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Serial No # 4

 

Energy Cooperation in South Asia: Prospects and Challenges

A, Ahmed*, C. M Shahariar* and  M. A. Rashid Sarkar**

 

 

*          Graduating term student, Department of Mechanical Engineering, BUET

**        Professor, Department of Mechanical Engineering, BUET

Abstract

Energy Security has always been a concern for all the countries in the world, as with modernization, the use of energy has been increasing rapidly and people’s life and national economy becoming dependant on the usage of energy. So, to maintain a secured future, different initiatives are being taken in the energy sector all over the world. South Asian region is vital part of this world with its huge population base and rapid growing economy marked by increasing GDP. To facilitate the objective of this region to progress towards better economy, South Asian Association for Regional Cooperation (SAARC) was formed in 1985. But, due to some lack of trust between the member states and political dilemma, this association has never flourished to its full potential. However, through building mutual trust and understanding the greater perspective of this region, SAARC Member States (SMSs) has a big scope to create a strong regional cooperation which includes bilateral and multilateral energy trade between the states and a generalized energy policy which can provide a guiding principle for energy security in the future. With the present scenario of energy reserve, production and consumption of the countries of this region, it can be seen that there is a dire need of cooperation among the countries. Observing the successful regional cooperation in other parts of the world, monitoring the benefits of this kind of cooperation, it is high time that the leadership of the SMSs proceed towards a more secured future in the energy sector by pursuing strong regional cooperation.

1.      Introduction

            According to the United Nations geographical region classification Southern Asia comprises the countries of Afghanistan, Bangladesh, Bhutan, India, Iran, Maldives, Nepal, Pakistan, and Sri Lanka. By other definitions and interpretations (see below), Burma and Tibet are also sometimes included in the region of South Asia. South Asia is home to well over one fifth of the world's population, making it both the most populous and most densely populated geographical region in the world.[3] The South Asian Association for Regional Cooperation is an economic cooperation organization in the region.

            To bring South Asian nations under one roof and increase regional cooperation in different sectors, SAARC was established in 1985. Although it covers only 3.95% of global landmass, SAARC countries are inhibited by 23.7% of global population. The South Asian Association for Regional Cooperation (SAARC), comprising Afghanistan, Bangladesh, Bhutan, India, the Maldives, Nepal, Pakistan, and Sri Lanka, is characterized by desolate contrasts. The total gross domestic product (GDP) of the region amounted to $3,860 billion in 2009, but was less than 3% of the world’s total GDP. Still it is one of the rapidly emerging regions in the world. It experienced an average annual GDP per capita real growth rate of 5.2% from 2000 to 2009. Countries such as Bhutan and India have developed at even higher per capita

            GDP growth rates of 6.8% and 5.6%, respectively [1]. This economic growth is anticipated to assist the mitigation of extensive poverty in the region. To support and quicken economic escalation in the region, one of the significant inputs needed is increasing access to energy, as there is a formidable direct relationship between economic growth and energy demand. Increasing social mobility related to faster economic growth further emphasizes the demand for energy. This puts pressure on all SAARC member states (SMSs) to make sure that an uninterrupted and dependable supply of energy in its different types.

            Even though the region as a whole is enriched with assorted energy resources, with enough potential in renewable energy field, a lion’s share of these resources are yet to be exploited, for a number of causes. Inadequate availability of indigenous energy supplies, combined with the large population base, makes the region significantly dependent on energy imports. The variation of energy resource endowment between South Asia and its neighboring regions presents prospects for interregional energy trade to obtain the optimum advantages from available resources. However, the geopolitics involved and competition from alternative energy markets makes interregional energy trade a challenging proposition.

            Regional cooperation can be a supplement for national programs and projects to boost growth and energy security. Throughout the region, poverty is still prevalent, but fast progress in some countries shows that policy atmospheres can be pro-growthand that historic difficulties can be conquered. Inside the extensive set of economic policies, energy policies must play an indispensable part in maintaining the economic progress in the South Asian region. SAARC member states (SMSs) requires ensuring energy security, plummeting the expenses of energy supplies, and protecting themselves from potential threat of oil price hikes. This involves an eclectic variety of proceedings, including providing public goods and for cross-border infrastructure.

            Regional cooperation presents a key opportunity for individual SMSs to tackle obstacles to sustainable comprehensive economic progress, particularly in the energy sector. Examples of successful collaboration in chasing reliable energy policies can be observed in different regions of the world, predominantly in sharing electricity generation using cross-border transmission interconnections. Estimates suggest that in Europe, electricity system interconnection has resulted in a 7%–10% reduction in generation capacity costs. Similar cooperation within the United States has been estimated to bring benefits in the order of $20 billion. A study of the Greater Mekong Sub-region in Southeast Asia suggests that regional cooperation in energy could reduce energy costs by nearly 20%, for a saving of $200 billion during 2005–2025 [1].


2. Energy Scenario in South Asia:

 

 
  Text Box: Figure 1: SAARC Region


            In South Asia, the reserve and potential for energy resources comes from a wide variety of options. The contemporary practice of energy usage has been as much a result of the natural bequest as the historical progression. Initially reliant on conventional bio-mass fuels, the forward-looking sectors of the countries moved on to the use of coal. So, coal mines were one of the first symbols of modernity in colonial times. Coal was discovered first in 1774, but mining began in mid-nineteenth century, primarily from eastern Indian coal seam but also later from Assam and central India. These coals were used to fuel the new railways and industries such as the jute mills around Calcutta metropolis. As modern modes of transportation started to flourish, Oil and natural gas began to be counted as the new inclusions in the energy basket. The Assam Oil Company went operational in the first quarter of twentieth century after Petroleum was struck in Digboy, Assam in 1889 [2]. As part of multipurpose river valley projects in late 1940s, large-scale hydroelectric projects were initiated. The vital factors behind creating greater demands for modern energy sources are the Population growth and urbanization. For instance, the primary energyconsumption in India increased as much as four times between 1971 and 2000 with increasing urbanization and this demand is expected to grow further while other South Asian countries have pursued comparable course, with little variations.

            Oil reserve has always been a constraint for South Asian region which is rather inadequate to meet the oil demands of the region. So, it is clear that, the region will remain dependent on oil imports. The natural gas reserves in Bangladesh, India and Pakistan are sizeable but they are not seen by experts as a dependable source for long term planning. India and Pakistan, along with Bangladesh, have large coal reserves. India is the world’s third largest coal producer, and will continue to use coal as the primary commercial fuel for electricity generation. Pakistan’s immense coal reserves are yet untapped and estimated at 175 billion tonnes in the Thar area of Sindh province, a source that Pakistan will probably start to utilize fully in the years to come, although oil and gas are plentiful in regions to the north and west of Pakistan [2]. Pakistan also has plans to develop its lignite resources and to set up mine-head power plants. Bangladesh has limited coal reserves and plans to develop them slowly; although its one large open-cut project in Phulbari has been shelved just before beginning production due to mass demonstrations about the displacement of local communities. Sri Lanka intends to begin coal imports for power generation. Hydro-electric potentials are pretty high in this region with possible locations being primarily in India, Pakistan, Nepal and Bhutan. Two mountainous countries, Nepal and Bhutan, have the potential to produce power from hydro-electric plants which are far in excess of their current or projected demands. But, high investment required is the only barrier for them to produce surplus power. Traditional fuels such as biomass and animal waste continue to contribute handsomely in the region’s energy mix, but at the same time, nuclear sources provide increasingly sizeable portions of power (in India and Pakistan), as do solar and wind power projects in India. Renewable energy sources have become a point of interest in this region and researches are going on to extract a noteworthy amount of power from renewable energy sources. Solar and Wind power is the segment that is getting pretty high interest from the researchers, private investors and governments.

 

3. Country-Wise Energy Scenario    

            In different countries in the SAARC region, the energy resources differ. Similarly, the process of power extraction also differ as some countries are dependent on natural gas as their main source of energy while some others are dependent on coal. These country-wise energy scenarios are discussed below in brief to get an overview on the present situation of that country and to get an insight on why regional cooperation in energy sector is required.


3.1 Afghanistan

            In 2008, Afghanistan generated 0.83 billion kilowatt-hours of electricity from an installed capacity base of 0,489 megawatts. The top 2 energy sources overall were Hydroelectricity (76.48% of total capacity) and Conventional Thermal (23.52%). 76.48% of the installed capacity base comprised of renewable energy sources, the largest being Hydroelectricity at 374 megawatts [3].

            From statistics, it is observed that energy scenario of Afghanistan is not truly representing the energy demand of the country. Afghanistan is a country of around 26.12 million people, but the present energy consumption of the country is far below the bench mark of 1978. Collection of energy statistics is also another big issue. From historical data and some recent studies or surveys conducted by different international organizations are the major sources of future energy demand projection. It is observed that in the coming years, Afghanistan would experience primary energy growth rate of around 6% a year and at the same time, growth rate of electrical energy would be 10.5% a year [4]. Though endowed with natural resources, the country will have to largely depend on energy imports to meet its energy demand. Currently, out of a yearly 3.81 mtoe of non‐diminishing hydropower potential, Afghanistan utilizes only 6.69% [4]. From a regional energy perspective, Afghanistan has the potential to act as energy transit country for South Asia.

3.2 Bangladesh

            Energy sector of Bangladesh is heavily dependent on natural gas. If probable gas reserve can not be firmed up, Bangladesh will experience serious energy challenge due to gas shortage after 2016. To avoid this situation, Bangladesh will have to switch its extreme primary fuel dependency on gas to coal. Bangladesh is meeting its oil requirement through imports. From analysis, it is observed that Bangladesh would experience fuel based primary energy growth of around 6.24% a year, along with electrical energy growth of 7.8% a year from the period 2010 to 2020 [4]. Bangladesh can diversify fuel supply mix in an economic way, through import of gas and electricity from neighboring countries. With respect to East Asia, Bangladesh could act as energy transit country in the Eastern part of South Asian region.

            Among all the energy sources, presently, Bangladesh heavily relies on fossil fuels, especially natural gas, petroleum oil and coal. Bangladesh has not yet gone for large scale usage of renewable energy sources except the hydroelectric power plant in Kaptai or a failed wind turbine power plant project in Kutubdia. But, steps are being taken to popularize renewable energy sources in form of solar energy or wind energy. But, at present, it is almost all fossil fuels. Here is an over view of the present scenario of the energy resources of Bangladesh:

·         Natural Gas

            Natural Gas is the most important energy source for Bangladesh. From household uses to heavy industries, natural gas is used frequently. But, unplanned use of natural gas in earlier years and highly subsidized price of it has made it difficult to perfectly utilize the full potential of total natural gas reserve in Bangladesh. Contrary to popular belief, Bangladesh does not have a large reserve of natural gas. According to the latest information found, the natural gas reserve situation of Bangladesh looks like:

 

Table: Natural Gas Reserve in Bangladesh [5]

Natural Gas Reserve

Amount in Bcf

Reserve (Proven + Probable)

28,619.70

Reserve (Recoverable)

20,631.45

Cumulative Gas Production (Till Dec 2010)

9,407.14

Remaining Recoverable Reserve

11,224.31

Daily Gas Production in 2010-2011 (Till April 2011)

2.19

 

So, from the information stated above, it is clear that Bangladesh has used up almost half the total reserve of natural gas. With the increasing rate of use of natural gases, it is obvious that Bangladesh will run out of Natural Gas reserve within 2025 if not sooner.

 

            Now, if we look at the present pattern of gas consumption In Bangladesh, it can be seen that the consumers can be divided to two broad divisions, a) Bulk and b) Non Bulk. In bulk sales, As per latest information from Petrobangla, in 2008-09 fiscal year, for total production of 653.7 Bcf, total bulk sales was 426.682 Bcf where grid power industry consumed 351.85 Bcf and fertilizer industry consumed 74.832 Bcf. The non-bulk sales consumed a total of 217.258 Bcf. Present situation of demand-supply relation of natural gas is not looking positive in Bangladesh. According to the monthly report for the month of august from Petrobangla, there is around 500 Mcf shortage of supply every day. [5]

 

Table: Demand Supply Situation as in August 2011 [5]

            . Consumer

Demand (Mcf)

Supply (Mcf)

Shortage (Mcf)

Power

923

804

 

Fertilizer

289

132

 

Non-Grid Power

40

37

 

Captive

425

340

 

CNG

125

114

 

Industry

400

323

 

Domestic

275

224

 

Commercial and others

36

26

 

Total

2513

2000

513

 

·         Petroleum Oil

            Petroleum oil is the most important fossil fuel around the world. Due to its higher heating value and portability by carrying in fuel tanks, it has become the most prominent fuel for different uses especially transportation sector. Though presently a very large number of vehicles and industries are running in CNG in Bangladesh, petroleum oil is still a very big source of energy. Unlike past, Bangladesh is presently producing enough petrol to serve its own needs. A healthy amount of petroleum products are being produced at different fields under Sylhet gas fields ltd. According to Monthly Production and Sales Statistics of different fields of the company, June 2011, in the month of June 2011, total production of condensate is 1088.83 Barrel from Haripur, Beanibazar and Rashidpur gas fields.  But unfortunately, petrol is not as important as diesel as a fuel because bigger machines usually run on diesel engines. The amount of diesel produced from this condensate can barely serve a very low percentage of demand. So, every year, Bangladesh has to import a huge amount of petroleum oil in form of Crude oil, refined oil and lubricating oil.

 

            Based on a presentation of BPC (Bangladesh Petroleum Corporation), in 2009-10 fiscal year, BPC imported a total amount of 3778041 MT petroleum products which had a value of 16781.75 crore taka. In 2010-2011 fiscal year (up to April) BPC imported 3851149 MT which had a value of 20336.79 crore taka [5].

 

Table: Sector wise sale of petroleum products in fiscal year 2010-2011(up to May 2011) [5]

Sector

Agriculture

Industry

Power

Communication

Domestic & Others

Total

Amount (bbl)

1070632

183852

362350

2362778

482836

4462448

Percentage

23.99

4.12

8.12

52.95

10.82

100.00

 

·         Coal

            Coal is a very important source of energy in worldwide perspective. Since the dawn of industrial age, coal has played a very big part as the primary energy source. But, in Bangladesh, coal is not a popular source because it’s a new discovery in Bangladesh and due to bureaucratic red tape scenario; coal has not been yet used in mass level. Presently, only one mine is on operation in Bangladesh and that is in Barapukuria, Dinajpur. According to the data found in Centre for Energy Studies, BUET, the total amount of coal reserve in Bangladesh is 3.015 Billion MT of which 1.4 Billion MT is recoverable [5].

·         Electricity

            In 2008, Bangladesh generated 32.93 billion kilowatthours of electricity from an installed capacity base of 5,453 megawatts. The top 2 energy sources overall were Conventional Thermal (95.78% of total capacity) and Hydroelectricity (4.22%). 4.22% of the installed capacity base comprised of renewable energy sources, the largest being Hydroelectricity at 230 megawatts [6].

 

 
  Total Electricity in Bangladesh


Bangladesh’s total electricity capacity has increased on an annual compound basis by 3.91% over the last 20 years to 5,453 megawatts (MW) in 2008. In the last year, the total installed capacity base increased by 208 megawatts (+3.97%) with the largest source of new capacity being Conventional Thermal (+208 megawatts). Total renewable energy capacity accounts for 4.22% of this total installed capacity base whilst renewable energy sources excluding hydropower account for 0%. Conventional Thermal experienced the fastest capacity growth rate (4.15%) in the last year whilst Conventional Thermal Energy added the most capacity in the last 5 years, reaching 5,223 MW in 2008. Total electricity generation meanwhile climbed 11.72% over the last year to 32.93 billion kilowatthours (bn kWh) in 2008 with the largest source for electricity generation being Conventional Thermal (95.57% of total net generation). Conventional sources including conventional thermal (coal, petroleum, gas), nuclear power and hydro pumped storage accounted for 95.57% of total electricity generated, up from 94.78% 5 years previously. In 2009, Bangladesh had a zero balance net import requirement. There were no exports of electricity. [6]

3.3 Bhutan

            Bhutan has the lowest per-capita GDP of all the countries of this region. However, it has greater access to electricity and has about eight-fold higher per-capita energy consumption. In 2000, 55% of Bhutan's commercial energy consumption (which totaled 380.7 million kWh) was provided by hydroelectric power, 24% from petroleum, and 21% from coal. Electric power was introduced in Bhutan in 1962; by the mid-1980s, six hydroelectric and six diesel power stations were in operation. The 336-MW Chukha hydroelectric project, in south-western Bhutan, was completed in early 1987 and is connected to the Indian power grid; the project was funded by India, which is to receive all the electrical output not used by Bhutan. As of 2002 the major hydroelectric project under construction was the 1,020 MW Tala plant, slated for completion in 2004/05. In 2001, Bhutan's net installed capacity was 425,000 kW; in 2000 production totaled 1,900 million kWh, of which 99% was hydroelectric [2].

3.4 India

            India’s energy consumption is increasing by leaps and bounds; from 4.16 quadrillion Btu (quads) in 1980 to 12.8 quads in 2001, recording a 208% increase. In 2001, coal accounted for 50.9% of India’s primary energy consumption, with petroleum accounting for 34.4%, hydroelectricity 6.3%, natural gas 6.5%, geothermal/wind/solar (non-conventional) 0.2%, and nuclear power 1.7%. Despite this growth and high population, India’s energy consumption is still below that of US, China, Japan or Germany [2]. In 2008, India generated 785.53 billion kilowatt-hours of electricity from an installed capacity base of 176,788 megawatts. The top 3 energy sources overall were Conventional Thermal (68.95% of total capacity), Hydroelectricity (22.23%) and Wind (5.46%). 28.72% of the installed capacity base comprised of renewable energy sources, the largest being Hydroelectricity at 39,308 megawatts [7].

 
  Total Electricity in India


India’s total electricity capacity has increased on an annual compound basis by 4.61% over the last 20 years to 176,788 megawatts (MW) in 2008. In the last year, the total installed capacity base increased by 7,473 megawatts (+4.41%) with the largest source of new capacity being Conventional Thermal (+4,094 megawatts). Total renewable energy capacity accounts for 28.72% of this total installed capacity base whilst renewable energy sources excluding hydropower account for 6.49%. Biomass and Waste experienced the fastest capacity growth rate (23.92%) in the last year whilst Conventional Thermal Energy added the most capacity in the last 5 years, reaching 121,892 MW in 2008.Total electricity generation meanwhile climbed 3.45% over the last year to 785.53 billion kilowatthours (bn kWh) in 2008 with the largest source for electricity generation being Conventional Thermal (82.02% of total net generation).Conventional sources including conventional thermal (coal, petroleum, gas), nuclear power and hydro pumped storage accounted for 83.69% of total electricity generated, up from 85.74% 5 years previously. In 2009, India had a zero balance net import requirement. There were no exports of electricity [7].

 

 
  Renewable Energy in India

3.5 Maldives

            About 55% of total energy consumption comes from wood. Nearly all of the inhabited islands of the Maldives (194 out of 199) have access to electricity; in late 2001, the Asian Development Bank issued an $8 million loan to boost the availability and supply of power to 40 outlying islands of the Maldives. In 2000, net electricity generation for all of Maldives was 110 million kWh, of which 100% came from fossil fuels. Total installed capacity at the beginning of 2001 was 25 MW [8].

            The State Electric Company is to establish power stations all throughout the 200 islands under a planned program of rural development. With 23 island electrificated by the State Electric Company, the remaining 177 islands have some form of limited and not-so-reliable power supplies run by individual entrepreneurs. The airports and the tourist resorts have their own power generation systems. All these power supply systems are entirely run on imported fossil fuel, diesel. Renewable energy is used to power navigational lights (marking the reefs), communication transceivers on fishing boats and for power supply at the remote installations in the national telecommunication network. These installations are not connected to the grid and are privately owned and operated. Solar energy is also used on a small scale for producing hot water for homes and in the tourism industry. The telecommunication company of Maldives is the single biggest user of renewable electrical energy, which is produced using solar energy. One hundred and seventy seven sites, mainly using solar power or solar-diesel hybrid systems, are operational. The largest site has a capacity of 3.5 kW while the total capacity approximates to 130 kW [8].

