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An inclusive model of remittances and entrepreneurship

Migrant remittances can play a critical role in the economic development of low/middle-income countries. Remittances to developing countries are generally seen as an instrument to reduce poverty and inequality, to provide social benefits and multiplier effects, and to act as buffers against economic shocks. However, the full developmental potential of remittances is far from being realized. While the relevant stakeholders, from the financial institutions to actors from the public sector and the civil society, seem to appreciate the opportunity remittances represents, effective best practices to harness this opportunity are still to be identified. Additionally, expanded access to the financial sector helps finance small business and microenterprise: a positive correlation has been found between financial inclusion and employment opportunities, and it is generally believed to positively affect economic growth.

This article endeavors to outline existing as well as new solutions to maximize the impact of remittances for economic development underscoring the role that each stakeholder can play. It will also analyze the pilot project by TechnoServe/Microfinance International Corporation (MFIC), which took place in El Salvador in 2008, and was aimed at incentivizing business startups through securitization of future remittance flows.

In December 2007, TechnoServe and Microfinance International Corporation (MFIC) launched a pilot project that aims at leveraging migrant remittances to empower small and medium enterprises (SMEs) to get greater and cheaper access to much-needed credit, which can be channeled to growing the SME, thus generating employment and income opportunities in developing countries.

TechnoServe is a US-based nonprofit development organization established in 1968, whose mission is to help reduce poverty by working with entrepreneurial people to create competitive and sustainable businesses. TechnoServe works in Latin America, Africa and Eastern Europe to implement economic opportunities with high potential for creating jobs and income for the poor. TechnoServe experience has contributed to the development of competitive strategies in a variety of sectors, from rural crops to tourism and light manufacturing in urban areas. The technological packages developed by TechnoServe are derived from a business approach that allows client small enterprises to address and solve the constraints to profitably accessing markets. TechnoServe is involved in executing projects related to SME development, through value chain enhancement, business plan competitions and youth and women entrepreneurship development programs, among others. TechnoServe has deep experience in delivering cross-sector entrepreneurship development via a business plan competition methodology, implemented 10 times since 2002 across the target countries.

Microfinance International Corporation (MFIC) is a for-profit company founded in 2003 by banking, microfinance and remittance professionals whose mission is to make affordable and professional financial services available to underserved markets worldwide. The company is supported by close to 100 social and commercial investors, ranging from foundations to listed multinational trading companies and a US government agency. MFIC has developed a remittance platform for banks, microfinance institutions (MFIs) and other financial institutions, named ARIAS, which since its creation in 2004, has been introduced to more than forty financial institutions in seventeen countries across Latin America and has processed tens of millions of dollars in remittances.

The article recommends launching a pilot project that aims at leveraging migrant remittances to empower small and medium enterprises (SMEs) to get greater and cheaper access to much-needed credit, which can be channeled to growing the SME, thus generating employment and income opportunities in Pakistan. The objective of the project is to demonstrate that it is possible to channel remittance flows to productive purposes, specifically to improve a remittance-receiving entrepreneur’s access to business credit.


The basic structure of the project is as follows:

1. Identify an entrepreneur that meets the following criteria:

a. Owns a high-potential SME/SBV (For the purpose of this article, the term of “Small Business Vehicle” ~SBVs is coined)
b. Is based in Pakistan
c. Is in need of credit to capture growth opportunity
d. Is willing to collaborate
e. Receives a stable flow of remittances from the Gulf countriesas they are the largest source of remittances to Pakistan
f. Whose remitter is stably resident in the Gulf countries

2. Prepare a business plan for the SMEs, including the impact of the loan would have on the SME’s financial performance (to be performed by the bank).

3. Prepare a comprehensive credit profile of the remittance-receiving entrepreneur [to be outsourced to credit rating agency], which includes: (a) Legal, migratory and employment status (b) Financial/credit situation and (c) Track record of remittances received in the past 2+ years.

4. Assist the negotiation between the FI and the entrepreneur.

5. Monitor the performance both of the loan and of the business after the loan has been disbursed.

Basic financial flows of a small entrepreneur

For a remittance-receiving entrepreneur, the typical cash flow is simple: the ‘family account’ has two basic inflows: the cash flows from the business and the remittances, plus, potentially, the loan. This money is used either for consumption or for reinvestment in the business. As illustrated in the chart, in this project the inflow of cash from the business is documented by means of a detailed business plan, whereas the bank can document the flow of remittances by liaising with the remitter to collect the necessary material, as listed above.

In other words, the purpose of this project is to monetize the information related to the remittances, in a way that is ultimately profitable to all parties involved. The FI, who can reduce the risk exposure, better assess the risk profile of its clients, and thus disburse more credit more profitably — the entrepreneur, who receives a cheaper, larger loan — the provider of credit information, which can generate income from the credit profile, for instance via a fixed fee or via profit sharing arrangement. This setup ensures that a remittance-based loan product is sustainable in the long term, as all actors have a stake in it. The value of the information will be split three ways, as described above, but, while the fee to the credit profile provider and the better terms of the loan are clearly measurable, the way in which the FI monetizes the gain will vary according to risk management and accounting policies.

The writer is a Karachi based freelance columnist and is a banker by profession. He could be reached on Twitter @ReluctantAhsan

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