remittances are essentially private (“It’s their money”, as Donald Terry³, manager of the Multilateral Investment Fund MIF, has pointed out). However, they are an important resource as they have: A positive macro-economic impact:

• constant growth in each stage of migrants’ integration;
• strong stability and low elasticity with respect to interest and exchange rates;

A direct impact on reducing poverty:

• remittances are sent, in most cases, to poorer segments of the population;
• remittances reach beneficiaries directly.

At the micro level, remittances can be considered as part of the immigrant’s received income, which they then send to their families in their countries of origin. They do not necessarily include all of the immigrant’s savings. This is because immigrants all have different needs, linked to their integration process, which lead them to accumulate part of their income in the form of savings in their destination country. Still at the micro level, remittances can be broken down into two components⁴. The first is the ordinary component, which is the normal amount the migrant sends to their family on a fairly regular basis. And the second is the discretionary component, which is any sum in excess of the ordinary component that the migrant sends occasionally for various reasons, usually linked to particular needs or requirements. At the same time, remittances can have many different functions and end-uses, which can be classified as: individual, business and community⁵. In terms of possible end-uses:

• remittances are first and foremost a source of subsistence and consumption for the immigrant’s family of origin. For this reason, any reduction in transfer costs and the possibility for the migrant to influence consumption decisions are two strategic factors.
• remittances can be a source of future consumption, especially with respect to education, buying a house and forms of social and pensions insurance. In this sense, the availability of suitable financial products (for savings and investment) and the ease with which the accumulated funds can be transferred are two factors of vital importance.
• remittances can become a resource to develop and support business activities in the migrant’s country of origin, and for trans-national business activities. But to channel remittances to enable access to credit by small- and medium-sized companies, new and appropriate instruments are needed.
• lastly, by funding community social projects, remittances can be an important resource for migrants to help support and develop their community of origin. At the same time, they nourish the migrant’s link with their home community and enable them to maintain their identity and roots. We need to create mechanisms that can act as catalysts and multipliers in this process.

This diagram is an attempt to summarise in graphic form the different functions and roles played by remittances. The term “remittance” therefore has a much wider significance that cannot be considered separately from the concept of “savings”. Remittances are, first and foremost, a form of savings intended for a whole range of functions related to the migrant’s integration, migration and resource allocation strategies. Financial intermediaries who provide appropriate instruments to intercept these savings can generate financial leverage, thus enabling the resources to be allocated to better effect and promoting a sense of ownership of the savings themselves. In so doing, they can enhance the resources and bind them to their specific geographical area, without losing sight of the essential component of the remittance. Namely, that remittances are a private resource and largely respond to immediate consumption needs. For this to happen, financial intermediaries need to be able to offer complete financial products that allow real resource-allocation strategies. These products must respond to the various needs and reasons for which remittances are sent in the first place, and offer some stimulus for migrants to divert part of the remittances that currently travel over informal channels (see fact-sheet on remittances and financial instruments). ³ Donald Terry, FMI-BID, 2004. ⁴ R. Pleitez, Heterogeneidad de las Remesas, Implicaciones para el desarrollo de produco financieros, Departamento de Estudios Economicos y Sociales DEES, giugno 2007. ⁵ Estruch, Ferro, Frigeri, in “Strumenti finanziari per l’invio delle rimesse degli immigrati”, in Fondazione ISMU, RIAL: Dagli Appennini alle Ande: le rimesse dei latinoamericani in Italia, Ed. Franco Angeli, Milano 2008

As we have already explained (see “Remittances can create value” fact-sheet), financial intermediaries, and financial instruments in particular, have the potential to channel and add value to remittances. Their effect can be seen on several levels. They can:

• ensure that resources are allocated to better effect;
• foster greater “ownership” of savings;
• support the immigrant’s integration process;
• support the development of the immigrant’s community of origin, and indeed their country.

This is a typical function of financial intermediation, but it is also a challenge for the financial industry in general and for micro-finance in particular. A challenge that requires a new approach that is able to see immigrants in all their aspects and needs, and in all their potential. Low-income individuals, a significant proportion of whom are immigrants, often have a low capacity for saving, a capacity that is also subject to a high degree of uncertainty and variability. They often find it impossible to access formal channels to accumulate and protect their savings. In the case of immigrants, their decisions on how best to allocate their savings also have to bridge two countries – their country of origin and their destination country. Their decisions are directly influenced by their different personal and family migration strategies. We need new, appropriate financial instruments to meet these challenges – instruments that should be highly accessible and have flexible conditions. They should also have a low degree of risk, offer an adequate return on savings and be easily transferred into ready cash to meet the needs arising from migrants’ different migration experiences and often precarious circumstances. Above all, financial instruments should be mobile, in keeping with the immigrant’s “double identity” (country of origin and destination country). Micro-finance in particular, and the financial industry in general, is responding rapidly to these challenges. Financial inclusion is slowly rising up the policy agenda in many countries. And researchers are trying to find innovative instruments and models, starting with an analysis of the financial needs expressed on a case-by-case basis. We have drawn up a chart outlining some of the main financial instruments, each with their different features and objectives, that could be developed to channel and add value to remittances. The instruments are classified on the basis of the specific aims underlying immigrants’ different types of financial behaviour (and their different approaches to allocating savings). On the basis of the goals and interests expressed by the migrant, various products and allocation opportunities open up, which have direct and indirect repercussions on migrants and their family of origin. The repercussions and impact – both in Italy and in the country of origin – of financial products designed for the immigrant population can encourage and support immigrants in making greater use of banks, and thus foster financial inclusion. This will occur in different ways, depending on the product considered. Suitable financial products can also:

• reduce immigrants’ financial vulnerability;
• provide access to payment services (in Italy and their country of origin);
• provide access to credit and other financial services (various forms of guarantees);
• add value to savings by providing an adequate return and fostering asset-building strategies.

View the chart here This chart is intended to be up-dated as the financial instruments develop. It will also be up-dated in line with the on-going research in which CeSPI is directly involved along with operators in the sector. For a more in-depth analysis of remittances and their possible role in development, see Frigeri’s report. D (CeSPI): Valorizzazione delle rimesse dei migranti: modelli a confronto