 

3.6 Nepal

            After Bhutan, Nepal is the poorest of the South Asian countries. Nearly all energy consumption was in the residential sector and most of that energy was derived from fuel wood. Nepal has little or no fossil fuel reserves so it relies on totally on imports. Because of this, some emphasis is being put on renewable sources of energy. For example, the 10thFive Year Plan (2002–2007) aimed to provide more access to energy to rural families from alternative energy sources, as a means for poverty alleviation. In 2008, Nepal generated 3.05 billion kilowatthours of electricity from an installed capacity base of 717 megawatts. The top 2 energy sources overall were Hydroelectricity (92.05% of total capacity) and

 
  Total Electricity in Nepal

Conventional Thermal (7.95%). 92.05% of the installed capacity base comprised of renewable energy sources, the largest being Hydroelectricity at 660 megawatts [9].

3.7 Sri Lanka

            Fuel wood and oil provide Sri Lanka with about 90% of its primary energy supply, in roughly equal proportions [2]. Nearly half of the oil is used for transportation and a quarter for power generation. In terms of electrical power produced, roughly equal amounts come from hydro and thermal plant. Some of the issues Sri Lanka will have to deal with concerning electrical power are:

·         Inadequate generation capacity additions

·         Absence of cost reflective pricing

·         Absence of a coherent policy towards sector expansion such as weak public-private partnership situation

·         Increased dependence on imported fossil fuels in the thermal generation sector and increased fuel switching, biomass to LPG.

3.8 Pakistan

 

 
  Total Electricity in Pakistan


            Pakistan’s economy is at the crossroads, with a projected growth rate between 7-8% in the next five years. The energy sector consists of natural gas 45%), oil (15.2%), hydroelectricity (6.43%), coal (3.3%), nuclear (.42%) and renewable (negligible). Natural gas is currently utilized by the power sector (35.4%), fertilizer (23.4%), industrial (18.9%), household (17.6%), commercial (2.8%), and cement (1.5%). In electricity consumption, the domestic sector demands 41.4%, with industries claiming 31.1%, agricultural 14.1%, other government sectors 7%, and commercial consumers 6%. The government has recently published a 25 year Energy Security Action Plan (ESAP) with two main thrusts: first is to clearly separate short-term, mid-term and long-term goals, and secondly to increase self-reliance on indigenous fuels.
Natural gas is the fuel of choice, and the country is considering various pipeline options from Iran, Qatar and Turkmenistan as well as enhancing exploration. This Plan also aspires to change the hydro-thermal mix in favor of hydro power, and increase the share of nuclear energy to 5–6% by 2025 [2].

4. Benefits of Regional Cooperation in Energy Sector of SMS

i.           Dependable support, reserve sharing, cleaner fuels, improved investment opportunities and decreased risks for investors, and the associated sharing of knowledge and experience will benefit everybody.

ii.            Scopes to increase access to up to date and cleaner energy, especially electricity, to unreached localities and to intensify performance of the energy utilities would be created by economic progress.

iii.            Differing resource endowments, development needs, and demand patterns among the countries in the region and its neighborhood create significant opportunities for cooperation and trade in the energy sector and eventually for creating one of the world’s largest integrated energy markets.

          iv.            Energy resource-surplus countries (Nepal, Bhutan in the region, Central Asian countries, Iran, Myanmar in the neighborhood) would be benefitted from economic progress through energy export and accomplishments of comprehensive regional schemes which would not be practically feasible otherwise.

            v.            Improved energy security would be possible in those countries with considerable energy import needs like India, Pakistan, Sri Lanka and Afghanistan, as would the others like Bangladesh from developing the energy mix.

          vi.            Enhancing energy trade through specific projects, whether bilateral or multilateral and strengthening regional organizations and institutions, to complement the track, help to enhance mutual trust and confidence. SAARC could play a major role in helping to build mutual trust, to develop regional institutions and physical infrastructure, and to partner with development organizations [11].

        vii.            Two regional energy trading hubs initially: the first at the western flank of the region, comprising Afghanistan, Pakistan and north-western India as importing markets, trading with Central and Western Asia; the second at the eastern flank of the region, comprising India (as the main importing market), Nepal, Bhutan, Bangladesh, and Sri Lanka. Both hubs could develop gradually, with India eventually bridging the two hubs into a region-wide integrated market [11].

 

5. Obstacles for Regional Co-operations in Energy Sector

5.1 Political Obstacles

·         In Bangladesh and Nepal, a group of politicians and some other important persons from the society have discouraged energy trade with India.

·         Recently, the Indian Directorate General of Foreign Trade applied an import duty on electricity and classified electricity as a “restrictive commodity” for trade. The possibility of application of such import taxes creates significant uncertainty for export-oriented projects. When projects are not carried out through government-to-government agreements as in the Bhutanese case, private investors have no protection against sudden increases in tax and final project costs. The situation remains unclear as to whether Indian authorities will discriminate between Indian and Nepali exports in the application of import taxes. The insecurity created has made Nepali investors hesitant to go ahead with their projects.

·         Prolonged political tension between India and Pakistan over Kashmir, warlike conditions in Afghanistan, internal armed conflicts in Sri Lanka and Nepal, as well as the political turmoil Bangladesh, were not conducive to develop regional cooperation and trade.

·         The previous inward-looking, import-substitution–based policy was aimed at the elusive goal of national self-sufficiency. This approach regarded energy imports as diluting energy security.

·         Overshadowing all the aspects mentioned in the previous paragraphs is a severe lack of trust between SAARC member states. This can be perceived in almost any aspect of the negotiations, in particular the regional negotiations at the SAARC level. The SAARC Energy Working Group, which is in theory the correct platform to facilitate regional cooperation, has shown rather slow progress. In 2008, a high-level study on regional energy trade was carried out by the ADB. Its endorsement, however, has been repeatedly postponed until the end of 2010. While this is only a preparatory study and further feasibility studies will have to be carried out before any implementation, it does indicate that energy trade has not been high on SAARC’s list of priorities [12].

 

5.2 Monetary Obstacles

·         Pervasive state ownership of the utilities, their poor earnings, and their inadequate internal cash generation to finance their own domestic needs let alone the investments for export infrastructure—proved a major handicap for the development of regional trade.

·         Economic benefits were the main reason for cooperation in other regions, such as the Greater Mekong, the Nordic Pool and Southern Africa. In South Asia, most countries are energy-deficient and lack the capacity to trade in electricity. Instead, large-scale upfront investments have to be incurred for a long-term benefit. That is one of the reasons why both decision makers and the people at large perceive short-term improvements in domestic systems and power availability as superior investment priorities.

·         On account of such poor operational and financial performance of the power utilities and their lack of creditworthiness, the entry of independent power producers (IPPs) for generation in most cases could be only on the basis of “take or pay” obligations fully covered by sovereign guarantees [1]. Even in such cases, the inability of the utilities to absorb the rising cost of power from IPPs (indexed to variations in fuel prices, exchange rates, domestic inflation, and similar variables) resulted in disputes, cancellation, or renegotiations, which soured the investment climate. This environment was clearly not conducive for electricity trade among the countries.

5.3 Social Obstacles

·         A study by USAID found that Bangladesh’s and Nepal’s populations have a relatively strong objection to exporting energy to India, even if it would be highly beneficial in the long run [12]. A strong distrust of India among domestic populations influences their actions and voting behavior. South Asia is the least economically integrated region in the world, owing to a recent past of mutual antagonism. Apart from Bhutan, all countries are power-deficient. However, some claim that this is a simple argument to excuse the lack of copying or following into the example of Bhutan’s trade with India. They perceive that for Bhutan the cost of electricity export is its own sovereignty: India has significant influence over both Bhutanese defense and foreign policies .

 

5.4. Environmental Obstacles

Hydropower generation and the construction of multipurpose projects are considered to have significant environmental repercussions [12]. Internationally, it is still highly debated whether hydropower is a renewable energy source or not. The construction of multipurpose projects, which include large reservoirs, means a disruption of riverine fauna, and displacement of human settlements and agriculture.

 

5.5. Technical and Infrastructural Obstacles

The absence of infrastructure in the regionby way of electrical interconnections and gas pipelines across the borders (except in the case of the few interconnections between India and Nepal, India and Bhutan, and between Afghanistan and Central Asia and Iran) is a physical constraint to the energy trade [1]. This is not attributable to any difficult terrain, except perhaps in the border areas between India and China and to a lesser extent between Pakistan and Afghanistan. There is no special geographical reason for lack of interconnections between India and Pakistan or between India and Bangladesh.

6. Lessons from the International Community

There are a number of successful examplesof regional electricity gridsthroughout the world.  The choice of experiences is based on the regional blocks’ success in achieving a government-level agreement; institutionalizing interaction between different member states and stakeholders; establishment of a supervisory/supranational authority; infrastructure investment and transmission connections; and increased availability of reliable energy for citizens. Now let us take a look at some of these organizations who have succeeded.

6.1. ASEAN: Communication Expert

 

 
 

ASEAN has been active in energy cooperation, in particular in its institutionalization. At several levels of government and depending on the issue (fossil fuels, renewable energy, power utilities, regional policy and planning), the member countries are organized and meet on an annual basis, while their reports are made available to the general public. In 2002, the Memorandum of Understanding (MoU) for the construction of the Trans-ASEAN Natural Gas Pipeline (TGAP) was signed, establishing the ASEAN Gas Consultative Council. For both the gas pipeline and a power grid, an ASEAN Master Plan was completed in 2000 and 2003 respectively (The 22nd ASEAN Ministers on Energy Meeting 2004). Four power grid interconnections are already in place in Southeast Asia: Peninsular Malaysia–Singapore, Thailand– Peninsular Malaysia, Vietnam– Cambodia, Thailand–Cambodia). ASEAN’s strategy is to “encourage interconnections of 15 identified projects, first on cross-border bilateral terms, then gradually expanding to a sub-regional basis and, finally to a totally integrated Southeast Asian power grid system.” There are four ongoing interconnection projects and an additional 11 projects are planned for interconnection by 2015. The investment requirement of the ASEAN Power Grid is estimated at US$5.9 billion. A potential saving of about US$662 million in new investment and operating costs is estimated as resulting from the proposed interconnection projects (ASEAN Centre for Energy 2009).

6.2. Southern Africa: Institutional Success

The Southern African Power Pool (SAPP) is a cooperation of national electricity companies in Southern Africa under the auspices of the Southern African Development Community (SADC). The members of the SAPP have created common power grids between their countries and a common market for electricity in the SADC region. The SAPP was founded in 1995 and is considered to be the most successful example of regional energy cooperation. Its coordination centre is located in Harare, Zimbabwe. Prior to its creation a history of 40 years of cooperation supported its development. Before 1995, two independent networks were already in existence: The Southern Network, which connected Namibia, South Africa and Mozambique, was dominated by thermal-based power generation; and the Northern Network, which connected the DRC, Zambia and Zimbabwe, supported mainly hydropower generation. It is a fascinating achievement when looking at electricity exports, imports and production for all sub-Saharan countries in 1997, 20 out of 42 countries were exporting or importing power. Half of those are members of the SAPP. The SAPP example demonstrates one of the preconditions for grid integration: the prevalence of competitive electricity trade legislation, which had been decided at an early stage of cooperation.

6.3 Europe: The Ideological case

The EU’s story of integration can be seen as the mother of all regional agreements. While the EU mainly evolved out of the regional cooperation on coal, steel and nuclear energy under the 1951 European Coal and Steel Community (ECSC) and European Atomic Energy Community (EURATOM) treaties, energy policy has never become a supranational portfolio. Energy cooperation at the intergovernmental level, however, has deepened integration and always been supported by EU institutions. Gas Pipelines like the Nabucco (connecting Europe to the Middle East through Turkey) or North-Stream projects (connecting to Russia through the Baltic) have an inherently European character for importing gas from the EU’s eastern and southern neighbors. Before 2007, the EU was divided into regional transmission organizations, coordinating national transmission system operators. Synchronization of the regional grids happened in 2007 (Bower 2003). An analysis of the role played by energy policy in the overall European integration process will further add to the theoretical approach to regional cooperation.

6.4 The Lessons for South Asia

One of the key arguments given by representatives and commentators in our region is that apart from Bhutan none of the South Asian countries has an energy surplus which would essentially justify regional integration. Europe, however, has always relied on external supply of energy sources to meet its demand. Predictions till 2020 even foresee a dependence of 56 percent of its energy needs. This is due to a peaking in domestic consumption in, for example, the North Sea. By 2020, 77 percent of natural gas will have to be imported, 93 percent of oil, and 8 percent of solid fuel supplies (European Commission 2008). This is why the goal of the EU’s energy policy has been in fact exogenously oriented: it is “to build up a wide network of countries around the EU, acting on the basis of shared rules or principles” (European Commission 2007). Furthermore, the European Commission argues that “the dependency is not a problem in itself. However it requires an active energy security policy, building up internal strengths through a well functioning internal energy with good interconnections, diversity in the types of energy used, clear regulation for security of supply and mechanisms for cooperation to deal with crisis”  The ideal rationale therefore becomes that common problems may only be solved with transnational solutions. Two ideas can be seen as central to the success of any regional project: the role of a secretariat, and the role of spillover effects. In theory, India could pursue a similar strategy with its northern neighbors. By persuading SAARC member states to adopt similar energy regimes and to jointly decide on certain standards, the theory suggests that a spill over into other areas of cooperation could not only generate trade benefits but also contribute to economic and political stability in the region. One of the key aspects of such a spillover, the theory claims, is an increasing frequency in the meetings of representatives from different countries

 

7. Initiatives for Regional Energy Cooperation

7.1. SAARC Inter governmental Framework agreement for Energy co-operation

Energy ministers in SAARC nations have decided to finalize the SAARC Inter-Governmental Framework Agreement (IFA) for Energy Cooperation by mid of this year to ease electricity crisis in the region. Reiterating the importance of electricity in promoting economic growth and improving the quality of lives, realizing the common benefits of cross-border electricity exchange and trade among the SAARC member states this agreement was done. The framework agreement would also include the provision of allowing unrestricted cross-border trade of electricity on voluntary basis subject to regulations of the respective member countries. The agreement would allow the SAARC nations buying and selling entities to negotiate the terms, conditions, payment security mechanism and tenure of their power purchase agreements as normal commercial agreements. It would also allow the national grid operators to jointly develop coordinated procedures for the secure and reliable operation of the inter-connected grids of the member states and prepare scheduling, dispatch, energy accounting and settlement procedures for cross border trade. But would also allow transfer of technology related to the power generation, transmission and distribution among the SAARC member states.

7.2. SAARC Energy Trade Study (SRETS)

This has been completed with the assistance of Asian Development Bank.  It has identified four trade options which will be considered by the relevant SAARC mechanism in order to make a road map for implementation.  As a follow SAARC has commissioned a study on Regional Power Exchange.  The study is likely to be completed in 2012.  The Study will   explore the development of a regional power market involving SAARC countries that already have interconnection, as well as those that have planned interconnections.  It will also examine both economic and technical requirements of establishing a regional power exchange that would maximize the potential for power transfers among SAARC regions to reduce power shortages and take advantage of economic benefits.

7.3. SAARC Market for Electricity (SAME)

The 16th summit held on 28-29 April 2010 in Thimpu, Bhutan has adopted an Indian proposal for a roadmap to create a SAARC market for electricity. The summit urged the member countries to quickly ratify the trade in services deal to open their service sectors. The leaders noted the proposal from India for preparing a roadmap for developing a SAARC market for electricity on a regional basis, as SAARC is considering electricity trading, supported by enabling markets in the member states. The leaders emphasized the need to undertake studies to develop regional energy projects, promote regional power trade, efficiency, conservation and development of labeling and standardization of appliances, and sharing of knowledge and technologies, according to the declaration. Earlier, Bangladesh Prime Minister Sheikh Hasina in her summit speech proposed for a regional grid of electricity in the SAARC region. Energy-starved Bangladesh has been in negotiation with India and Bhutan to import electricity from the neighboring countries.

7.4. SAARC Energy Centre (SEC)

The creation of SAARC Energy Centre (SEC) came into picture after the Dhaka Declaration in 2005. In this declaration, the Heads of the State or Government welcomed the joint Statement of the first SAARC Energy Ministers meeting held in October 2005 in Islamabad. They agreed to the recommendation to establish the SAARC Energy Centre in Islamabad: to promote development of energy resources, including hydropower; and energy trade in the region; to develop renewable and alternative energy resources; and to promote energy efficiency and conservation in the region. It has started journey from 1st March 2006 in Islamabad. SAARC energy cooperation program provides a major substantive element for economic prosperity of South Asia through meeting the energy demand of the countries. SAARC Energy Centre is converting energy challenges into opportunities for development. It is the platform involving officials, experts, academics, environmentalists and NGOs to tap potentials of cooperation in energy sector including development of hydropower, renewable and alternative energy, promoting technology transfer, energy trade, energy conservation and efficiency improvement in the region.

7.5. Energy Cooperation through BIMSTEC

Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) is an international organization involving a group of countries in South Asia and South East Asia. The member countries of this group are: Bangladesh, India, Myanmar, Sri Lanka, Thailand, Bhutan and Nepal.  It was formally launched on 31 July 2004 in order to create a link between ASEAN and SAARC. Seven members of BIMSTEC covers thirteen private sectors led my member countries in a voluntary member. Trade and Investment, Transport and Communication, Energy, Tourism, Technology, Fisheries, Agriculture, Public Health, Poverty Alleviation, Counter-Terrorism and Transnational Crime, Environment and Natural Disaster Management, Culture and People to People contact. Out of the seven members five are the members of SAARC and energy is one of the priority sectors.

7.6. MOU for Establishment of BIMSTEC Grid Interconnection

Member states of the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) have reached a consensus to sign a Memorandum of Understanding (MoU) in June or July this year to exchange electricity among them. The proposed MoU will provide a broad framework for the member countries to cooperate towards the implementation of grid interconnection for the trade in electricity based on bilateral building blocks with a view to promoting rational and optimal power transmission in the BIMSTEC region. It also added that the BIMSTEC trans-power exchange and development projects will be implemented through strengthening of bilateral and intra-regional cooperation within the framework of respective member countries' environmental and electricity laws and regulations. According to the MoU, the member states will coordinate and cooperate in the planning and operation of interconnected systems to optimize costs and maintain satisfactory security to provide reliable, secure and economic electricity supply to the member countries. The issue of imposing import, export, or transit fee, duty, tax or other government charges on construction, operation and maintenance of the BIMSTEC grid interconnection will be mutually agreed upon under the MoU.

7.7. Four Borders Project: Reliability Improvement and Power Transfer in South Asia

During 2001–2002, under the USAID sponsored SARI/Energy programme, Nexant conducted a study on the “Four Borders Project: Reliability Improvement and Power Transfer in South Asia”, which suggested connecting Siliguri (India) to Anarmani (Nepal) and Thakurgaon (Bangladesh) initially by 132 kV lines, capable of being upgraded to 220 kV as the volume of interchange increases. It also suggested the alternative of connecting Purnea (India) to Duhabi (Nepal) and Ishurdi (Bangladesh). Further connections are possible from Chhukha (Bhutan) to Siliguri and then on to Purnea. The cross-border flows would be around 500 MW and these would represent a relatively low-cost initiation of power trade, which could be extended later.

 

 
 

7.8. Energy trade and creating an energy ring

After decades of insignificant volumes of cross-country electricity trade and absence of any trade in natural gas through pipelines among the countries in the South Asia, political leaders and businessmen of the region have recently evinced a great deal of interest and enthusiasm in cross border electricity and gas trade, not only within South Asia but also with its neighbors in the west (Central Asia and Iran) and in the east (Myanmar).

So the concept of an “energy ring” has now come into picture & political leaders now realized that to establish an regional energy ring & build an international grid among the countries is necessary. The steady, reliable supply of energy at reasonable cost is one of the key determinants for industrial competitiveness.

             

8. Recommendations

To ensure energy security all the neighboring countries have to step up and its true success lies with the neighboring countries. Co-operations like SAARC and BIMSTEC have been formed and these have been active regarding the energy situation. Followings are a few more areas where the countries should focus on –

8.1. Governments

The governments of all countries carry the key responsibility for advancing regional energy cooperation. Without the highest-level approval, progress is not possible and the government has to believe in the success of these types of co-operations. The recommendations for South Asian governments can be condensed into four key ones:

 i.            Unbundle national utilities, distribution and transmission systems operators.

ii.            Sign more agreements to harmonize and synchronize the grids, which will also facilitate conventional imports and exports.

 iii.            Update domestic power grids to allow for feed-in.

iv.            Become the prime project sponsors to create an environment of security for private and foreign investors, as well as upgrade regional infrastructure.

