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Opportunities and challenges for banking remittances

Ramazan is that time of the year when expatriates send money to their loved ones back home so that they could celebrate the festive occasion of Eidul-Fitr. The boost during the holy month may also help in arriving at the State Bank of Pakistan estimate of USD 20 billion for the first time in Pakistan’s history. Nevertheless, since Pakistan is a consumption-driven society, hence a meagre amount goes into savings, which results in a low savings rate of 13-14 percent of GDP. Most of the beneficiaries of remittances are highly dependent on the funds sent from abroad and are unaware about its productive uses. Financial literacy targeted at remittance-receivers, who can be accessed via remittance-receiving FIs, can be educated on the risks of dependency on remittances and alternative solutions to avoid it and use remittances productively; marketing campaigns which target specifically remittance-receivers and technological innovation that can speed up and improve the efficiency of markets for remittance-related products such as mobile payments.

Opportunities

Increasing access to financial services can help both immigrants and recipient households by increasing the options available for remittance use. Banking services can give these families tools to facilitate savings, grant access to loans, or take advantage of insurance products —financial tools that help them achieve their goals of improved economic well-being that spurred the decision to migrate in the first place. The banking of recipients requires more than just channeling remittances to be paid through financial institutions. The establishment of banking strategies is needed to ensure that recipients that are now coming into bank branches to pick-up remittances do effectively gain access to financial services. Not all remittances have the same potential to be banked. It is important to develop a banking strategy that takes into consideration the specific characteristics of remittances in each local context.

Remittances are sent for different purposes; some of them can be banked, while others cannot. It has been identified that receiving remittances with frequency has an important impact in determining the potential to bank them. Remittances that are sent during the initial years to pay for the debt incurred during the migration trip or funds that are not sent with frequency—such as gifts for special occasions, holidays, or family emergencies — have less potential to be banked. On the other hand, remittances that are sent with frequency to either improve the quality of life of the family back home or invest have greater potential to be banked.

 

A key component needed in order to develop an appropriate banking strategy for remittances is market segmentation. Market segmentation can provide valuable inputs for developing financial services targeted to recipients that have greater potential to be banked and also for developing communication and marketing strategies that can effectively reach these potential clients.

Challenges

Other contributing factors that may cause remittances to increase are rising oil prices and recent appreciation of Pak Rupee. Pakistan has recently witnessed two waves of depreciation in its currency against the dollar. The first wave was witnessed on December 8, 2017, which saw rupee sliding 5 percent. The Pakistani currency took another nosedive on March 20, 2018 depreciating by another 5 percent. The rupee is down 10 percent against the dollar in 4 months and is now trading in the range of PKR 116-118. The rupee has depreciated twice over the past 6 months against the greenback by around 10 percent in total.

It is a natural phenomenon that remittances tend to go up when Asian currencies slide against the dollar. In times of currency depreciation, the white-collar workers tend to take advantage as they have larger disposable incomes. Normally, we see about a 15 to 20 percent increase in remittances during the holy month of Ramazan as compared to other months.

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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