Capturing Remittances in Central America
(International Relations and Security Network, 05/10/2006)
Editor's Note: This is the second in a three-part series on the impact of microfinance programs in one region of the Americas: Andes, Central America, and along the US-Mexican border, in northern Mexico.
Life in Central America presents a host of challenges, ranging from personal security in urban centers to dismal economic alternatives in the rural regions. The logical result is to find a better life elsewhere. The millions of immigrants that have left the region to look for work in the US and elsewhere have created an informal, largely undocumented, flow of dollars back home.
Worker remittances reached some 18 million households in Central American nations in 2005, according to the Inter-American Development Bank (IADB). A total of US$11 billion in remittances were distributed to these households in Central America and the Dominican Republic. It is a sum greater than the combined amount of foreign direct investment (FDI) and official development assistance (ODA) sent to these nations by investors, organizations, governments and the international business community.
The growing amount of remittances to Central America remains largely undocumented, moving through networks outside of the formal financial sector. Apart from some concerns over the vulnerability these systems have for money-laundering practices, more focus has been placed on how to capture the growing amount of remittances and channel this wealth into formal systems where regional and local banks and micro-lending organizations play a role in bringing more Central Americans into the formal financial sector.
It is a step toward increased economic options and away from the stagnation of poverty and ignorance.
Within the realm of the formal financial sector, individuals and families have access to organizations and programs that demonstrate how mothers, wives, brothers and cousins of immigrant workers may use the money they receive through remittances to invest in their future.
Micro-finance programs offer capacity-building and micro-lending to create micro-entrepreneurship, a special combination of skills and finance that presents a clear pathway from poverty to financial stability and growth. This particular path seems to be one of the most promising systems that - if paired with remittances - can help create a long-term strategy for alleviating poverty through economic stimulation on a local level in both urban centers and rural regions.
Remittances and informal financial transfers
Guatemala received US$2.99 billion in remittances in 2005, up from US$2.44 billion in 2004. By comparison, FDI and ODA inflows to Guatemala totaled US$373 million in 2004.
The 2005 amount represents 10 percent of the country's gross domestic product (GDP), according to the Central Bank of Guatemala.
It is the country with the highest remittance rates in Central America.
Most of this money comes from 1.2 million Guatemalans that live in the US, where 60 percent of them are undocumented, according to the International Organization for Migration (IOM). This lack of documentation is partly why many Guatemalans choose to use informal financial transfer systems to send cash back home.
Recipients of the cash are then reticent to engage the formal financial sector for a variety of reasons. First, the lines are long, but more importantly, many of the informal financial transfer systems have flexibility banks do not. Companies such as Western Union can work in tandem with gas stations, convenience stores, or just about any store front with a cash register and telephone line.
Those remittance recipients who do choose to engage banks sometimes run into skepticism, a normal reaction for bank tellers who receive large amounts of cash deposits from unknown customers.
Passing this barrier, most individuals choose to open a savings account, which provides a safe place to store their money, but offers little by way of financial growth or access to microfinance programs.
“Microfinance and remittances are definitely linkable, and we are working hard to accomplish that,” Maria Jaramillo, the executive director of the remittances program with International micro-finance consulting organization ACCION, told ISN Security Watch.
Jaramillo said ACCION and other institutions “found that banking [remittance] recipients presents more challenges than [they] had anticipated.” She claims that on average, 10 to 15 percent of remittance recipients who open a savings account decide to take advantage of other banking programs such as loans.
Jaramillo admits that a “significant portion of [remittance] recipients do not have an additional source of income, from a micro enterprise or salary, and this makes it hard for them to qualify for a loan.”
Microfinance in Nicaragua
One of ACCION's partner institutions in Nicaragua, FAMA, claims that some 20 percent of its clients receive remittances. It is a small but significant number in a country where immigrant workers sent home US$850 million in remittances in 2005.
FAMA has been working in Nicaragua for 14 years, promoting programs that target individuals and groups with loans matched to their needs for the growth of micro-business that normally operate beneath the reach or interest of traditional banks.
The average loan across all programs is between US$400 and US$500; FAMA offers these loans together with a series of capacity-building programs designed to provide loan recipients with the tools for successful business.
“[FAMA] offers its clients the option of capacity building, including business administration, time management, cost reduction, accounting and these types of skills that help [our clients] better manage their business,” Victor Telleria, FAMA CEO, told ISN Security Watch.
Telleria explained that under FAMA's micro-lending programs, groups of individuals are able to come together to improve their chances of obtaining a loan because if “one is not able to pay, the others in the group become responsible for the debt.”
“Through this practice we are able to facilitate access to credit for individuals who have lower levels of earnings,” Telleria said.
The challenging connection
Due to the growing amount of money remittances represent to Central American economies, banks in the region feel pressure to get involved.
“Many of the banks have realized that remittances add up to a lot of money,” Jaramillo said, adding, “so they ask themselves ‘how can we as banks intermediate?'”
This is where the challenge becomes most apparent. Banks are not designed to engage the lowest income levels that represent the majority of remittance recipients. These recipients for myriad reasons do not make many attempts to engage the banks, making the connection between the two a daunting task.
Yet micro-finance institutions such as FAMA in Nicaragua take the risks banks are not willing to take by extending credit - and opportunity - to those with little or no financial history to prove their ability to payback the loans.
Operating in the realm not touched by banks has created a niche market for micro-lending institutions where they theoretically are able to provide a bridge between banks, or the formal financial sector, and remittance recipients.
Micro-lending institutions are more flexible than banks; many of them have years of experience in the field and operate dozens of offices throughout Central American countries, including locations where there is little or no bank presence.
These institutions provide skills and a formal financial history that begins with the extension of some trust; it is supported by a robust verification process. And in some cases reinforced by groups of individuals who support one another.
The trend is catching on, from the top down, and, in the case of FAMA, from the bottom up. In the Inter-American Development Bank's 2005 Remittances report, the authors argue that the informal cash-to-cash flow of remittances from developed countries to developing countries will begin to move into a formal account-to-account flow, slowly but surely.
The IADB argues that remittances are a more stable source of income for developing countries than foreign direct investment - a position that is sure to spur Central American banks to reach further into the lower income strata providing services and products tailored specifically to capture more remittance dollars.
Fortunately for these banks, a history of strong relationships and good business practice has already been installed by micro-lending institutions. As long as migrants continue to send remittances home, family members back home in Central America will have greater chances of attaining financial stability and finding economic opportunities. It is a cycle of positive growth that eventually may work well to reduce poverty in Central America and, perhaps even to re-unite families.