Given the state of energy deficiency in Bangladesh, India and Nepal, the key to cooperation lies not only in the import and export of power and gas to exploit complementarities but also in many softer areas of cooperation that are still lacking significantly. These are energy efficiency, rural electrification, smart grid, grid harmonization, renewable energy and technology transfer, e.g., through exporting solar photovoltaic technology. More concretely, the 2010 SAARC Regional Energy Trade Study (SRETS) carried out by the ADB suggests four ways of moving forward in regional energy cooperation. The four areas for successful regional cooperation were identified as:

         a) Regional/Sub-regional Power Market

         b) Regional/Sub-regional Refinery

         c) Regional/Sub-regional LNG Terminal and Gas Transmission Expansion

         d) Regional/Sub-regional Power Plant

The final market approach can be adopted, once the essential preconditions for any region to trade in a competitive market are fulfilled, which are:

         a) Adequate redundancy in generation and transmission

         b) Electricity sales price reaching its economic value

         c) Level playing field

         d) Mechanism for market surveillance to guard against abuse of power

The attainment of these conditions affects the final timeline of market opening.

On a more general note, the individual countries should pursue their trading interests. The key remains a connection through the chicken’s neck area, where Bangladesh, Bhutan and Nepal are separated by only a narrow strip of Indian Territory. Bangladesh needs to lobby hard for a connection to the hydropower centers of its neighbors, Bhutan and Nepal. At the same time, the Bangladeshi government will have to support natural gas pipelines from Southeast Asia connecting its own infrastructure. While they are necessary for regional cooperation to happen, they are not sufficient. When technical knowledge and feasibility are attained, policy makers on all sides and in particular India have to take the leadership role.

 

8.2. International Aid

Donors and actors like the World Bank have been always trying to make these type of co-operations function properly. But sometimes they have been criticized for being unsuccessful in fostering regional energy cooperation. According to a former Nepali Minister for Water Resources, Dipak Gyawali (2010), in the Nepali context, donor-funded projects have become mere “cemeteries” of energy cooperation.

Regardless of such criticisms, the USAID, the World Bank and the ADB are continuing their assistance on the issue. The USAID has been focusing on capacity building in the Nepal Electricity Authority known as NEA. The World Bank is giving legal assistance to the NEA and carrying out feasibility studies on the consequences of electricity trade. The ADB is willing to assist in future transmission lines and integration. There remain a number of areas where their involvement is likely to benefit overall progress in energy cooperation.

There are a number of areas in which the expertise of international donors and organizations can be useful. These are:

         a) Capacity building of policy makers

         b) Fostering interaction of decision makers at the highest level

         c) Support of negotiations through provision of advisory and legal services

         d) Research support

         e) Payment mechanisms

Technical assistance is also a major part where the international actors can play a vital role. At a conference in New Delhi, Shri S Padmanabhan, the regional director of SARI/Energy explained how imported hydropower and natural gas would help in moderating the increase in fossil fuel requirements. He enumerated the following roles of SARI/E: to promote regional cooperation together with governments and the private sector; to bridge the gap of barriers and distrust; to provide counterpart funding, resources and unbiased support for regional initiatives; and to showcase examples of the benefit of regional cooperation.

Unlike more recent directional changes in development assistance, there remains a considerable aspect for technical assistance to be fulfilled. The debates on regional cooperation have remained at the policy level. What is needed is a detailed feasibility study estimating possible trade volumes, transmission lines required and citizens affected. Similarly, financial and economic calculations of the poverty- alleviating benefits surrounding the construction of export projects weighed against their true social costs have to be provided. This will facilitate goal-oriented negotiations between India and its future energy trading partners, as well as in the long run at the multilateral level.

            Potential areas for research and initiatives

•          Assessment of positive and negative externalities of hydropower projects.

•          Assessment and predictions of bilateral trade and regional exchange volumes.

•          Infrastructure investments in transmission networks

•          Technical and financial feasibility to connect generation and transmission for export and domestic consumption.

•           Information collection and sharing.

•           Knowledge networking and technology cooperation in rural electrification.

•          Building greater energy efficiency.

•          Enhancing the role of the private sector in energy development and trade.

•          Evolution of coordinated legal and regulatory frameworks.

•          Back-to-back arrangements.

•          Joint R&D.

 

8.3. Education, Research and Training

Educational institutions can play a key role in supporting regional cooperation. Universities are able to provide neutral platforms for discussions, since they are both centers of research and ideas.

Through executive training specifically on energy trade, higher-level officials can be targeted and representatives from the different countries be brought together. One of the key advantages of the encouragement of education institutions to work in the area of energy cooperation is their neutrality and acceptability for most stakeholders.

8.4. Leadership

It is clear in the case of energy cooperation that the challenges faced by stakeholders and advocates are not of a technical nature. The issues here are the lack of initiative, leadership and ownership of the issues. Interventions require problem solving following the strategy of adaptive leadership, when problems cannot be clearly defined and solutions not easily found. Instead, the process of regional energy cooperation has gone a long way, during which problems and obstacles have not been constant. Even to define the problem and subsequently find the solution requires significant capacity and willingness to learn. India’s commitment and leadership can push the stalled process of regional energy cooperation forward. However, prudent diplomacy from other member states can play an important role in setting the policy agenda. A strong alignment of these members can help bring India on board. An important step would be to accept the responsibility for the shortcomings of the past and build a consensus to move forward.

 

9. Immediate steps the South Asian governments should take to promote regional cooperation

 

Now the government should find some necessary measure to have some kind of policy established to encourage the power trading. Some guidelines are given below:

Subscribe to, and become members of the Energy Charter Treaty, as Pakistan has done, in order to place the cross border energy trade on a firmer multilateral footing in relation to investment protection, regulation of cross-border energy infrastructure and flows, provide additional comfort and confidence to all participants, and minimize the political risks to prospective investors.

·         Create firm political commitment towards energy trade.

·         Give attention in adequate training to enhance individual country capability in power sector as well as launch educational program.

·         Reduce political tensions within and across the countries, with special attention to the integrity of transit countries (such as Afghanistan) and the viability and operational stability of their energy systems. Trade flourishes under peaceful conditions.

·         Adopt a sustainable commercial approach to trade (rather than a political ad hoc approach) and use standard commercial contracts which allocate risks fairly. Let the private investors and market forces play a major role in actual buying and selling,

·         Keep the price expectations realistic based on reliable market signals and ensure that both the buyer and seller see advantage in the trade.

·         Promote private sector investment & public private partnership in power production.

 

10. Remarks

Market strategy or political support are the key drivers of regional energy cooperation in South Asia Based on our discussion in this paper, the answer would be that once the circumstances of political stability and commitment to cooperation are established, technical and commercial problems can be resolved. The technical problems can be overcome with joint research work.  Political support at the national level, however, remains the predominant and crucial factor for regional integration. Also we know the imperative of climate change, compel the countries for regional energy co-operation. Without doubt, international pressure for more regional cooperation will increase.  So we have to admit that the present SAARC structure has to evolve with time to face the coming difficulties and take this region ahead socially and economically through proper co-operation.

 

Reference

1.      Asian Development Bank. Energy trade in South Asia: Opportunities and challenges. Mandaluyong City, Philippines. 2012. ISBN 978-92-9092-631-3.

2.      Lahiri-Dutt, Kuntala. “Energy Resources: Will they be the last frontier in South Asia?”. Research Fellow, Resource Management in Asia Pacific Program, Research School of Pacific and Asian Studies, Australian National University, ACT 0200, Australia.

3.      Energici. Afghanistan:Energy Profile. http://www.energici.com/energy-profiles/by-country/asia-a-l/afghanistan

4.      Obaidullah, A.N.M. “Integrated Energy Potential of South Asia: Vision 2020”. Reasearch Fellow (Energy Trade), SAARC Energy Center. Islamabad, Pakistan. September 2011.  

5.      Shahariar, M. Choudhury, Ahmed, Asif, Sarkar, M. A. Rashid. Energy Subsidy and Sustainable Development of Bangladesh. This paper prepared for presentation in at the 18th Biennial Conference of the Bangladesh Economic Association. 2012.  

6.      Energici. Bangladesh:Energy Profile. http://www.energici.com/energy-profiles/by-country/asia-a-l/Bangladesh

7.      Energici. India:Energy Profile. http://www.energici.com/energy-profiles/by-country/asia-a-l/india

8.      Developing Renewables. “Country Profile Maldives”. September 2006. http://www.energyrecipes.com

9.      Energici. Nepal:Energy Profile. http://www.energici.com/energy-profiles/by-country/asia-a-l/nepal

10.  Energici. Pakiistan:Energy Profile. http://www.energici.com/energy-profiles/by-country/asia-a-l/pakistan

11.  World Bank. Regional Cooperation on Energy. 2011. http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/SOUTHASIAEXT/0,,contentMDK:21510953~pagePK:146736~piPK:146830~theSitePK:223547,00.html

12.  A khan, R Roy and M A R SARKAR “Energy Coperatipon in SAARC Countries”  Paper presented at the conference of Bangladesh Economic Association 2010

13.  Gunatilake, Herath. “Energy Security in South Asia: The Role of Regional Cooperation”. This paper was presented in Fourth South Asia Economic Summit (SAES IV). Dhaka, Bangladesh. 22-23 October 2011

14.  Energy Sector Management Assistance Program and the South Asia Regional Cooperation. March 2008.Program Potential and Prospects for Regional Energy Trade in the South Asia Region. Formal Report 334/08. Washington, DC 20433, USA.

15.  IEA (International Energy Agency) (2002) World Energy Outlook: Energy and Poverty. Available on-line at: http://www.iea.org//textbase/nppdf/free/2002/energy_poverty.pdf Paris: IEA.)

16.  Mehta, J.K. (2005) India: Facing up to the future, The World Energy Book, World Energy Council, London, pp. 22–23.

17.  United States Agency for International Development (USAID). 2004. Economic and Social Benefits: Analysis of Power Trade in the South Asia Growth Quadrangle Region. http://www.sari-energy.org/ProjectReports/ ESBA-SAGQ_ExecSum.pdf (accessed February 2011).

18.  Singh, Aparna Shivpuri. 2009. Regional Integration in South Asia and Energy Cooperation: Opportunites and Challenges. In Marie Lall (ed.). The Geopolitics of Energy in South Asia. pp. 51–82. Singapore: ISEAS Series of Energy.

19.  Sikkim University. 2010. 3rd Japan-SAARC Energy Symposium. Promoting Energy Cooperation in South Asia. pp. 1–25. New Delhi: Sikkim University.

20.  Srivastava, Leena and Neha Misra. 2007. Promoting Regional Energy Co-operation in South Asia. Energy Policy 35(6): 3,360–3,368.

21.  United States Agency for International Development. (August 2006) (PDF). South Asia Regional Initiative for Energy Cooperation and Development - SAARC Energy Center: Strategic and Operational Plans.prepared by Nexant, Inc. under Contract No. 386-C-00-03-00135-00

 

 

 

Serial No # 5

 

 

Bangladesh: Improved Access to and Reduced Costs of Migrant Remittance Flow

 

Jamaluddin Ahmed PhD FCA

 

 

 

 

Executive Summary

 

This report is prepared in compliance with the Terms of Reference prescribed in the contract to investigate the data on remittance inflow to Bangladesh since the beginning to   Remittance Partnership Program (RPP) in the last quarter to 2006. The report examines the remittance flow from 2003-04 to 2007-08 and the share of State Owned Banks (SoB), Private Commercial Banks(PCB), Foreign Commercial Banks (FCB) and specialized financial institutions during the period. National growth of migrant remittance during this period 2003-04 to 2007-08 was evaluated in total. A Bank by bank growth pattern of remittance to the country, identification of remittance prone areas by banks was marked and the ranking of a banks performance was carried out. The banks were ranked according to competition in performance as well as district wise. The ICT infrastructure of the sample banks were evaluated, with regards to comparative information on paper Vs electronic remittance and partial automation of SoB remittance channeling. A score card based on an international study has been tried, in order to formulate the Bangladesh remittance transfer process. A discussion on a businesses model for remittance service providers has also been addressed in this report. In the absence of a detailed data structure and cost components of major RSPs, an international study has been used as a benchmark for the purpose of assumptions and estimations. Remittance and its impact on real exchange have been discussed and comparative foreign rate spread from the international study has been evaluated, which can be applied to the context of remittance business in Bangladesh. The regulatory environment for RSP businesses in Bangladesh have been evaluated including the compliance requirements of banks. Drawing arrangements with overseas RSPs and contents of the MoU between local banks and overseas RSPs have also been addressed. Compliances of Foreign Exchange Regulations of Bangladesh and problems arising there of have been evaluated. Government policy measures with regards to fees for remittance of foreign currency from different corridors have been looked out in this report as well as the general principles of international remittance services by WB committee on payment and settlement system. Fiscal incentives provided to promote remittance in official channel have been acknowledged. In addition to this, the report also takes a look at other issues such as: operating procedures for management of foreign remittance within bank, interbank, and via third banks; and consumer education for safe, sound, secure, low cost and faster remittance and investment opportunities available within the country.    

 

Summary and findings

 

Growth of remittance:Bangladeshis recording an increase of remittance in the formal channel. Remittance corridors are changing from Middle-East to North America and Europe. During the years 2006 and 2007, Bangladesh registered a 25% increase in remittance.

 

National share of channeling remittance: The State owned Banks (SoB) share is declining from 2003-04: 59% to 55% in 2004-05, 2005-06: 46%, 2006-07: 39%, and 2007-08: 34%. On the contrary, the corresponding share of PCB is following an increasing trend and significantly capturing the market share, 2003-04: 37%, 2004-05: 40%, 2005-06: 49%, 2006-07: 57% and financial year 2007-08: 63%. This establishes DFID’s funded RPP effort to create awareness among the bankers to create a competition between private sector and public sector banks in channeling of migrant remittance.

 

Remittance Performance of Banks:The RPP project has been conducting a series of discussions with bankers since 2006 and still it is continuing which created a positive environment and consciousness among the bankers. For example RPP could sharpen the business characteristics of remittance service perception of most bankers, which previously was different. Institutional weakness in providing competitive banking services with ICT support and automation of banking operation has come to surface since the operation of RPP. The result shows that banks are becoming competitive in attracting scarce foreign currency. Since SoBs have a tendency to be institutionally weak, these with the largest branch network are losing their market share, by contrast, comparatively, those with institutional strength and a ICT backbone and automated environments are aggressively increasing their market share from 37% in 2003-04 to 63% in 2007-08 financial year and SoBS losing market share from 59% in 2003-04 to 34% in 2007-08. This structural change is making remittance faster and safer.

 

Top remittance receiving locations:Based on information available top remittance receiving locations were identified for Sonali, Islami, Janata, Agrani, Uttara and South East Bank have been identified. Figures reveal that 16 districts out of 64 districts attract major position of inward remittance to Bangladesh. Ranking of districts by banks processing inward remittance was done. The entire six bank’s remittance performance in Dhaka, Sylhet and Comilla ranks number one to three respectively.Chittagong, being fourth largest remittance receiving location excepting Uttara Bank all other five banks are performing, Noakhali occupies 5th national position and excepting Uttara Bank all other five banks are operating competitively in this district. Tangail occupies 6th national position with operation of Sonali, Islami, Agrani and Janata. The 7th national positon goes to Feni with operation of 5banks with exception of Islami Bank. Brahmanbaria attractive 8th largest remittance, with operation of five banks with the exception of South East Bank. Gazipur is a nearby district of Dhaka, and occupies 9th national position in terms of remittance delivery. With the exception of Uttara Bank all other 5 banks are very much in competition. Chandpur occupies 10th position with operations of Sonali, Islami, Agrani and Janata Bank. Moulivibazar is a migrant prone district and occupies 11th national position and all 6 banks mentioned here are operating in this district. The National position of Mymensingh is 12th with major contribution of Sonali, Islami, Janata and Agrani Bank. Munshigonj captured 13th national position with operation of Sonali, Agrani, and Islami Bank. Sonali, Islami and Janata remittances channeling made Manikgonj 14th national position. Islami, Agrani and Janata operation made Narsingdi at 14th national position. Finally operations of Islami, Agrani, Janata and Uttara have made Narayangonj 15th in the National position of Remittance operation.

 

Since RPP emphasized on the identification of remittance receiving locations, all banks including the central bank has been very much interested to take motivational approach through identification of such branches and location and declaring incentives programs, for example, Janata Bank introduced incentives to the reward those managers of their bank. More other banks are also following similar path.    

 

Janata Bank 5 Years Remittance Performance:Five year data of Janata Bank have been captured by source countries and by Exchange Houses to see the trend of increase from one year to the other including yearly, country, and exchange house performance and their share in the total annual remittance flow of the bank. Data up to August 2008 indicate Janata Exchnage Company Italy shared 6.47%; UAE: 40.97% comprising of Janata bank branches-27.04% and other exchange houses-13.93%. Performance and share of Janata Exchange Company located in Italy in terms of total remittance on annual basis accounts for 2003: 3%; 2004:10%; 2005:17%; 2006:26%; 2007:29%; and up to August 2008:15%.  Share of remittance from UAE source as a percentage of total was in 2003: 12%; 2004:13%; 2005: 14%; 2006:15%; 2007:25%; and up to August 2008 record is  21%. Share of other countries in total Janata remittance in 2008 accounts 52.56%. Among the other countries remittance from Kuwait is 18.28% -the largest one; Saudi Arabia:7.74%; Oman emerges as the third largest with 2.49%;  UK: 2.08%  (4th) and Bahrain: 2.05%. By contrast, the KSA share to total remittance towards Bangladesh (2008) is 29.02%, USA: 15.56%; UK: 14.83%; UAE: 13.46%; and Kuwait: 11.39%. Remittance record from other countries showing increasing trend, for example, 2004: 16%; 2005:7%; 2006:6%; 2007:10% and 2008: (15%). Kuwait corridor recorded increase in 2004: 11%; 2005: 18%; 2006:38%;  2007: 38% and 2008 (August): (31%). UAE corridor has two sources- one is own branch and the other is exchange house. The branches recorded increase in 2004: 5.62%; 2005: 8.51%; 2006:0.51%; 2007:62.15% and 2008: (15.15%). The other exchange houses recorded increase in Kuwait corridor 2004: 15%; 2005: 6%; 2006: 27%; 2007: 62%; and 2008 (August): (15%).                  

 

ICT Infrastructure: Development of a national payments system establishing a Bangladesh Automation Clearing House (BACH), Bangladesh Electronic Fund Transfer Network (BFTN) and the campaign and training program for bankers under the RPP and central bank platfrom has created a positive impact on the automation of banks. The third generations PCBs are ahead in this race in particular. The first and second generation PCBs and SoB are also putting the ICT on their priority list. Sonali , Agrani, Janata and Rupali has embarked automation program during last two years . While Islamic, Duth-Bangla, South East and many others proceeded far ahead in automation. Remittance channeling marked an important aspect in such automation. State owned Banks: Sonali, Janata, Agrani and Rupali Banks are owned by the Government and have been corporatized recently, need capacity building in the infrastructure. In the process of such a transformation these banks are working in different areas. In the case of remittance delivery all these banks have a common weakness, their IT infrastructure but this is on the priority. All four commercial banks have taken up action programs for automation of branches; those are activities involved in remittance processing. For example, Sonali Bank’s Remittance transactions from December 18, 2007 to 2nd January 2008 indicates that their remittance delivery done electronically through Instant Financial Report Management System: 18%, Remittance Management System: 67%, Third Bank: 0.77%, courier and postal services: 14.23%.

 

Paper Vs Electronic Remittance: Islami Bank Bangladesh Limited introduced electronic remittance service. In the month of January 2006 reduction was 20.45%, February: 14.63%, March: 18.99%, April 25.26% increase May: 0.85% increase, June: 16.70% reduction July: 20.15% reduction, August: 44.42%, September: 17.78% and October: 10.77%. In the year 2008 IBBL introduced EFI message for delivery of remittance which shows significant increase in the use of EFT for remittance delivery. The percentage increase ranges from 89.37% to 150.23% during the January – October period currently, Islamic Bank remits 65% of their transaction for remittance on the same day. The remaining 35% transaction, 18 percent are cloned by 2-3 days, 8% by  10 days, 5% by 20 days and 4% by 30 days.

 

Scorecard on remittance transfer: Competition between RSP/MTOs should be a contributor to the decline in transaction costs and participation of more banks and similar financial institutions as remittance players. There are nine criteria for the analysis of market performance in relation to development and consumer rights. These include, transfer fee exchange rate, commissions, mechanisms used to send the money, competitive position of the corridors, geographic coverage across corridors, levels of engagement with local consumer community, relationship with financial intermediaries, transparency and disclosing information about pricing, and compliance to regulatory rules. In Bangladesh, a detailed study is needed on the scorecard on remittance transfer.

Business model in RSP/MTO industry: Agency model employed by Western Union, Moneygram and VIGO used agent who nearly always operate other businesses in same location in the receiving and sending countries. These agents pay for all rates, personnel and other fixed and operating expenses for the location in exchange of commission. Commissions are generally a fixed percentage of MTO fee for the transfer excluding foreign exchange spreads. In the branch model used by Dolex and many of smaller MTO and small to mid size niche player, the MTO owns the sending, and often also the receiving branch and pays for all fixed and operating cost associated with each branch.

 

Remittance Pricing: Corridor volume, which attracts global and regional MTOs as well as small niche players that compete on price, appears to be the most significant factor driving remittance fee prices.Exclusive agency partnerships between large Global MTOs and postal systems also appear to have a major influence on remittance prices by serving as a significant entry barrier to small competitors and allowing high prices to be maintained even in the face of serious competitive challenges from other large, lower priced rivals.Restrictive regulations in the US and sending countries in the EU may also have an impact on pricing by discouraging new competition and making it easier for the large global MTOs to maintain higher prices. Other factors that appear to influence remittance pricing within a corridor include: the active participation of banks, credit unions and other non-bank financial institutions in the remittance market, migrant access to low cost alternatives offered by these organizations,   technology and product/service innovations, and the strength of the informal transfer network.  Government policy initiatives may have helped reduce remittance prices in selected corridors such as the US to Mexico, but the significance of their impact is difficult to ascertain.

 

Cost structure of MTO/RSPs: Agent commission is the dominant variable cost in the agency network model, which varies considerably by corridor and by company. Costs include identifiable cost comprising of variable cost mainly agency commission, fixed and depreciation cost that include marketing, general administration, depreciation, amortization and agency start up cost and some unidentifiable variable and fixed costs. To arrive at total cost of remittance, it is necessary to know the exchange rate applied to the conversion either at the remitter’s end or while making payment to the beneficiary in home country.

 

Competitive foreign exchange spread: Foreign rate spreads on remittance for both Western Union and Moneygram appear to be too high, even in high volume corridors, and are not transparent to the sender. Increased consumer awareness of the high level foreign exchange spreads, could encourage more exchange rate competition and help lower overall remittance costs. Detailed investigations need to be carried out in the context of exchange rate spread for Bangladesh remittance.

 

Variation of remittance fees:Remittance fee pricing varies significantly by competitor, corridor and channel. Three set of factors contributing to remittance prices, corridor specific, sending country specific and receiving country specific. Driving factors for remittance fee pricing include competitive factors, technology and product factors, and government policy factors.

 

Regulation of MTO/RSP business:Bangladesh Bank plays important role in remittance business. Commercial banks are to comply with regulatory requirements. The trial and error techniques applied  in Bangladesh for promoting RSP business in attracting safe secured, at lower cost still needs to be re-casted compared to the international practices.

 

Problems faced by the beneficiary of migrant through the channel:Cost of sending the remittance is based on per transaction so the small remitter have to pay the same cost of a large remittance. Sometimes the distance of migrant work and dueling place with the exchange house/bank are so far that they can not come to remit money frequently.  Major portion of the migrants have little educational backgrounds and so they face problems with language and the exchange house/banks formalities. As most of the migrant remitters go abroad from the rural area the beneficiaries reside in the same area, very few of them have knowledge about the banking system. As a result, they face problems completing the banking formalities. Non-availability of bank account of the beneficiary and the remitter is another deterrent. Some times the beneficiaries are harassed and caused delay by the corrupt bank officers.

 

Government Policy measures to influence the flow of remittance: Remittance transactions are inherently private, and as such, regulation does not address in any way the allocation of remittance funds, which receivers clearly have the freedom to spend or invest as they choose. Within this scope, regulatory concerns are normally aimed at facilitating the provision of formal remittance service at the lowest cost possible to as many users as possible, while maintaining a high level of security in the system. By nature, remittance involves operations in various jurisdictions, under different regulatory framework. After reconciliation of the overall objectives of high security with low costs remains a major challenge. The first objective of regulation is enforcing security in remittance services from misuse for illegal transactions including financial terrorism. The second broad objective of regulation refers to facilitating the reduction of the prices of remittance. For immigrants sending money home, remittances services have traditionally been expensive, with fees of up to 20 percent of the principal sent depending on the size and type of transfer to the destination. Authorities have shied away from imposing direct price control on remittance services, favoring mechanisms aimed at increasing transparency, enhancing competition in the system, and, in some cases, reducing barriers for users to access a wider range of services providers.

 

National Payment System:For safe secured, at lower cost and speedy remittance to the rural people, like other countries, Bangladesh needs a national strategy for Payment System. The National Payment System needs cooperation among banks who are in constantly engaged in business competition. Out of 6500 bank branches over 60% owned by State Owned Banks who lacks automation and inter branch connectivity. Operation of National Payment System supported Automatic Clearing House (ACH), Electronic Fund Transfer Network (EFTN) and Automation of Cheque Processing can support the speedy, safe, secured, and cheaper remittance processing to the poor of the rural Bangladesh.   Central Bank as supervisory authority of the national payment system, clearing operation, and cheque modernization process for the commercial banks must emphasis priority on the ICT application in its own operations. Central Bank should review its current operational and priority areas and outsource non-core functions to the other agencies. 

 

Recommendations

1.       In the absence of correct price and cost data on remittance, corridor specific study is needed to evaluate the data and then recommend for further action plan.

2.       Awareness program on cost, prices, foreign exchange regulation, AML, and remittance linked new banking products should be promoted among bankers

3.       Awareness program on fiscal incentives for migrant remittance should be carried forward before they proceed for their work and homecoming time in the airplane journey and TV drama specially chalked out for migrants 

4.       Readiness assessment of individual banks to implement the cheque modernization, BACH, and BFTN under the RPP. Separate study need to be conducted immediately to determine the eligibility participating banks with BACH and BFTN.

5.       Central Bank sitting at the steering of the national payment system should embrace stakeholders of the payment system, BACH, BFTN, and cheque modernization process to make it a success.

6.       Central Bank must take its pioneering role by accepting the genuine problems with foreign exchange regulation those hinder the smooth delivery of migrant remittance and create friendly environment to make lower cost, faster, safe and secured delivery.

7.        Central Bank should monitor the price and cost remittance on timely interval to have control over the activities of banks and remittance service providers.

 


 

Table of Contents

 

 

Section One: Background and Introduction. 8

Section Two: Basics of Remittance Operation. 9

Section Three: Five Performance of Bangladesh Remittance13

Section Four: Remittance Fees and Pricing23

Section Five: Cost of Remittance35

Section Six: Remittance Regulatory Environment in Bangladesh. 43

 


Section One: Background and Introduction

 

The DFID funded Remittance Partnership Program (RPP) started working at Bangladesh Bank since October 2006 to promote cheaper cost, legal means, and faster migrant remittance processing to rural Bangladesh. RPP components include development of National Payments Strategy followed by National Payments Laws and regulations, establishing modernized cheque processing system, automatic clearing and electronic fund transfer network and introduction of innovative banking products by challenge fund besides the research and promotional works to promote legal remittance to Bangladesh. Objective of this report is to make an evaluation of the current state of remittance processing in terms of volume increase, price and cost in Bangladesh compared to the findings of other studies and readiness of banks in terms of ICT application for speedy remittance. Literature on price and cost on remittance is not easily available in the absence of empirical studies in this particular area and case of Bangladesh study in this regard have not  been conducted  as it is very much difficult to get the information on cost and price.  This report is structured into seven sections. Section two starts with basics of remittance operation with a brief on remittance transactions, structure, players, instruments, and value added by the remittance firms. Section three provides 5 years data on remittance towards Bangladesh channeled from different corridors and by banks and Remittance Service Provider firms over the period 2003-2008. Performance of banks, identification of top remittance prone areas by banks and five year data of Janata Bank from RSP and corridors have been disclosed. ICT infrastructure of local banks have been evaluated. Section four initiates discussion on business models for RSPs including cost structure. Section five details on remittance fee pricing. Section six details on the cost of remittance transactions. Section seven provides a picture on the regulatory regime on RSP in Bangladesh including fiscal incentives and Section eight provides a summary and recommendation.

 


Section Two: Basics of Remittance Operation

 

The basics of a remittance operation:  A remittance transfer is a cross-border retail payment with special access requirements on thesending and receiving side.

 

 

 

A remittance operation is initiated by a remittance service provider capturing funds from a remitter using any of a variety of instruments, either directly or through a capturing agent. The most normal instrument is cash; other instruments in use are direct debits, cheques, money orders, and credit cards. There is a large number of possible instruments; one example is stored value accounts associated with cell phones. The capture channel can be physical, such as a grocery store operating as agent for a remittance service provider, or virtual, such as the internet or a call center. An ideal capture channel is close to the remitters, trusted, can handle cash, and can easily be linked to the remittance service provider. The limitations on available capture channels tend to be associated with credit risk, compliance risk, and operating costs. For example, the internet is cost effective but it cannot handle cash, and it poses compliance challenges. An external agent may have good compliance procedures but can be costly and pose a credit risk. The capturing agent transfers the funds to the remittance service provider (or to a designated third party) using mechanisms such as a domestic payment system, transport of cash or written instruments, or the creation of liabilities to the remittance service provider. The communication between the agent and the remittance service provider can take place through a dedicated computer system, email, fax, or telephone. Credit and compliance risks are addressed at some point in this process, and the data supplied by the remitter is validated.

 

When the remittance service provider’s policies on transaction validation are met, the disbursement process starts. The remittance service provider orders a disbursement agent to make funds available to the recipient. This message goes through channels such as SWIFT, a proprietary database, fax, email, or phone, and it is originated either by an entity in the country where the remittance is initiated or by a partner or subsidiary of the remittance service provider in the country of destination. In many cases, the time from funds capture to funds availability is close to instant. In other cases, the transfer can take up to several days. Often, the determinants of speed are the instruments used for capture and the means of messaging. Compliance requires the remittance service provider to check recipients against a list of barred recipients, which is a process that must be computerized in order to allow for instant transfers. The disbursement agent may use a variety of instruments. A bank or non-bank account is credited, cash is picked up, or a cheque or money order is issued.What legitimizes the remitter to pick up the remittance varies. It may be an official ID showing that the name and other identifying information is the same as in the remittance record, it can be a code communicated from the remitter to the recipient, and it can be a code sent to the recipient’s cell phone by the service provider.

 

How the remittance service provider settles across borders varies with the nature of the operation. Smaller service providers typically use a settlement agent, such as an international bank or a bank with correspondent relationships, to wire funds to the service provider’s account in the receiving country, or, alternatively, to its disbursement agent in that country. Remittance firms can also rely on disbursing partners that have accounts in the sending country. In these cases no international settlement is required from the perspective of the remittance service provider. Larger providers are able to use corporate treasuries to settle on their own books. International banks and banks with correspondent relationships settle through their usual means.

 

A stylized remittance transaction—structure, players, instruments

 

Atypical remittance transaction takes place in three steps: (1) initiation of remittances by a migrant sender using a sending agent, (2) exchange of information and settlement of funds, and (3) delivery of remittances to the beneficiary. In step 1, the migrant sender pays the principal amount of the remittance to the sending agent using cash, cheque, money order, credit card, debit card, or a debit instruction sent by e-mail, phone, or Internet. In step 2, the sending agency—which may be an MTO, bank, or other financial institution, money changer, or merchant (gas station, grocery store)—then instructs its agent in the recipient’s country to deliver the remittance. In step 3, the paying agent makes the payment to the beneficiary. In most cases, there is no real time fund transfer; instead, the balance owed by the sending agent to the paying agent is settled periodically according to a mutually agreed schedule. Settlement usually occurs through commercial banks acting through the national clearing and settlement system. A portion of informal remittances is settled through goods trade.

 

 

 

 

 Remittance securitization structure

 

 


Remittance senders


Beneficiary’s

account


 

 


Remittance

payments

(foreign currency)


Issuing bank credits

beneficiary’s account in domestic currency


 


 

Correspondent banks


Message


 

Issuing bank


 

 

Remittance flows (foreign currency)

 


Trustee collateral account


Excess cash

(foreign currency)


Issuing bank’s

account at correspondent bank


 

Debt service payment

 

 


International investors


Offshore   Domestic


 

 

 

The value added by remittance firms: A remittance firm transfers funds from one person in one country to another person in another country. Often, the international remittance is the monetary fruit of migrant labor that is being transferred back to the migrant worker’s family. This makes the remittance service a crucial component of the logistics of migration. There is a multitude of companies providing remittance services, of all sizes and using a large variety of technologies. They mainly add value in the following four areas, where their services are unique.

 

First,there is no global retail payment system. Global payments are largely effectuated by banks with correspondent relationships, or, in a variation of this, through a system of payment card processors that effectuate the retail transactions using correspondent banking relationships to settle balances. Bank wire transfers are often expensive, and the use of payment cards for remittances is in its infancy. Therefore, remittance firms perform a unique function in the cross border retail payment infrastructure. Second, the senders of remittances often need an interface to access the banking system. Many do not have bank accounts, and banks’ opening hours are often not conducive to migrant work schedules. Cultural and language barriers can be significant, as can reluctance to engage with large financial institutions. Concerns about immigrant status can also prevent some migrants from using banks for international transfers. Similarly, migrants often have access to a more limited number of payment instruments, frequently only cash and money orders. Whereas a person with access to bank accounts, internet, payment cards, and cheques can initiate payments in a large number of ways, a person with access only to cash and not to a bank account has a limited number of options. Remittance firms provide access to payment services for individuals that would otherwise have been excluded from such services. Third, remittance firms offer delivery of funds through instruments and channels that the recipient can access, such as cash from a disbursing agent that is located not too far from where the recipient lives or that offers courier delivery. Since domestic payment systems in many receiving countries are underdeveloped, agent networks provide a substitute and prevent recipients from having to travel to places covered by the banking system. As the case with the senders, remittance firms increase access to payment services for the recipients. Fourth, remittance firms offer opportunities for cost savings. International wire transfers through banks are costly and slow. Remittance firms ‘bundle’ a number of transfers, send the bundled funds through the banking system, and ‘unbundle’ the funds at the other end. In this way, the settlement charges are spread over many remittance transactions. In this way, remittance firms reduce the cost of transferring funds.

 


 

Section Three: Five Performance of BangladeshRemittance

 

National Share of Remittance: Five years data ranging from 2003-04 to 2007 – 08 have been collected from different banks and analyzed those in different perspectives total remittance flow to Bangladesh during 2003 – 2004  to 2007 – 2008 have been captured. Information revealed that in 2003 – 04 total remittance to the country was USD 3,371.79m and  share of SOB are 59%, private commercial Banks: 37%, specialized financial institutions: 1%, and Foreign commercial Bank: 3% of the total remittance channeled to Bangladesh. During 2004 -05 financial year total remittance channeled to the country was USD 3848.29 m in comprising of SoB: 55%, Private sector commercial Banks: 40%, Specialized institutions: 4% and FCBs: 1% of total remittance flow. In the year 2005 – 06 total remittance flow was USD 4801.87m shared by SoB : 46%, PCBs: 49%, FCBs: 4% and specialized institutions: 1%. In this year the private commercial banks crossed the national share of SoB remittance for the first time. In year 2006 – 07 total remittance flow to the country was USD 5978.47m with share of SoB: 39% (further reduction) PCBs: 57%, FCBs: 3%, and specialized institutions : 1%. In the financial year 2007 – 2008, total flow of remittance to the country was USD 6430.93m with reduced share of SoBs : 34%, PCBs: 63%, FCBs: 2% and specialized institutions: 1%.

 

BangladeshInward Remittance Scenario : 2003-2004 to 2007-2008

Year

Total

Growth

Percentage

2003-04

3371.97

0

0%

2004-05

3848.29

476.32

14%

2005-06

4801.87

953.59

25%

2006-07

5978.47

1176.59

25%

2007-08

6430.93

452.46

8%

 

 

 
 

 

Performance Rating on remittance

 

Annual performance of all banks in remittance channeling has been analyzed. Remittance performance of Banks varied from year to year and month to months.In 2003 -04 total remittanceflow of USD 3371.97m share of Sonali Bank was 31% topping the legue table, Agrani Bank: 17%, Janata Bank : 11%, Pubali Bank: 11%, Islami Bank : 9%, Uttara Bank: 8%, National Bank : 3%, Standard Chartered Bank: 1%, Citi Bank N A: 1%, AB Bank : 1%, and other banks: 7%.

 

 

Bank

2003-04

%

1

Sonali Bank

1034.55

31%

2

Agrani Bank

570.88

17%

3

Janata Bank

373.47

11%

4

Pubali Bank Ltd

360.93

11%

5

Islami Bank Bangladesh Ltd.

291.56

9%

6

Uttara Bank Ltd

279.74

8%

7

National Bank Ltd

116.17

3%

8

Standard Chartered Bank

44.03

1%

9

Citi Bank NA

33.87

1%

10

Arab Bangladesh Bank Ltd

32.2

1%

 

Others

234.57

7%

 

Total

3371.97

100%

 

In 2004 – 05 remittance flowof USD 3848.287m was channeled by Sonali Bank: 30% with percentage point reduction from last year, Agrani Bank : 16%    with reduction of 1%  from the previous year, Islami Bank 12% marking 3% increase from earlier year, Uttara Bank 10% marking 2% increase from previous year, Janata Bank : 9% accounting reduction of 2% from earlier years. Pubali Bank captured 6th position with 6% share, National Bank: 4% marking 1% increase from last year, Citi Bank NA: 2%, The City Bank Ltd. : 1%, AB Bank: 1% and other banks: 10% and the Standard Chartered Bank lost their position among top 10 banks channeling  remittance.

                                                                                                                                               

 

Bank

2004-05

%

1

Sonali Bank

1163.702

30%

2

Agrani Bank

598.969

16%

3

Islami Bank Bd Ltd.

467.405

12%

4

Uttara Bank Ltd

365.703

10%

5

Janata Bank

343.284

9%

6

Pubali Bank Ltd

214.121

6%

7

National Bank Ltd

139.594

4%

8

Citi Bank NA

66.789

2%

9

The City Bank Ltd

51.003

1%

10

Arab Bangladesh Bank Ltd

50.237

1%

 

Others

387.48

10%

 

Total

3848.287

100%

 

Financial year 2005 – 06 recorded USD 4801.87m remittances to Bangladesh where Sonali Bank shared 25% losing 5% compared to last financial year. Islami Bank captured 13% by increasing 1% from last year. Agrani Bank went down to 3rd position with 11% share marking reduction of 5% share in the same year, Uttara Bank: 9% recording reduction of 1% from previous year, Janata Bank: 8% recording 1% reduction this year. National Bank accounted their share at 5% by increasing 1% from the last year. Pubali Bank recorded 4% share with reduction of 1% from last year, Citi NA: 3% with 1% increase from last year. Both Dhaka Bank and South East Bank entered in the list of top 10 Banks with 2% market share each.

 

 

Bank Name

2005-06

%

1

Sonali Bank

1220.44

25%

2

Islami Bank Bd Ltd.

643.78

13%

3

Agrani Bank

535.66

11%

4

Uttara Bank Ltd

418.19

9%

5

Janata Bank

360.47

8%

6

National Bank Ltd

251.73

5%

7

Pubali Bank Ltd

210.55

4%

8

Citi Bank NA

122.95

3%

9

South East Bank Ltd.

93.44

2%

10

Dhaka Bank Ltd

91.08

2%

 

Others

853.58

18%

 

 

4801.87

100%

 

Financial year 2006 -07recorded USD 5978.47m retaining  Sonali Bank position as number one with 20% market share and reduction of 5% share compared to previous financial year. Islami Bank recorded 16% share with 3% increase from the previous year. Janata gained 4th position with 7% share toppling, Uttara Bank 7% little margin. The National Bank share increased 6% from 5% in last year. Pubali Bank recorded 5% share by increasing 1% from last year. BRAC Bank joined the top 10 league by gaining 3% share and the same applies to PRIME Bank Limited recording 3% share. South East Bank also recorded 3% share by increasing 1% from last year. The other banks also recorded their share 21% with 3% increase from the previous year.

 

 

Bank Name

2006-07

%

1

Sonali Bank

1197.20

20%

2

Islami Bank Bd Ltd.

949.76

16%

3

Agrani Bank

595.87

10%

4

Janata Bank

440.01

7%

5

Uttara Bank Ltd

393.54

7%

6

National Bank Ltd

336.27

6%

7

Pubali Bank Ltd

286.42

5%

8

BRAC  Bank Ltd

207.49

3%

9

Prime Bank Ltd

175.84

3%

10

South East Bank Ltd.

150.24

3%

 

Others

1245.83

21%

 

 

5978.47

100%

 

Financial year 2007 – 08recorded USD 6430.93m. Islami Bank recorded 20.6% share by capturing top position in remittance channeling by increasing 4.6% compared to last financial year. Sonali Bank dropped to second position with 17% share by reduction of 3% from last year. Agrani Bank recorded 9% share with reduction of 1% from last year. National Bank recorded 7% by increasing 1% share. Janata Bank gone down to 5th position with 6% share by reduction of 1% from previous year. Uttara Bank share was 6% with reduction of 1% from last year. Pubali Bank retained 5% and BRAC Bank increased its share to 5% from 3% of last year. Prime Bank retained its 3% market share and Eastern Bank graduated to top 10 banks in remittance channeling with market share of 2% and South East Bank was dropped from top 10 list this year.  

 

 
 
 

 


Bank Name

2007-2008

%

1

Islami Bank Bangladesh Ltd.

1322.36

20.6%

2

Sonali Bank

1080.31

17%

3

Agrani Bank

591.60

9%

4

National Bank Ltd

432.27

7%

5

Janata Bank

406.93

6%

6

Uttara Bank Ltd

375.31

6%

7

Pubali Bank Ltd

316.58

5%

8

BRAC  Bank Ltd

316.09

5%

9

Prime Bank Ltd

189.82

3%

10

Eastern Bank Ltd

125.10

2%

 

Others

1274.56

20%

 

 

6430.93

100%

 

Top remittance receiving locations: Based on information available top remittance receiving locations were identified for Sonali, Islami, Janata, Agrani, Uttara and South East Bank have been identified. Figures reveal that 16 districts out of 64 districts attract major position of inward remittance to Bangladesh. Ranking of districts by banks processing inward remittance was done. The entire six bank’s remittance performance in Dhaka, Sylhet and Comilla ranks number one to three respectively.

 

Chittagong, being fourth largest remittance receiving location excepting Uttara bank all other five banks are performing Noakhali occupies 5th national position and excepting Uttara Bank all other five banks are operating competitively in this district. Tangail occupies 6th national position with operation of Sonali, Islami, Agrani and Janata. The 7th national positon goes to Feni with operation of 5banks with exception of Islami Bank. Brahmanbaria occupies 8th largest remittance, with operation of five banks with the exception of South East Bank. Gazipur is a nearby district of Dhaka, and occupies 9th national position in terms of remittance delivery. With the exception of Uttara Bank all other 5 banks are very much in competition. Chandpur occupies 10th position with operations of Sonali, Islami, Agrani and Janata Bank. Moulivibazar is a migrant prone district and occupies 11th national position and all 6 banks mentioned here are operating in this district. The national position of Mymensingh is 12th with major contribution of Sonali, Islami, Janata and Agrani Bank. Munshigonj captured 13th national position with operation of Sonali, Agrani, and Islami Bank. Sonali, Islami and Janata remittances channeling made Manikgonj 14th national position. Islami, Agrani and Janata Operation made Narsingdi at 14th national position. Finally operations of Islami, Agrani, Janata and Uttara have made Narayangonj 15th in the National position of Remittance operation.


 

Janata Bank 5 Years Remittance Performance: Five years data of Janata Bank have been captured by source countries and by Exchange Houses to see the trend of increase from one year to the other including yearly, country, and exchange house performance and their share in the total annual remittance flow of the bank. Data up to August 2008 indicate Janata Exchnage Company Italy shared 6.47%; UAE: 40.97% comprising of Janata bank branches-27.04% and other exchange houses-13.93%. Performance and share of Janata Exchange Company located in Italy in terms of total remittance on annual basis accounts for 2003: 3%; 2004:10%; 2005:17%; 2006:26%; 2007:29%; and up to August 2008:15%.  Share of remittance from UAE source as a percentage of total was in 2003: 12%; 2004:13%; 2005: 14%; 2006:15%; 2007:25%; and up to August 2008 record is  21%. Share of other countries in total Janata remittance in 2008 accounts 52.56%. Among the other countries, remittance from Kuwait is 18.28% -the largest one; Saudi Arabia: 7.74%; Oman emerges as the third largest with 2.49%; UK: 2.08% (4th) and Bahrain: 2.05%. By contrast, the KSA share to total remittance towards Bangladesh (2008) is 29.02%, USA: 15.56%; UK: 14.83%; UAE: 13.46%; and Kuwait: 11.39%. Remittance record from other countries showing increasing trend, for example, 2004: 16%; 2005:7%; 2006:6%; 2007:10% and 2008: (15%). Kuwait corridor recorded increase in 2004: 11%; 2005: 18%; 2006:38%;  2007: 38% and 2008 (August): (31%). UAE corridor has two sources- one is own branch and the other is exchange house. The branches recorded increase in 2004: 5.62%; 2005: 8.51%; 2006:0.51%; 2007:62.15% and 2008: (15.15%). The other exchange houses recorded increase in Kuwait corridor 2004: 15%; 2005: 6%; 2006: 27%; 2007: 62%; and 2008 (August): (15%).                  


Janata Bank Limited: Remittance Performance 5 Years data

Janata Bank Limited: Country /Exchange House Annual Remittance Record

Remittance received from Foreign Bank/Exchange Co.

 

 

 

(Fig. BDT M)

 

 

 

 

Sl. No.

Country/Exchange Co.

2003

2004

2005

2006

2007

2008 (August)

% to total

 

 

 

Remittance received from Italy through JE

 

 

 

 

 

 

 

 

Janata Exchange Co., Italy

             350.40

       1,182.50

       2,077.10

     3,102.10

         3,513.00

       1,856.60

6.47%

 

 

 

 

%  Increase

 

237%

76%

49%

13%

-47%

 

 

 

 

Remittance received from UAE

 

 

 

 

 

 

 

 

 

1

Janata Bank, UAE Branches

          4,919.60

       5,196.00

       5,638.00

     5,666.70

         9,188.30

       7,763.70

27.04%

 

 

 

 

% Increase

 

5.62%

8.51%

0.51%

62.15%

-15.50%

 

 

 

 

2

Others Exchange Co.

          1,868.40

       2,143.50

       2,279.50

     2,901.70

         4,714.00

       3,998.70

13.93%

 

 

 

 

% Increase

 

15%

6%

27%

62%

-15%

 

 

 

 

Sub Total

          6,788.00

       7,339.56

       7,917.59

     8,568.41

       13,902.92

     11,762.24

40.97%

 

 

 

Remittance received from Other Countries

 

 

 

 

 

 

 

 

 

1

Kuwait

          3,138.20

       3,468.60

       4,089.30

     5,652.60

         7,615.90

       5,248.60

18.28%

 

 

 

 

% Increase

 

11%

18%

38%

35%

-31%

 

 

 

 

2

Saudi Arabia

          2,866.60

       4,057.90

       3,762.70

     3,598.30

         3,025.20

       2,221.50

7.74%

 

 

 

 

% Increase

 

42%

-7%

-4%

-16%

-27%

 

 

 

3

Oman

          1,235.70

       1,129.80

       1,095.60

     1,106.20

         1,171.00

          716.10

2.49%

 

 

 

 

% Increase

 

-9%

-3%

1%

6%

-39%

 

 

 

 

4

Bahrain

             829.30

          785.20

          817.40

        853.20

            834.50

          589.20

2.05%

 

 

 

 

% Increase

 

-5%

4%

4%

-2%

-29%

 

 

 

 

5

Greece

                     -  

                 -  

                  -  

        537.90

            697.90

          515.80

1.80%

 

 

 

 

% Increase

 

 

 

 

30%

-26%

 

 

 

 

6

UK

                     -  

                 -  

                  -  

                -  

                    -  

          595.80

2.08%

 

 

 

 

% Increase

 

 

 

 

 

 

 

 

 

 

7

Qatar

             186.30

          196.10

          190.80

        149.20

            173.60

          125.30

0.44%

 

 

 

 

% Increase

 

5%

-3%

-22%

16%

-28%

 

 

 

 

8

United States

                     -  

            26.90

            29.20

        132.80

            153.60

          134.40

0.47%

 

 

 

 

% Increase

 

 

9%

355%

16%

-13%

 

 

 

 

9

Malaysia

          1,193.10

       1,139.30

          623.90

        264.20

            208.70

            94.60

0.33%

 

 

 

 

% Increase

 

-5%

-45%

-58%

-21%

-55%

 

 

 

10

Singapore

                     -  

              0.20

              0.40

            5.30

                0.70

            10.00

0.03%

 

 

 

 

% Increase

 

 

100%

1225%

-87%

1329%

 

 

 

 

11

Korea

                     -  

                 -  

            23.20

            2.50

                    -  

                  -  

0.00%

 

 

 

 

% Increase

 

 

 

-89%

 

 

 

 

 

 

12

Canada

             119.70

          166.70

                  -  

            6.60

                7.20

                  -  

0.00%

 

 

 

 

% Increase

 

39%

 

 

9%

-100%

 

 

 

 

13

Australia

               30.20

            14.40

                  -  

                -  

                    -  

                  -  

0.00%

 

 

 

 

% Increase

 

-52%

 

 

 

 

 

 

 

 

14

Other sources (SWIFT/Telex)

          3,814.80

       4,556.40

       5,945.70

     5,288.00

         5,484.40

       4,828.90

16.82%

 

 

 

 

% Increase

 

19%

30%

-11%

4%

-12%

 

 

 

 

Sub Total

        13,413.90

     15,541.76

     16,578.92

   17,611.30

       19,372.56

     15,090.02

52.56%

 

 

 

 

% Increase

 

16%

7%

6%

10%

-22%

 

 

 

 

Total

        20,552.30

     24,063.82

     26,573.61

   29,281.81

       36,788.48

     28,708.86

 

 

 

 

 

% Increase

 

17%

10%

10%

26%

-22%

 

 

 

 

N.B.: 41 Nos. of Exchange Co./Bank under Taka Drawing Arrangement.

 

 

 

 

 

 

                             

ICT Infrastructure:

 

For safe, secure, and faster remittance delivery, the ICT infrastructure is an important element in the banking industry in addition to other institutional issues. At the moment there are approximately 6,500 bank branches, comprising of 4691 government owned banks, 1760 private commercial banks and 49 branches of foreign banks, with the exception 4 state owned and few specialized banks, private commercial and foreign banks do not have their branches at head quarters of 64 districts. Still automation has taken significant position in the banking industry for survival in the competition and to meet the needs of national payment system of the country.

 

Although automation is a nightmare in Bangladesh, there still there attempts to automate. Other than a few foreign banks automation is misnomer and needs definition. In true terminology, the automation of banks still has far to go, both in private and public sector banks. Bangladesh Bank being the regulator of the banks is still far behind the commercial banks. However, current status of IT application in the commercial banks can be categorized into: fully automated, partially automated and computerized. Fully automated banks include: AB Bank, BRAC Bank. Citi Bank NA, Dutch Bangla, Eastern Bank, First Security Bank, HSBC Bank, One Bank, Prime Bank, Shahjalal Bank, Social Investment Bank, South East Bank, Standard Chartered Bank, Trust Bank, Woori Bank, Commercial Bank of Ceylon, Dhaka Bank and Bank Asia. Only Prime Bank and BRAC Bank are in the top ten banks of remittance service provider.

 

Partially Automated Banks include Al-Arafa Islami Bank, Exim Bank, Habib Bank, IFIC Bank, Islami Bank, National Bank of Pakistan, NCC Bank, The City Bank, Oriental Bank, Premier Bank and United Commercial Bank. The computerized banks include BCI Bank, Jamuna Bank, Mercantile Bank, Mutual Trust Bank, National Bank, Pubali Bank, Standard Bank, Uttara and State Bank of India.    

 

State owned Banks: Sonali, Janata, Agrani and Rupali Banks are owned by the Government and have been corporatized recently, need capacity building in the infrastructure. In the process of such a transformation, these banks are working in different areas. In the case of remittance delivery all these banks have a common weakness, their IT infrastructure but this is on the priority. All four commercial banks have taken up action programs for automation of branches, these are activities involved in remittance processing. For example, Sonali Bank’s remittance transactions from December 18, 2007 to 2nd January 2008 indicates that their remittance delivery done electronically through Instant Financial Report Management System: 18%, Remittance Management System: 67%, Third Bank: 0.77%, courier and postal services: 14.23%.

 

Paper Vs Electronic Remittance: Islami Bank Bangladesh Limited introduced electronic remittance service. In the month of January 2006 reduction was 20.45%, February: 14.63%, March: 18.99%, April 25.26% increase May: 0.85% increase, June: 16.70% reduction July: 20.15% reduction, August: 44.42%, September: 17.78% and October: 10.77%. In the year 2008 IBBL introduced EFI message for delivery of remittance which shows significant increase in the use of EFT for remittance delivery. The percentage increase ranges from 89.37% to 150.23% during the January – October period currently, Islamic Bank remits 65% of their transaction for remittance on the same day. The remaining 35% transaction, 18 percent are cloned by 2-3 days, 8% by  10 days, 5% by 20 days and 4% by 30 days.

 

 

 

 

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

 

 

 



Section Four: Remittance Fees and Pricing

 

Two basic business models are used in the MTO industry: The “agency” model employed by Western Union, Moneygram and Vigo, who usesagents who nearly always operate other businesses in the same location in thereceiving and sending countries. These agents pay for all rents, personnel and other fixed and operatingexpenses for the location in exchange for a commission. Commissions are generally a fixed percentage of the MTO fee for the transfer,excluding foreign exchange spreads. However, in some countries, includingMexico, commissions to paying agents are negotiated at a fixed price pertransaction.In the “branch” model used by Dolex and many of the smaller regional MTOs and small to mid-sized niche players, the MTO owns the sending, and often also the receiving branch and pays for all fixed and operating costs associated with each branch.

 

Detailed cost data is not available, but some components of the cost structure for major MTOs using the agency model can be estimated:  Agent commissions, the dominant variable cost in the agency network model, vary considerably by corridor and company. Total commissions for both sending and receiving agents appear to be in the range of 40% to 60% of the remittance fee (excluding foreign exchange commission) for most MTOs, and 25% to 45% of the premium priced remittance fees charged by Western Union.Marketing costs for First Data’s Payment Services reporting segment, which is nearly all Western Union, were disclosed as 7%-8% of segment revenue, approximately $300 million. This number is included in selling, general and administrative costs, which totaled 16% of total revenue at the corporate level.Depreciation and amortization on capitalized costs, including the costs associated with building or purchasing software and systems to handle transactions and transfers, is approximately 3%-4% of total cost.Agency start-up costs have been estimated by Piper Jaffray at $1000-$1500 per newAgency. Licensing and regulatory compliance costs were not quantified in the study, but were considered a major problem by the small MTOs interviewed in the World Bank Andreassen study.

 

A model was developed to estimate Western Union’s cost structure and capacity to lower remittance fees:  Information disclosed in SEC filings and the agency cost component estimates were used develop a rough model of the cost structure for the international portion of Western Union’s MTO activity that is most relevant to worker remittances.A simple model (assuming that a 35% commission on fees is the only variable cost and that all other costs are fixed) was used to illustrate the impact that transfer fee price reductions would have on Western Union’s international operating margins.This model was also used to demonstrate how costs could be lowered by operating low cost regional hubs and increasing transaction volume

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated Cost Structure for Western Union International Transactions Related to Remittances

 

Millions

Total

Average

Estimated Elements of Cost Structure

 

 

Number of Transactions 

76

1

Revenue 

 

 

Fee Revenue

$1,746

$22.91

Foreign Exchange  Fee Revenue

$485

6.37

Total Revenue

$2,231

$29.28

Identifiable Costs

 

 

Variable Costs:

 

 

Agency Commissions @ 35% of Fee Revenue

$(611)

$(8.02)

Fixed and Discretionary Costs:

 

 

Marketing @ 8% Total Revenue

$(178)

$(2.34)

General and Administrative Costs @ 8% of Total Revenue

$(178)

$(2.34)

Depreciation and Amortization @ 3% of Total Revenue

$(67)

$(0.88)

Agency Start-up Costs (37K new agents @ $1500/agent)

$(56)

$(0.73)

Total Identifiable Costs

$(1,090)

$(14.31)

Unidentifiable Variable and Fixed Costs

$(468)

(6.14)

Operating Profit

$673

$8.83

Operating Margin (Operating Profit as % of Total Revenue)

30%

30%

Source: George R. Kalan (Orien Ventures) Dilek Aykut   (The World Bank)  (July 2005) Assessment of Remittance Fee Pricing. The World Bank Washington DC.

 

 

Remittance and Real Exchange Rate: Literaturesupported that remittance number of beneficial effects for the welfare of receiving countries, higher remittances inflows tend to be associated with lower poverty indicators and higher growth rates. Beyond these typical income dimensions of welfare, remittances seem to reduce output volatility to some countries and some socio-economic groups. For a while remittance inflows may ease external financing constraints and therefore hold the potential for higher investment by developing countries. Workers’ remittance can be viewed as capital inflow and therefore the theory of Dutch Disease phenomenon associated with a surge in inflows can also be applied in this context. Remittance additional demand for non-tradables in the domestic economy due to additional demand or so called spending effects.  Remittance is considered to have impact on the resource movement effect and output growth in non-tradables production more profitable. Output growth in the non-tradables pushes factor demands. The price shift and resources relocation in favor of non-tradables erode the competitiveness of export oriented sectors and hurt import competing sectors. The final result of this real exchange rate appreciation is normally increased import flows and lower export sales. There are number of connected  macroeconomic effects  that can result from  a real exchange rate appreciation associated with remittance flows which include; (a) adverse effects on the tradable sectors; (b) widening the current account deficit;  and (c) weaker monetary control, inflationary pressures and sectorial allocation of investments. Thus remittance can potentially affect the real exchange rate through three main channels. First: remittance may affect the external equilibrium of the economy by raising the net foreign asset position of the country. Second: remittance can also affect internal equilibrium of the economy in a situation where domestic capital and labor are efficiently utilized. Third: for remittance to affect the real exchange rate is through their impact on growth.   

 

 

Exchange Rate: A remittance transfer will usually involve a foreign exchange transaction, typically conversion from the currency of the remitting country to the currency of the receiving country.  Sometimes it may involve more than two currencies in case the remitter is located in a under developed market from where he converts his local currency into US Dollar and thereafter it is converted again into Taka at the Bangladesh end as direct quotations between the local currency of the remitter and the Taka may not be available in many centers in Africa, Central Europe etc. To arrive at the total cost of the remittance, it is necessary to know the exchange rate applied to the conversion either at the remitters’ end or while making payments to the beneficiary in home country.

 

Typically in some of the centers in the Middle East, where Exchange Companies are engaged in making such remittances, the local currency gets converted into home country currency for payment through the Vostro accounts of the concerned Exchange Companies. It will depend on the competitiveness of the market at that centre, whether the remitter is getting a market related competitive price. The remitting agency adds a margin over the interbank rate while quoting the price to the remitter. Such margins will vary depending on the uncertainty about the inter bank rates available to the remitting agency. Small Money Transfer Operators (MTOs) may not be able to access competitive rates for covering their remittance. However in case of remittance through larger banks information on margins, fees etc. are always made available to the customer. It is very difficult to compare the exchange rates between various remittance service providers and therefore arrive at a very definite cost for remittances.

 

At the home country end, both for inward and outward remittances, while special interbank linked rates are being quoted by the remitting bank for valued customers, however in a majority of small value remittances, the “Card Rate” of exchange is being used. The margin could range from 0.25% to 1% in such cases. However, if the remittance amount is small, the exchange cost in absolute terms would be marginal.

 

Comparative Foreign Exchange Spreads: Actual daily foreign exchange spreads (for Western Union transfers to 22 countries from the US and the UK and for Moneygram transfers from the US to the same countries) were calculated for four consecutive business days early in June 2005.Spread calculations for each corridor were based on the difference between theaverage wholesale commercial market exchange rates for that corridor published daily on Bloomberg and the actual exchange rates charged by Western Union and Moneygram. Four-day average spreads were used in the analysis to smooth out the daily fluctuations, such as the ones illustrated below:

 

 

Western Union Exchange Rate Spreads As % Of Market Rate for selected US Corridors (%)

 

Local currency

June-1

June-2

June-3

June-4

June-5

Indian Rupees

3.38

2.97

3.17

3.13

3.23

Mexican Peso

2.33

2.26

2.34

2.31

2.42

Philippine Peso

2.76

2.73

2.66

2.74

2.70

Pakistani Rupees

1.77

1.65

1.65

1.68

1.60

MoroccoDirham

4.78

4.73

4.65

4.22

4.04

CFA Franc-Senegal

2.17

3.21

2.58

3.04

3.24

George R. Kalan (Orien Ventures) Dilek Aykut   (The World Bank)  (July 2005) Assessment of Remittance Fee Pricing. The World Bank Washington DC.

 

 

Janata Bank: Exchange Rate given to Exchange Houses

 

Year/Date

Buying Rate

1USD=BDT

Selling Rate

1USD=BDT

Gain/(Loss)

%

2006-Nov-30

69.67

70.47

1.15

2006-Dec-5

69.97

70.97

1.43

2006-Dec-13

69.47

70.97

2.16

2006-Dec-26

69.22

70.47

1.81

2007-Jan-8

69.02

70.47

2.10

2007-Jan-15

69.22

70.47

1.81

2007-Jan-18

69.40

70.65

1.81

2007-Jan-24

69.20

70.45

1.81

2007-Feb-2

69.00

70.20

1.74

2007-Feb-7

68.70

70.00

1.89

2007-Mar-21

68.50

69.60

1.61

2007-Apr-26

68.70

69.50

1.16

2007-Jul-7

68.50

69.50

1.46

2007-Aug-1

68.40

69.25

1.24

2007-Sept-29

68.60

69.40

1.17

2007-Oct-25

68.75

69.40

0.95

2007-Oct-28

68.65

69.40

1.09

2007-Dec-26

68.50

69.40

1.32

2008-Mar-25

68.60

69.40

1.17

2008-May-15

68.80

69.40

0.87

 

To summarizethe Foreign exchange rate spreads on remittances for both Western Union and Moneygram appear to be too high, even in high volume corridors, and are not transparent to the sender.Increased consumer awareness of the high level of foreign exchange spreads, could encourage more exchange rate competition and help lower overall remittance costs.

 

Float: Findings of Ole E. Andreassen (June 2006) sponsored by World Bank on Remittance Service Providers in the United States: How remittance firms operate and how they perceive their business environment found that thelevel of float in a remittance system depends on the structure of how funds flow through the system. The average transfer time in our sample is 14.72 hours; the median is 3, and the funds move between several institutions in the course of a transfer. This means that there is little opportunity for a net float income. This is consistent with firms settling cross-border on average once per weekday. The more funds move from institutions to institutions, the less opportunity there is for creating float. In a best-case scenario, where a firm has the control of funds for the entire process and funds are available to the recipient in 12 hours, a firm with the average volume per month from our sample, $36.3mn, which could earn 10% on float, will have a float income of only around $3,500 per month.Of the firms interviewed, 16.33% report some float income, 83.67% report that they have no float income, and 73.47% report float loss. Of the firms that report float income, one is very small and settles with its overseas partner every month, one has an agreement with its partners allowing it a day of float, and the majority are subsidized by their owners in that the owner is in charge of disbursement and collects money less frequently than technically feasible, thereby carrying the cost of working capital on the disbursement side. The net effect for the latter type of operation depends on the cost of capital in the receiving country versus the return on capital in the sending country.

 

 

 

In most cases, pre-funding takes place by transferring money to a bank account in the receiving country, ready for disbursement. This means that any float is most likely to accrue to the financial institution providing the account, bar a possible interest rate on the bank account. The only real option for investing float in such a case, is where the bank owns, or is the same entity as, the remittance operation.

 

Currency conversion:Andreassen (June 2006) study indicated a sample, 8.82% of the firms disburse in USD only, 48.53% disburse in local currency only, and 42.65% disburse in both currencies, normally at the discretion of the recipient. This means core component of most remittance services includes a currency conversion. Remittance firms solve this in different ways. Only 19.70% of firms do these themselves; in 62.12% of the cases, the overseas partner (or parent/subsidiary/sister company) does the currency conversion. In 7.58% of the cases, the currency conversion is outsourced to a third party. The average spread that a remittance firm charges over the rate it obtains is 1.63%, the median is 1%. The firms that exchange currency themselves gain a 3.31% spread on average, the firms that have the partner exchange currency gain a 1.24% spread, and the ones that outsource gain 1.01%. Note that this rate is the spread that accrues to the remittance firm; it is not the spread over the wholesale rate. Since the firms typically do not do the currency conversion themselves, it is likely that the entity that does the conversion charges a spread over the wholesale rate, which means that the exchange rate spread over a wholesale rate faced by the remitter, is higher than the numbers reported above. Where the remitter is quoted a rate, the remittance service provider runs the risk of covering that rate. Many firms take on such risk, and assume that the spread they quote will cushion them from currency fluctuations, but there are many variations. One firm, for example, notifies agents of the rate its disbursing partner is able to obtain several times per day, but if it turns out the agent promises a rate that the disbursing partner is not able to cover, the agent carries the risk.

 

Firms that consider their comparative advantage in commercial relationships and strong finances tend to also have a higher spread, perhaps related to their bargaining power in the relationship. They tend to settle internationally more frequently, which also allows them to match their buy and sell rates better, and they use banks and credits to payment cards more frequently than the average company for disbursement. Higher spreads are significantly correlated with the perception that exchange controls are an obstacle to doing business, which might indicate that exchange controls give opportunities for charging higher spreads.

 

The exchange revenue is shared in 29.09% of the cases. There is no significant correlation between the size of the spread and whether it is shared or not. Firms that perceive an increasingly competitive environment are more likely to share their foreign exchange revenues than the sample average. Sharing the exchange gain with a partner can be a way of buying oneself out of trouble. Firms that share foreign exchange gain have fewer problems with corruption and reporting requirements abroad. The firms that share the foreign exchange need on average 20.13 hours to make the funds available to the recipient, the firms that do not share exchange gain need 9.59 hours on average. A possible explanation of this is that the gain is realized immediately during the transaction (which takes time) rather than being settled after the transaction has taken place.

 

 

Transfer time:Andreassen (June 2006) study findings reported that companies spend on average 14.72 (median: 3) hours getting a remittance to the recipient. Transfer times vary within the different products that a company offers. The minimum transfer time reported by companies is 7.34 hours on average (0.58 hours median), while the longest is 32.06 hours on average (5 hours median). The average difference between the longest and shortest transfer time reported is 25.17 hours (1 hour median). When we look for factors in the firms’ business environment that might be correlated with longer transfer time, we find that firms with longer transfer times perceive competition both in the U.S. and abroad as a higher obstacle than other firms. We also find that longer transfer time tends to be associated with higher average transaction sizes. There can be several explanations for this. Remitters may send transactions less frequently if it takes longer, or firms that principally send higher amounts may not face the pressure to transfer fast. There is no apparent relationship between transfer time and fee or exchange rate spread, even if we control for destination region.

 

Remittance fee pricing: This exercise is both complex and non-uniform and remittance fee pricing varies significantly by competitor, corridor and channel. Major fee pricing differences can also be observed between different sending countries-even for the same competitors sending remittances to the same receiving countries. Fees also vary with the size of the remittance. Fees can also vary significantly for a single competitor by type of service offered, sending city, and individual sending agent.

 

Fees by Competitor, Corridor and Channel for Sending $200 from US (NYC)

Corridor

US-China

US-India

US-Mexico

US-Philippine

US-Pakistan

Global-MTOs

 

 

 

 

 

Western Union

 

 

 

 

 

Phone quote immediate

14.00

14.00

10.00

22.0

14.00

Moneygram

 

 

 

 

 

Phone quote immediate

10.00

9.99

9.99

9.99

9.99

Regional & Smaller MTOs

 

 

 

 

 

Figo

 

 

 

 

 

Phone quote-immediate

 

12.00

10.00

15.00

10.00

Phone/Agency Alternate Distribution

 

 

 

 

 

Max

 

 

 

15.00

 

Min

 

 

 

10.00

 

Dolex

 

 

 

 

 

Agency quote-immediate

 

 

4.00

 

 

Phone/Agency Alternate Distribution

 

 

 

 

 

Max

 

 

7.00

 

 

Min

 

 

3.00

 

 

Comments: No service within US or  outside US-Latin America

 

Small MTOs-WB Study-1

 

 

 

 

 

Max

 

10.00

9.50

15.00

5.00

Min

 

4.5

7.5

7.00

5.00

Comment: Data does not distinguish between instant delivery and next day delivery

Banks

 

 

 

 

 

Citi Bank

 

 

 

 

 

Global Transfer

10.00

10.00

5.00

10.00

 

Comments: Need Citi Bank A/C

 

 

 

 

 

Bank of America

 

 

 

 

 

Safe send transfer card

 

 

8.00

 

 

Comments: Mexico only. USD8 Per transfer up to USD 1500. UASD-0 in Chicago  need VISA/ Master Card/ Chk card

George R. Kalan (Orien Ventures) Dilek Aykut   (The World Bank)  (July 2005) Assessment of Remittance Fee Pricing. The World Bank Washington DC.

 

Variation of Remittance Fees:Remittance fee pricing varies significantly by competitor, corridor and channel. Major fee pricing differences can also be observed between different sending countries-even for the same competitors sending remittances to the same receiving countries. Fees also vary with the size of the remittance. Fees can also vary significantly for a single competitor by type of service offered, sending city, and individual sending agents.  Comparative Remittance fees varies largely  across different corridors, channels and competitors described insuggest that remittance fees are higherthan necessary in the EU, the higher pricedcorridors within the US and, with a few exceptions,for the services offered by Western Union. Small remittance transfers are particularly costly dueto the fee pricing policies of most MTOs

Major Global MTO Fees For Sending $200 To MexicoFromSelected US Cities

Sending City

NYC

DC

LA

Chicago

 

Western Union

 

 

Fees

 

 

 

 

Online

9.50

11.99

11.99

11.99

Phone Credit Card

14.99

 

 

14.99

Phone Quote-Immediate

10.00

14.99

14.99

14.99

                      Next day

9.99

9.99

9.99

9.99

Agency Quote-Immediate

10.00

14.99

14.99

 

Next day

9.99

9.99

9.99

 

 

Moneygram

 

 

Fees

 

 

 

 

Online

20.00

 

 

20.00

Phone Credit Card-N/A

 

 

 

 

Phone Quote-Immediate

9.99

 

 

8.99

                      Next day

 

 

 

 

Agency Quote-Immediate

9.99

 

 

 

Next day

 

 

 

 

George R. Kalan (Orien Ventures) Dilek Aykut   (The World Bank)  (July 2005) Assessment of Remittance Fee Pricing. The World Bank Washington DC.

 


Sending $200 To Mexico From Selected US Cities

 

Sending City

NYC

DC

LA

Hartford

 

Vigo

 

 

Fees

 

 

 

 

Online

 

 

 

 

Phone Credit Card

 

 

 

 

Phone Quote-Immediate

10.00

 

 

 

                      Next day

 

 

 

 

Agency Quote-Immediate

10.00

 

 

 

Next day

 

 

 

 

 

Dolex

 

 

Fees

 

 

 

 

Online

 

 

 

 

Phone Credit Card-N/A

 

 

 

 

Phone Quote-Immediate

 

 

 

 

                      Next day

 

 

 

 

Agency Quote-Immediate

3.00

 

4.00-7.00

 

Next day

 

 

 

 

 

Others

 

 

LaNaciones-Agency quote immediate

 

 

 

6.00

 

Small MTOs –WB Study

 

 

Maximum

9.50

 

11.00

 

Minimum

7.50

 

3.00

 

George R. Kalan (Orien Ventures) Dilek Aykut   (The World Bank)  (July 2005) Assessment of Remittance Fee Pricing. The World Bank Washington DC.

 

Factors Contributing to Remittance Prices: The potential impact of three sets of factors on remittance prices were analyzed quantitatively wherever possible, and qualitatively using anecdotal Examples, Corridor-Specific Factors,  Sending Country-Specific Factors and  Receiving Country-Specific.

 

Corridor-Specific Pricing Factors:  Corridor volume appears to be the single most important factor contributing to remittance prices.The next most influential price determinant is the extend to which global MTOs’ partner with national postal systems to expand their agency networks in either the sending or receiving end of the corridor and other factors that appear to have an impact on corridor pricinginclude: active participation of banks, credit unions or other non-bank financial institutions in the remittance market; cultural and geographic commonality with group of countries that includes one highly competitive, high volume corridor with lower prices;   the strength of informal transfer network in the corridor and  government policy initiatives within a corridor Factors.

 

Sending Country-Specific Pricing Factors:  A restrictive regulatory climate may be discouraging competition from smaller MTOs and enabling large players to maintain higher fee prices in the EU and, to less of an extent, the US corridors.Other sending country factors that appear to have an impact in pricing include: migrant access to low cost alternative remittance options through banks and non-bank financial institutions and the level of competition from the informal transfer network within the sending country

 

Receiving Country-Specific Pricing Factors:  There are several specific cases in which the access to modern, efficient, low cost transfer, payment and clearing systems in the receiving country may have been a factor in remittance prices, LikeAnalik, Bancomer, Credit union access to payment/clearing systems.  In receiving countries with high levels of mobile phone, Internet,ATM and POS usage, product and service innovations utilizingthese technologies are beginning to offer low cost remittancealternatives that could have a significant impact on remittancepricing in the future are Smart communication and Xoom.

 

To summarizecorridor volume, which attracts global and regional MTOs as well as small niche players that compete on price, appears to be the most significant factor driving remittance fee prices.Exclusive agency partnerships between large Global MTOs and postal systems also appear to have a major influence on remittance prices by serving as a significant entry barrier to small competitors and allowing high prices to be maintained even in the face of serious competitive challenges from other large, lower priced rivals.Restrictive regulations in the US and sending countries in the EU may also have an impact on pricing by discouraging new competition and making it easier for the large global MTOs to maintain higher prices. Other factors that appear to influence remittance pricing within a corridor include: the active participation of banks, credit unions and other non-bank financial institutions in the remittance market, migrant access to low cost alternatives offered by these organizations, technology and product/service innovations, and the strength of the informal transfer network. Government policy initiatives may have helped reduce remittance prices in selected corridors such as the US to Mexico, but the significance of their impact is difficult to ascertain.

 

Remittance Fee Pricing Trends and Driving Factors:  Remittance fee prices have declined dramatically in corridors such as the US to Mexico and Hong Kong to the Philippines in recent years. The study findings were used to identify the competitive, technological and policy factors that appear to be most influential in driving these price reduction trends and to make some observations on the future direction of remittance fee.

 

Competitive Factors:  The proliferation of new, small and mid-sized niche MTOs that competeby offering the lowest prices.  Intensified competition in high volume corridors between global andregional MTO’s seeking additional volume and increased market share.Increased competition in emerging corridors, such as the Gulf to SouthAsia, as global, and some large regional MTOs implement aggressive expansion programs in these areas. The active participation of banks such as Bank of America, and ICICIoffering low or negligible transfer fees to attract migrant accounts.  The activities of banks such as Bancomer and Analik, that focus on low priced remittance services as a major source of revenue.  The participation of credit unions and other non-bank financial institutions offering low fees for their members

 

Technology and Product Factors:  Investment in low cost transfer, processing and settlementsystems employing modern technology.  The introduction of innovative, low cost alternative remittanceproducts and services using the internet, mobile phones, ATMs,credit/debit cards or POS devices, such as those offered by Xoom, Ikobo, Smart Communications and others.

 

Government Policy Factors:  Migrant education programs that include information on remittance options and their costs, such as those provided by the Philippines Government.Unilateral policy initiatives in receiving countries, such as Mexico’s “Matricula Consular” identity card program that provides migrants with access to lower cost remittance services offered by banks and other financial organizations. Bilateral policy initiatives such as the joint US-Mexican program that linked the automated clearinghouse (ACH) systems used by their central banks to reduce the cost of remittance transaction

 

Future Fee Pricing:  After a rapid rate of decline from 1999-2003, remittance fees in the US-Mexico corridor appear to be stabilizing, and major decreases are not expected in the near future.  The remittance industry appears to be consolidating.  Global MTOs are acquiring large regional players (WesternUnion’s pending acquisition of Vigo).   Regional players are being acquired as growth platformsby large financial service organizations (Global Paymentsacquisition of Dolex).  Mid-sized MTOs are merging with or acquiring other midsizedfirms and small niche players in high volumecorridors such as the US to Mexico.  Industry consolidation could significantly reduce the numberof small to mid-sized competitors and lead to less price

 

To Summarize   Competition within the higher volume corridors, particularly among the small to mid-sized niche players that compete by offering the lowest prices, is most responsible for the trend toward lower remittance fees. Technology and product /service innovations are expected to have a major influence on prices in the future, but so far have only had a significant impact in a few areas. Policy initiatives appear to have been helpful in some corridors, but the significance of their impact is difficult to access. After any major drop, prices in most high volume corridors are likely to stabilize, particularly if the trend toward industry

 

Remittance fees are high, regressive, and nontransparent

 

Remittance fee pricing is complex, and rarely are   senders   informed   about   the   full   and precise price of a remittance transaction. Fees may be as high as 20 percent of the principal, depending on the remittance amount, channel, corridor, and transaction type. The average  price  is  reported  to  have  been  around 12  percent  of  the  principal  in  2004  (Taylor 2004;  Kalan  and  Aykut  2005).  Prices are believed to have declined recently but are still very high in low-volume corridors. Currency- conversion  charges  are  even  less  transparent than  remittance  fees;  they,  too,  vary  depending  on  the  competitor,  corridor,  and channel, ranging    from    no    charge    in    dollarized economies   to   6   percent   or   more  in   some countries   (Orozco   2004;   Hernández-Cos  2004; Kalan and Aykut 2005).

 

Major  MTOs  such  as  Western  Union  and MoneyGram  apparently  charge  higher  remittance   fees   than   banks   and   other   financial institutions   that   offer   remittance   services to   attract   migrant   customers. Informal channels such as hawala are reported to   be   cheaper   than   formal   services.   Some heavily traveled remittance corridors, such as United   States–Mexico   and   South   Africa– Mozambique, are much cheaper than others. Urgent  transactions  delivered  in  minutes  cost much more than next-day transfers, and electronic transfers cost more than bank checks or drafts,  because  they  also  clear  much  faster than the latter.

 

The fee amount also depends on the remittance amount.  Average remittance  fees,  as  a percentage  of  money  sent,  decline  rapidly  as the transaction size increases, indicating scale economies   and   the   potential   advantage   of bundling  remittances—that  is,  the  advantage of  sending  more  funds,  but  less  frequently. According to one firm’s fee schedule, the cost of  sending  money  from  Belgium  to  Africa drops  from  21  percent  to  below  4  percent as   the   transaction   amount   increases   from 40  euros  to  900  euros.  Similarly, the cost of remittances from the United States to Mexico (through the major MTOs) is more than 10 percent for $100, but less than 3 percent for $500.

 

In recent years, remittance fees have declined in high-volume corridors in response to several   factors.   First,   global   and   regional MTOs   have   intensified   their   competition in   mature   corridors   (United   States–Latin America, for example), as new competitors have   been   attracted   by   high   and   growing remittance   volumes.   In   the   United   States– Mexico corridor, for example, remittance fees have dropped nearly 60 percent since 1999.   Second,   Bank   of   America   and other banks in source countries are using minimal transfer fees to attract migrant accounts, while a growing number of banks in recipient countries (including ICICI and Bancomer) are competing for remittance customers.  Third, the use of Internet-based technology for messaging  and  advanced  clearing  and  settlement has  reduced  the  cost  of  remittance  transactions. In some countries, new remittance tools have   emerged   based   on   cell   phones   and smart cards. Finally, government policies to improve transparency in remittance transactions (as in the United Kingdom), provide  financial  training  to  migrants  (as  in  the Philippines),  and  establish  bilateral  initiatives (such as the Partnership for Progress between the  United  States  and  Mexico)  have  helped reduce remittance costs. These   positive   developments   remain   the exception.   In   most   corridors,   particularly the   low-volume   corridors,   remittance   fees continue   to   be   very   high.   In   the   New Zealand–Tonga   corridor,   for   example,   fees are  about  three  times  as  high  as  those  in  the United States–Mexico corridor. The wide gap between remittance fees and costs shows that both should be reduced.

 

Fees for transferring EURO 300 from Germany to Serbia-2005

 

German Financial Institutions

Money Transfer Product

Fees paid by Remitter-EURO

Max time to complete transaction

Commerzbank

Electronic transfer-swift

12.5

5-10 Days

Deutche Bank

Electronic transfer-swift

15.0

Max 7 days

Deutche Postbank

Postal money order

20.0

2-4 days

HypoVereinsBank

Electronic transfer-swift

25.0

Max 5days

Western Union-Postbank

Service in minutes

26.0

15 minutes

Western Union-Reisebank

Service in minutes

26.5

15 minutes

Dresdner Bank

Electronic transfer-swift

54.0

Max 7 days

Jose  De Luna Martinez, Esaku Endo, and Corrado Barberis (2006): The German Serbia Remittance Corridor-Challenges of Establishing a Formal Money Transfer System. The World Bank.

 


Remittance Fees paid by Recipients in case of immediate withdrawal of funds in Serbia

 

Selected banks in Serbia

Remittance-EUR: 100

Remittance-EUR: 500

Remittance-EUR: 1000

Remittance-EUR: 10000

Remittance-EUR:

100000

Hypo-Alpe- Adria

10

10

10

100

1000

Nacionalna Banka

3.5

5

10

40

300

Raiffeisenbank

3.5

3.5

3.5

30

300

Siciete Generale

0

5

5

125

1250

HVB Bank

0.5

2.5

5

50

500

Procredit Bank

0.5

2.5

5

50

As agreed

Jose  De Luna Martinez, Esaku Endo, and Corrado Barberis (2006): The German Serbia Remittance Corridor-Challenges of Establishing a Formal Money Transfer System. The World Bank

 

The main challenge for authorities is to ensure the integrity of the system by reducing the opportunities for misuse, while also aiming at minimizing the disruption and cost of the service for bonafide participants. In March 2006, a task force including the World Bank and the Committee on Payments and Settlement Systems (CPSS) released a set of General Principles for international remittance services. These include, first: Transparency and consumer protection-the market for remittance services should be transparent and have adequate consumer protection. Second: Payment System Infrastructure-improvements to the payment system infrastructure that have the potential to increase the efficiency of remittance services should be encouraged. Third: Legal and regulatory environment-remittance service should be supported by a sound, predictable, nondiscriminatory, and proportionate legal and regulatory framework in relevant jurisdictions. Fourth: Market structure and competition-competitive market conditions, including appropriate access to domestic payments infrastructures, should be fostered in the remittance industry. Fifth: Governance and risk management-remittance service should be supported by appropriate governance and risk management practices.

 

Types of Remittance Service and Accessibility Considerations

Types of Services

Provider

Price

Accessibility Constraints

Physical delivery

Informal providers and courier services

Difficult to monitor and quantify due to informal nature of the service

Lowest: No identification or reporting requirements and arguably few constrains to amounts

Cash-to-cash

Money Transfer Organizations (MTO)

Usually highest among formal Remittance Service Providers (RSP)

Low: Identification usually required only for transactions above certain limit

Account-to-cash

Financial institutions with disbursing agent

Usually cheaper than many MTOs

High: Requires that sender has a bank account.

Account –to account

Financial institutions only

Cheapest-can be zero due to cross-selling of other financial services

Highest: Requires that both sender and recipient have bank accounts.

Remittance and Development-Lessons from Latin America(2008)-edited by Pablo-Fajnzylber and J. Humberto Lopez (pp 311), The World Bank.

 


 

Section Five: Cost of Remittance

 

The cost of a remittance transaction appears to be far lower than the price: Service  providers’  remittance  costs  appear  to be  much  less  than  the  fees  charged  to  customers. Domestic transfer fees are only a fraction of the cross-border remittance fees (net of the currency-conversion charge). The cost of a domestic   automated   clearinghouse   (ACH) payment in the United States is one-third of a cent.  Domestic transfers using Visanet cost 2 cents per transaction, as opposed to 51 cents per   transaction   for   international   transfers (Brocklehurst, 2004).  In  some  corridors,  fees for  international  remittances  are  as  low  as $1.80    per    transaction    (London-Manila), which  hints  at  a  falling  lower  bound  for  the cost of remittances. The fact that some banks have been offering free remittance services as loss-leaders to attract new business suggests that the actual cost of remittances is modest. Courier  services  that  offer  remittances  also charge  small  fees  for  this  additional  service. Finally,   industry   cost   estimates   as   well   as other   calculations   presented   below   suggest that remittance costs are not very high.

The cost of providing remittance services varies with the business model used by the service provider.  Western  Union,  MoneyGram, and  Vigo  use  agents  who  pay  all  operating costs  in  exchange  for  their  franchise  and  a commission  on  sales.  In  the  “branch”  model used   by   Dolex   and   many   of   the   smaller regional MTOs, the fixed and operating costs associated  with  each  branch  are  paid  by  the MTO.  By  leveraging  existing  businesses  on  a commission  basis,  the  agency  model  is  much less  capital-intensive  than  the  branch  model and can be expanded rapidly through partner- ships, but it has higher variable costs.4 In both models, relatively high fixed costs are associated  with  transaction-processing  operations, compliance   with   regulatory   requirements, marketing, and administration.5

 

Data on MTOs’ costs of providing remittance services are hard to obtain. However, an analysis of profitability of the market leaders using  publicly  available  financial  statements suggests that remittance costs are significantly lower  than  the  fees  charged  to  customers. Western    Union    has    sustained    operating margins  that  are  at  least  50  percent  higher than  other  MTOs  and  industry  peers  in  the payments  and  electronic  processing  market  (table 6.2).7 Its operating profit per remittance transaction  may  have  averaged  $8  to  $9  in 2004. This is consistent with an earlier annual report   (Western  Union  2000)   that   put   the company’s  operating  profit  at  $684  million (or 30 percent of its $2.3 billion revenue). The operating profitability of the other major market players (MoneyGram and Dolex) has been in the range of 15–20 percent (table 6.2).  A very simple model for Western Union (which assumes that agency commission costs are 35 percent  of  revenues  after  deduction  of  fixed costs  and  that  all  other  costs  are  fixed  costs) suggests that average transaction fees could be reduced by as much as one-third while maintaining  operating  margins  within  the  same range as those of other major MTOs and peers. Reducing   these   operating   profits   to   zero would provide a rough estimate of the break- even cost for these firms. Such an exercise reveals   that   the   break-even   fee   for   Western Union is probably around $9 per transaction and  would  fall  below  $5  if  the  volume  of transactions  were  to  double  (box  6.2).  Although it would be unreasonable to suggest that any company reduce its prices to cost, this simple model does appear to indicate that there is considerable latitude for reductions in transaction fees within the higher-priced corridors. A more direct way of estimating the cost of a   remittance   transaction   in   a   hypothetical MTO is to add up plausible cost components, such  as  staff  to  process  the  transaction  and provide security, rental of the premises, fixed costs  (including  franchise  licensing),  the  cost of  network  and  technology,  and  administrative  costs  for  regulatory  compliance. This methodology yields a cost estimate of $5.50 for the first remittance transaction (table 6.3). Because   most   remittance   transactions   tend to   be   repetitive—the   same   amount   is   remitted  from  the  same  location  to  the  same beneficiary—the  cost  for  subsequent  transactions  drops  to  $3.60  (less  staff  time  is  required). It drops to under $3 per transaction if electronic processing is used.

 

Admittedly,  the  calculations  in  table  6.3 are  based  on  a  theoretical  model  of  a  basic remittance  transaction  that  does  not  capture the  global  network  and  diversified  services provided   by   major   MTOs.   Moreover,   the model’s assumptions are subject to considerable uncertainties, the greatest of which is that average costs would be higher if the number of transactions were smaller.  It  is  worth  noting, however,  that  many  independent  agents  provide remittances as a side business: for them, fixed and variable costs could be significantly lower  than  for  dedicated  remittance  service providers. Indeed, there may be a case for providing  free  remittance  services  in  order  to draw  customers  for  other  products  and  services, as practiced by certain banks. Remittance  costs  should  continue  to  fall under  the  influence  of  increased  competition and   better   technology.   Large   MTOs   may have   considerable   latitude   to   reduce   fees while maintaining reasonable profit margins. In  corridors  where  costs  have  already  fallen significantly,  further  decline  may  be  modest; but elsewhere there is scope for significant de- cline,  especially  with  the  volume  of  transactions rising rapidly.

 

A scorecard on remittance transfers:Competition between MTOs has been a major contributor to the decline in transaction costs and the emergence of many financial institutions as remittance payers. For the most part, money transfer companies have been proven to work in a competitive environment with financial institutions. In this section we examine those companies that have had the best performance within the realm of money transfers. Industry officials and observers of this market argue that it is important to look at factors other than transaction costs as indicators of a company’s importance to consumers, advocates and development players. For example, some argue that including information about geographic distribution as well as legal compliance, it is also critical in understanding performance. Our industry scorecard was based upon a quantitative framework that served as the basis of measurement for evaluating the ways in which money transfer companies respond to a range of important factors associated with remittance transfers.

 

The framework synthesis provided here includes nine criteria for an analysis of market performance in relation to development and consumer rights. The criteria includes transfer fees and exchange rate commissions, mechanisms used to send money, competitive position in the corridor, geographic coverage across corridors, levels of engagement with the local consumer community, relationships with financial intermediaries, transparency in disclosing information about pricing, and compliance to regulatory rules. We collected data from more than 50 money transfer companies on issues relating to costs, locations in the U.S., types of payers in Latin America and the Caribbean, consumer satisfaction with companies, and the relationship between the geographic locations of payers and of the households that receive remittances. The methodology employed was based on field work data collection on pricing, interviews with money transfer companies about their locations and payers, and surveys on consumer satisfaction. Companies were scored according to whether their activity was above or below the average. Furthermore, data was not collected for all of the indicators listed in Table 7 (see below). Specifically, data was not collected for three criteria relating to disclosure practices, compliance to the regulatory environment and corporate philanthropy, because the appropriate methodology is still being discussed with money transfer companies.

 

 

 

 

Scoring criteria and their measurable indicators

 

Criteria

Indicator

1. Transfer fee

Cost of sending money as reported by an MTO

2. Exchange rate used

Exchange rate reported by an MTO agent for the conversion of the dollar into local currency

3. Transfer mechanism

Type of sending method home delivery, money order, electronic transfer: debit card, bank to bank, internet, courier agency transfer, other

4. Marketplace competition (supply side)

Number of companies in any market

5. MTOs location geographic coverage in the U.S.

Number of MTO agents in each state they operate and ratio of these to the average MTO agents in each state

6. Consumer convenience and

satisfaction

 

Extra features that meet consumer need and preference over the product.

(complimentary phone cards to complete the transaction, hours of

Operation, choice of delivery methods or pay-out currency, etc.); Extent of satisfaction with MTO.

7. Type of payer in

Latin Americaand

the Caribbean

 

Payers that such as banks, credit union, microfinance institution, retail store, post office, or home delivery; concentration ratio of MTO payers in the recipient country’s capital vis a vis percent of remittance reception in those capitals.

8. Development

support

Support to the local community adds value to the product and loyalty to the company

9. Transparency

A company that advertises its exchange rates cultivates or promotes more trust from the customer.

10. Compliance to

regulations

A company that meets all the requirements to operate as a remitter.

Manuel Orozco (May 12, 2006)International Flows of Remittances:Cost, competition and financial access in Latin Americaand the Caribbean—toward an industry scorecardInter-American DialogueWashington, DC

 

Reducing remittance fees will increase remittance flows to developing countries

 

Reducing  remittance  fees  would  increase  the disposable  income  of  remitters,  encouraging them  to  remit  more.  It also might encourage smaller    and    more    frequent    remittances.

And   lower   prices   in   a   particular   channel might encourage remitters to shift from other channels—notably informal ones. The degree to which a fee reduction would result  in  an  increase  in  flows  depends  on  the purpose  of  the  remittance.  At  one  extreme, where the purpose is to meet a specific need— payment  for  tuition,  a  medical  emergency,  a social  ceremony,  or  the  purchase  of  a  gift item—the  amount  of  remittance  may  not  be sensitive  to  the  remittance  fee.  At the other extreme, remittances by a poor, cash-strapped remitter may be highly cost elastic.  Similarly, remittances meant for investment are likely to be   cost elastic. In reality,   most   remittance transactions fall between these two extremes. Even when remittances are driven by altruism, they will tend to be cost elastic, as evidenced by the literature on charity, which shows that people tend to donate more as the cost of donating declines.

 

In a recent survey of Senegalese migrants in Belgium, two-thirds of the migrants said they would send more if the cost of sending went down. In a survey of Tongan migrants in New Zealand, 30 percent of remitters said they would increase the amount of remittances by 0.74 percent (on average) if costs fell by 1 per- cent (Gibson, McKenzie, and Rohorua 2005). That survey found the overall cost-elasticity of  remittances with respect to the fee (averaging the  elasticity  over  those  who  would  increase remittances  and  those  who  would  not)  to  be –0.22. Based on this estimate, Gibson and others  (2005)  calculate  that  lowering  the  fixed cost  of  sending  money  through  banks  and MTOs from New Zealand and Tonga to competitive  levels  in  the  world  market  would  result  in  a  28  percent  increase  in  remittances from  existing  remitters.  It might also induce some non-remitters to start remitting.

 

If  the  cost  elasticity  (–0.22)  of  the  New Zealand–Tonga  study  were  applicable  to  all developing     countries,            a          reduction         in remittance  cost  from  12  percent  to  (say)  6 percent could result in an 11 percent increase in   annual   remittance   flows   to   developing countries.  One  caveat  to  this  calculation  is that  the  cost  elasticity  applies  only  to  high- cost  corridors,  which  also  tend  to  have  low volumes.  In corridors where the remittance cost is already low, further decreases may not increase flows.  For  example,  a  fee  reduction by  a  major  MTO  may  not  produce  much  effect  if  a  major  part  of  the  flows  is  already moving  through  low-cost  informal  channels. This  is  confirmed  by  the  World Bank survey of Senegalese migrants in Belgium; half of the respondents  who  paid  remittance  fees  of  20 percent or more said they would send more if costs  were  halved;  not  even  one-fourth  of those who paid less than 10 percent said they would send more. Almost 75 per- cent   of   the   Senegalese   migrants   who   send money   through   the   large   MTOs   said   that  they   would   send   more   if   the   costs   were lowered,  a  result  confirmed  by  findings  from a World Bank survey of the Nigerian diaspora in Belgium.

 

An  indirect  implication  for  cost  elasticity may be drawn from Yang’s (2004) finding of an  elasticity  of  0.6  for  remittance  receipts denominated  in  Filipino  pesos  with  respect to  the  peso–dollar  exchange  rate.  Applying this  elasticity  to  a  remittance  transaction  of $150, if the remittance fee were halved from (say)  12  percent  to  6  percent,  remittance  receipts  would  rise  by  3.6  percent,  or  $5.4, while  the  remittance  fee  would  decline  from $18  to  $9.31.10   If  the  same  elasticity  were to  apply  to  the  entire  flow  of  remittances  to developing  countries,  remittance  receipts,  in response   to   a   halving   of   costs  would   increase  significantly, by  more  than  $5  billion using  only  recorded  flows,  and  more  than $8   billion   using   both   recorded   and   unrecorded  flows. Reductions in remittance fees would also be likely   to   increase   other   cross-border   retail flows such as transfers from public and private institutions  to  individual  beneficiaries  (pensions,  child-care  payments),  small-value  payments in exchange for goods and services, acquisitions  of  assets,  and  debt  servicing.   In more developed countries, migrant remittances are only a small share of retail payments, which, in turn, are a fraction of wholesale payments. But in developing countries, especially in  smaller  and  poorer  countries,  remittances are a significant source of funding in relation to  the  size  of  the  economy  and,  therefore,  of the retail payment system. A reform of the retail payment system to facilitate remittances would probably benefit other (not easily quantifiable) components of retail payments.

 

Based  on  the  evidence  presented  above, notably  the  finding  that  the  cost elasticity  of remittances  is  negative,  policies  that  aim  to lower  remittance  costs  by  increasing  access to  banking  services,  promoting  competition, and   disseminating   information   have   the potential   to   provoke   sizeable   increases   in remittance flows to developing countries.

 

 

 

 

 

Policiestoreduceremittancecosts

 

Measures   to   reduce   remittance   costs should aim to improve the efficiency of remittance transactions by (a) enhancing market competition to reduce high profit margins; (b) helping remittance service providers’ access to new payments technology; and (c) devising ways to encourage remitters to send larger amounts.  As  a  way  to  enhance competition,   governments   can   encourage postal systems and other state-owned distribution  alternatives  to  open  their  networks  to multiple MTO partnerships on a nonexclusive basis. In addition, they should avoid overregulation,  excessive  monitoring,  or  reporting  requirements  that  could  drive  out  smaller  competitors  that  lack  the  economies  of  scale  to absorb the cost of compliance. Developing  a  shared  network  would  be  a powerful  way  to  increase  competition.  Cooperation  on  infrastructure  and  competition in  service  provision  would  allow  network benefits  to  accrue  to  the  consumer.  The technology  required  to  set  up  a  payment- processing  infrastructure  with  large  capacity is   no   longer   an   expensive   proposition.   A functioning payment infrastructure could be extended to a new country at a minimal cost and in a matter of weeks.  There have been some attempts to set up shared networks in the remittance-source countries.  Also  some  governments in remittance-receiving        countries have facilitated the establishment of payment net- works   that   are   shared   by   savings   banks, credit  unions,  and  microfinance  institutions operating   in   poor   and   remote   areas   (for example,  BANSEFI  in  Mexico   and  Apex Link in Ghana).  Another way to address the issue of high fees in the remittance industry would be to develop best-practice guidelines for remittance service providers. Several such guidelines have been is- sued  by  Credit  Union  National  Association, Inter-American Development Bank, and World Savings  Bank  Institute,  which  urge  service providers to disclose fees, exchange rates, and the time of delivery. At the end of 2004, the World Bank and the Bank for Committee on Payment and  Settlement  Systems  (CPSS)  set  up  a  task force,withparticipationfromtheIMF,todevelopvoluntaryprinciplesforremittanceservice providers,  regulators,  and  supervisors  for  im- provingtransparencyinthemarket.

 

Such guidelines would have to be voluntary. Central banks generally are not willing to impose such guidelines or to cap remittance fees and foreign-exchange commissions.  A  recent survey (de Luna Martinez 2005) revealed that in only 9 of 40 countries—Brazil, Bulgaria, Indonesia, Pakistan, Philippines, Russian Federation,  Thailand,  Tunisia,  and  República  Bolivariana   de Venezuela—did   central   banks even have the legal power to do so. All 40 central banks indicated that even if they had the power to limit fees, they would not do so, preferring to leave fee-setting to financial institutionsin response to market competition.

 

 

 

 

 

 

 

 

 

 

 

 

 

Policies to reduce costs, regulate informal providers, and provide remittance- linked financial services

 

Reducing Costs

Source Country

Recipient country

Increasecompetition

X

X

Avoidexclusivearrangements

X

X

Harmonizeregulationandcapitalrequirements (same policy for all players)

X

 

Introduce and harmonize electronic              payment systems (card-based products)

X

 

 

Improve data on corridors

X

X

Voluntary code of conduct

X

X

Bundling of transactions

X

X

Regulating informal providers

 

 

Make formal sector operations more convenient and user friendly

X

X

Improve banking access

X

X

Leveraging remittances

 

 

Improve banking access

X

X

Encourage microfinance institutions and credit unions to provide

25

 remittance services

 

X

X

World Bank Report (2006) Economic Implications of  Remittances and Migration

 

Approximate cost of remitting $200: Percent of principal amount

 

MajorMTOs

Banks

OtherMTOs

Hawala

BelgiumtoNigeria*

12

6

9.8

BelgiumtoSenegal*

10

6.4

HongKong,China,tothePhilippines

4.5

NewZealandtoTonga($300)

12

3

8.8

RussiatoUkraine

4

3

2.5

1–2

SouthAfricatoMozambique

1

SaudiArabiatoPakistan

3.6

0.4

UnitedArabEmiratestoIndia

5.5

5.2

2.3

1–2

UnitedKingdomtoIndia

11

6

UnitedKingdomtothePhilippines

0.4–5.0

UnitedStatestoColombia

17

10

UnitedStatestoMexico

5

3

4.7

UnitedStatestoPhilippines

1.2–2.0

0.4–1.8

Source:  Brocklehurst2004;Orozco2004;Gibson,McKenzie,Rohorua2005;Hernandez-Coss2004;RathaandRiedberg2005;KalanandAykut2005;Andreassenandothers2005. *WorldBanksurveyofAfricandiasporasinBelgium.  Note:  Figuresdonotincludecurrency-conversioncharge. —  Datanotavailable

 

 

 

 

 

 

Estimating the cost of a remittance transaction

 

 

Cost in dollars

 

First

Subsequent

Electronic

 

transaction

transaction

processing

Explanation

 

 

 

 

 

Sendingstaff

 

2.50

 

0.83

 

0.50

 

10minutesofstafftimeat$15perhour

Receivingstaff

0.17

0.17

0.17

10minutesofstafftimeat$1perhour

Fixedcosts

0.27

0.27

0.27

$40millionsystemcostrecoveredover

 

 

 

 

10 years; 2,000 branches with

20 transactions per day

IT,telecommunications

0.60

0.60

0.60

1minuteinternationalphonecall

Rent

1.50

1.50

1.50

$30rentperday;20transactionsperday

Administrativecosts

0.50

0.50

0.50

Compliance,generaloverhead

Totalcosts

5.54

3.60

2.94

 

Source:RathaandRiedberg2005.

 

 

 


Box: Estimatingremittanceindustrycosts

Remittance industry costs are difficult to obtain.


Isolatingthecostofremittanceservicesisdiffi

cultinthecaseoffinancialinstitutionsthatprovide otherservicesaswell.Estimatingcostsisnoteasy eveninthecaseofdedicatedremittanceservice providersbecauseofthedifferencesinthequality andreliabilityofremittanceservices(onlysome providersgivecustomerslegalredress).InRemit-

tanceindustrycosts,therefore,wehaveusedpublicly availableinformationonWesternUnion,thelargest MTOthatisalsoapubliclylistedcompany.

Weusedasimplemodeltoestimateabreak-even feeforWesternUnion’sinternationalmoneytransfer operations.ThemodelsuggeststhatforWestern Union’soperatingmarginsonitsinternationalmoney


 

 

 

Dollars

10

8

6

4

 

2

 

0


Western Union:Operating profit

break-even price vs.volume


transferstodroptothepeergroupaverageof17.8


75     100    125    150    175    200


225    250    275    300


percent(table6.2),theaveragetransactionfeewould havetobeloweredfrom$22.90to$15.30(column2 ofthetablebelow)—veryclosetothecompany’scur- rentfeeinseveralU.S.corridors.Themodelalsoindicatesthatthebreak-evenfeeatwhichtheoperating profitbecomeszerois$9.30(column3).Thispriceis inthesamerangeasMoneyGram’sstandardflat priceintheU.S.corridors.Asensitivityanalysisusing thismodelsuggeststhatthebreak-evenfeewouldbe

$6.50–$7.00ifagencycommissionswere25percent, andaround$11ifcommissionswere45percent.

Text Box: 	Calculation assuming	Calculation
	peer group margin	assuming
2004 data	of 18%	break-even margin

Operating margin (operating profit	30	18	0
over revenue) (%)
Operating profit per transaction	8.8	3.9	0.0
(revenue minus costs) ($)
Costs ($)	20.4	17.7	15.7
Agency commission, 35% of fee	8.0	5.3	3.3
Fixed costs	12.4	12.4	12.4
Revenue ($)	29.3	21.6	15.7
Foreign-exchange commission	6.4	6.4	6.4
Fee	22.9	15.3	9.3

Source: Western Union financial statement for 2004.
Note: Reflects 76 million transactions in 2004. Fixed costs include marketing, administration, depreciation, and amortization, agency start-up, and other unidentified costs. Figures may not add up due to rounding errors.
Transaction volume (millions)

 

Source:KalanandAykut2005.

 

Thefigureillustrateshowthebreak-evenfee showninthetabledecreasesasthenumberoftransactionsincreases.Iftransactionvolumedoubled

fromthecurrent76millionto150million,the lowestfeeatwhichtheinternationaloperation wouldremainprofitablewouldbe$4.74


 

Section Six: Remittance Regulatory Environment in Bangladesh

 

Regulation and Monitoring of remittance service business between a Local commercial bank and foreign exchange house:Bangladeshcommercial banks are the authorized institutions for receiving foreign remittances. For this purpose they have to establish drawing arrangement to the foreign exchange house. It may be mentioned here that the banks can make drawing arrangement to the foreign exchange house or they themselves can open overseas branches in the foreign country. In both cases they have to take permission from Bangladesh Bank. The pre-conditions for establishing drawing arrangements and procedures are stated below:

 

Pre-requisitions for a foreign exchange to enter in a drawing arrangement with a Bangladeshi Bank: A certificate of Her/His Majesties custom for UK, certificate of state Reserve System for USA and certificate or license from the Central bank in other cases.Encloseregistration certificate with application along with certificate from Chamber of Commerce of the country where the exchange house situated, Memorandum of Association & Article of Association. The application should include three year’s audited financial statement of the exchange house, Bankers or credit agency’s credit report, Identification & profile of the Board of Directors of the exchange house, whether they are the national of the concern country, Positive comments or certificate from Bangladesh Embassy.In compliance of all the prerequisitesin order to access the eligibility of the exchange house application for permission should be sent to Bangladesh Bank.

 

It is to be mentioned that the minimum limits in a drawing arrangement has been re-fixed vide Foreign Exchange Policy Department circular no – FEPD (LDA-1) 147/2007-1468. The present limits are as follows:

 

Country/Area             

Previous limits         

Present limits

1)U.S.A

$ 3.00 million                           

$3.00 million

2)U.K                                                 

2.00 million  pound starling                                                         

2.00 million  pound starling                                                         

3)ITALY                                          

……………………

Euro -2.00million

4)CANADA

$ 2.50 million                            

$ 2.50 million

5) MIDDLE EAST (KSA,UAE Qatar,  Oman, Bahrain, Kuwait.)

……………………..

$3.00 million

6) Middle EAST-(another country)

……………………..

$1.50 million

7) Another country/area

………………….

$1.50 million

 

Methods of drawing arrangement between a local bank and a foreign exchange house: The procedures include, the local bank have a Nostro account with a bank of the country where the exchange house is situated.The local bank enters into an agreement to receive and delivery of worker’s remittance with the foreign exchange house.Then the local bank opens a non resident foreign currency (NRFC) account in the name of foreign exchange house in US dollar, EURO or pound starling and a non resident non convertible (NRNT) BDT account in the name of exchange house. The foreign exchange houses have to maintain US dollar 25000.00 in his non resident FC account and a bank guarantee of TK.500000.00 as security deposit for electronic fund transfer. For the draft arrangement, US dollar 50000.00 in cash and taka 1000000.00 as bank guarantee have to be done.The Local banks with all the per-requisite paper & completing the above steps apply to BB for an approval to work with that foreign exchange house to receive and delivery the workers remittances to their beneficiary.


 

Terms & conditions to be followed by the Exchange house and local Bank entered in a drawing arrangement: The Exchange House has to follow:To send remittance the organization should follow the exchange rate quoted by the Bangladeshi Bank.The Remittance Service Provider (RSP) should ensure deposit of remittance money/cover fund within 24 hours of receiving the remittance to the Nostro account of the concerned Bangladeshi bank.The RSP is required to send regularly the number and the amount of remittance to the concern Bangladeshi bank.The RSP should not use the monogram ``Approved by Bangladesh Bank`` on their advertisement.The RSP should not run their activities through a Sub-Agent. To collect remittance from more than one country specified permission should be obtained.The RSP should follow the present rules and regulation to send remittance as well as transaction.

 

Banks to comply with:The Commercial Banks should follow the terms and conditions stipulated in the permission letter at the time of signing of agreement with the exchange house. In the banks book one or more NRFC and a NRTA account may be opened at exchange houses name; subject to permission from Bangladesh Bank.  The security deposit stipulated in the BB’s permission letter should be ensured before starting transaction within the drawing arrangement. The local bank shall pay the beneficiary from the NRT A/C of the exchange house after confirming that his Nostro A/C has been credited by the same amount of remittance. There shall be no overdrawn facility and any lead time allowed in favor of the exchange house A/C. As exchange house have to follow the quoted rate of the local bank, so the local bank should inform the exchange house, the foreign currency exchange rate regularly. The local bank shall monitor the deposit of remittance on its Nostro A/C on a daily basis.  The local banks shall submit a certificate that there are no overdue in cover fund to FEPD’s licensing and drawing arrangement (LDA) section on 10th of the next month.  The local bank shall submit a statement regarding the number and the amount of remittance sent by the foreign exchange house on a monthly basis. The local bank shall submit such data along with FCS-7 to the LDA section. One copy of agreement should be submitted to the LDA section after signing the agreement and once the remittance and drawing arrangement is effective. The effective date, full address with Phone, Fax E-mail. The drawing arrangement shall not be renewed until and unless the Registration/license is renewed. The banks should follow the instruction of delivering the receipt remittance time limit (72 hours). Moreover regulation regarding AML (Anti-Money Laundering) should be followed strictly along with the present transaction rules and for better customer service, pre-caution should be taken. To prevent fraud and forgery of foreign demand draft approved by exchange house officers specimen signature (latest) should be kept at each branch of the bank. Reporting should be ensured correctly and timely.  If any irregularity is observed it should be reported to the FEPD.  Any violation of the permission letter and present laws relating to foreign exchange, immediate action should be taken to cancel the permission.

 

Process flow of inward remittance: The process of sending and delivering the foreign remittance can be divided in to two parts. One is the process of remittance comes in to Bangladeshi bank & other is the process of delivering such remittance.

 

From abroad to Bangladesh: Here the step by step process of flow for inward remittances is sent to Bangladesh. Step one: A remitter comes to the foreign exchange house to negotiate the exchange rate and pays the remittance amount and charges, the exchange house issues him a draft, in the case of draft arrangement or a personal identification number (PIN) incase of electronic fund transfer. Step two:The exchange house deposits the remittance amounts in the Nostro account of the local bank and informs/advices the local bank about the remittance. In the case of draft, particulars of the draft, name of the branch where payable and in case of electronic fund transfer the PIN number and amount through e-mail or other faster way.The remitter sent the draft to its beneficiary or inform the PIN number and the name of branch where the money is payable. Step three:  Local bank after having the information/advice, immediately checks his respective Nostro account, if it is as per the information/advice of the exchange house, its credited to the NRFC account of the exchange house in the arranged currency then by debiting the NRFC account credit the NRNT account of the exchange house, from where the remittance is to be delivered to its beneficiary. The local bank immediately informs his branch or outlet about the remittance from where the exact delivery is made.

 

Step four: Having drafted via the mail or other way or having the PIN number through telephone or e-mail, the beneficiary goes to the nominated bank and presents the draft or PIN number to the local bank branch from where the money is payable.

 

 

 

 


 

 

 


 

 

Bangladesh Bank wants banking and remittance transfer to be efficient and on the other hand wants to stop the use of banking channels for illegal transaction. For this reason, Bangladesh Bank issues foreign exchange guidelines in 1995 in addition to the Foreign Exchange Regulation act, of 1991 to monitor the foreign exchange activities of the country. Earlier the first and only law was the Foreign Exchange Regulation Act,1947.Later another law, ‘Money Laundering prevention act,2002’ came into effect to comply with the general norms and conditions of the international monitoring institutions.

 

Problems faced by the beneficiary of migrant through the channel: Cost of sending the remittance is based on per transaction so a small remitter for the small amount like a large remitter have to pay the same cost.  Sometimes the distance of migrant work and dueling place with the exchange house/bank are so far that they can not come to remit money frequently. Major portion of the migrants have little educational backgrounds and so they face problems with language and the exchange house/banks formalities. As most of the migrant remitters go abroad from the rural area, the beneficiaries reside in the same area; very few of them have knowledge about the banking system. As a result, they face problems completing the banking formalities. Non-availability of bank account of the beneficiary and the remitter is another deterrent. Some times, the beneficiaries face harassment by the corrupted bank officer & it make delay to remit the money.

 

Government Policy measures to influence the flow of remittance: Remittance transactions are inherently private, and as such, regulation does not address in any way the allocation of remittance funds, which receivers clearly have the freedom to spend or invest as they choose. Within this scope, regulatory concerns are normally aimed at facilitating the provision of formal remittance service at the lowest cost possible to as many users as possible, while maintaining a high level of security in the system. By nature, remittance involves operations in various jurisdictions, under different regulatory framework. After reconciliation of the overall objectives of high security with low costs remains a major challenge. The first objective of regulation is enforcing security in remittance services from misuse for illegal transactions including financial terrorism. The second broad objective of regulation refers to facilitating the reduction of the prices of remittance. For immigrants sending money home, remittances services have traditionally been expensive, with fees of up to 20 percent of the principal sent depending on the size and type of transfer to the destination. Authorities have shied away from imposing direct price control on remittance services, favoring mechanisms aimed at increasing transparency, enhancing competition in the system, and, in some cases, reducing barriers for users to access a wider range of services providers.

 

Government of Bangladeshencourages to increased facilities to remit money through official Channels. Five National Banks have extended its five corresponding branches abroad to facilitate remittance of money for the Bangladeshi Expatriates. Fifteen-money exchange branches have been established so far. At present 1051 numbers of correspondent banks of five Commercial National Banks are working for transaction of remittances. The Government has passed a new law titled “Money laundering Prevention Activity 2002”in which, provision has been made to punish the act of money laundering. Maximum Punishment is 7 years imprisonment.  Bank has taken effective measures to ensure disbursement of remittances to the family members of the migrants within 2/3 days.  All remittances are tax free, if sent through banking channels.  Bank charges have been reduced for sending remittances in the home country. Different announcement of the disadvantage of money laundering systems have been published in order to motivate overseas workers and strengthening the receiving system of remittances by introducing electronic transfer systems. Mission’s officers   are motivating the overseas workers/ employees for sending remittances through official channels.  The Government has introduced a new Dollar Bond to discourage the money laundering system and for earning remittances through regular banking channel at a 5% interest rate. This bond will be made available in the commercial banks. Interest and deposited money will be paid in local currency.

 

Utilization of Remittances: Remittance in rural area generally boosts consumption.A significant portion is used for purchase of land and home construction. They also help to expand business in agricultural products and construction materials. It may be mentioned here that, while going abroad a migrant worker generally collects the fund for his migration either by selling or by mortgaging land. So to retrieve the sold or mortgaged land and also to purchase additional land, remittances play an important role. A very small portion of the remittance is used by the recipient for investment in business or other savings. While returning home, the migrant workers bring some luxurious products like color TV, CD player, cosmetics or other electronic items which reduce the actual remittances that could be sent by them. It will be mentioned here that if utilization of remittance can be categorized as productive and non productive, then it will be found that most of the remittances are used for non productive purposes and a very insignificant portion of it is used for productive purpose.

 

Siddique and Abrar (2003) have made a study on sector wise use of remittances. According to their study 20.45% of remittances has been used for food and clothing; 16.43% for investment in land (i.e. agricultural land purchase, homestead land purchase, release of mortgaged land etc.); 15.02% for home construction and repair; 10.55% for repayment of loan that they had to take for migration purposes; 9.7% for social ceremonies such as wedding, naming of the child, Eid etc. The study also found that 7.19% of the total remittance was used for financing migration of other family members. Besides these, 4.75% of remittance has been utilized for investment and 3.40% for savings.

 

Tools for Investment of remittance: The Government is offering different savings instruments for the non-resident Bangladeshi to attract remittance that will boost the local economy. The Government is offering the following savings instruments:

 

1.      Non-resident Foreign Currency Deposit (NFCD)

2.      Resident Foreign Currency Deposit (RFCD)

3.      Non-resident Investor’s Taka Account(NITA)

4.      Wage Earner’ Development Bond

5.      US dollar Investment Bond,2002

6.      US dollar Premium Bond,2002

Non Resident Foreign Currency Fixed Deposit Account(NFCD): Expatriate Bangladeshi Nationals and persons of Bangladesh origin, including those having dual nationality may open non-resident Foreign Currency Fixed Deposit Account with any authorized dealer in Bangladesh for a period of one month, three months, six months or twelve months on renewable basis depositing minimum US Dollar 1000/- or Pound Sterling 500/- . The eligible persons may open this account at any time of their return to Bangladesh. Interest on NFCD Account is applicable on the basis of Euro currency interest rate which is tax free in Bangladesh. Principal amount including accrued interest is convertible in local currency as well as repatriable to the account holder abroad. This account may be maintained as long as the account holders’ desire. NFCD account opening Forms are available with authorized dealer, branches of Commercial Banks in Bangladesh and Embassy/ High Commission Offices of Bangladesh abroad.

Resident Foreign Currency Deposit (RFCD): Persons ordinarily resident in Bangladesh may open RFCD Accounts with the foreign currencies brought in at the time of their return from abroad. This account may be opened with any authorized dealer, branches of Commercial Banks in US Dollar and Pound Sterling. Interest is payable if the deposit is maintained for a term of not less than one month and the balance is not less than US Dollar 1000/- and Pound Sterling 500/-. RFCD account may be maintained as long as the account holders’ desire. Balances of such accounts are repatriable abroad.

Non-Resident Investor's Taka Account (NITA): Expatriate Bangladeshis may invest their hard earned money in the Stock Exchange for purchase of Bangladeshi shares and securities. For this purpose, the expatriates may open NITA account with any authorized dealer, branches of the Commercial Banks. Dividend earned from shares/securities is tax-free in Bangladesh. Balance of NITA account is repatriable abroad at the prevailing rate of exchange. NITA account may be operated by the nominee. The account holders may nominate their bank to act as nominee also.

Wage Earners Development Bond (WEDB): Expatriate Bangladeshi Wage Earners may invest their hard earnings in five years WEDB on renewable basis for denomination of Taka 25,000/-, Taka 50,000/- and Taka 100,000/- or any multiple of these amounts at attractive rate (Present rate 12% per compoundable in every six months) of interest and the accrued interest is tax free in Bangladesh. Principal amount of WEDB is repatriable to the bond holder abroad.

US Dollar Investment Bond: The Government of the People's Republic of Bangladesh has introduced US Dollar Investment Bond to facilitate investment of hard -earned foreign currency by the non-resident Bangladeshis.

Facilities of US Dollar Investment Bond:i) Period : 3(three) years. Renewable for further one term. ii) Rate of Interest :  a. On completion of 3 years (full term) -6.5%;   b. On completion of 2 years - 6%;   c. On completion of 1 year - 5.5%; d. No interest before completion of 1 year..   iii) Repayment of interest on 6(six) months basis;  iv) Interest is payable in US Dollar. Interest and Principal amount are also repayable in Bangladesh Taka at the request of the purchaser of bonds;  and v) Both Principal amount and interest are repatriable.

US Dollar Premium Bond: This instrument has also been introduced by The Government of the People's Republic of Bangladesh to facilitate investment of foreign currency by the non-resident Bangladeshis.

Facilities of US Dollar Premium Bond:  i) Period: 3(three) years. Renewable for further one term;  ii) Rate of interest: a. On completion of 3 years (full term) -7.5%;  b. On completion of 2 years - 7%; c. On completion of 1 year-6.5%;  d. No interest before completion of 1 year.
iii) Repayment of interest on 6(six) months basis;  iv) Interest is payable in Bangladesh Taka only. Principal amount is also repayable in Bangladesh Taka at the request of the purchaser;  v) Death-risk-benefit for purchase of Premium Bonds at least USD.10,000/- at the first instance and increase investment subsequently will qualify for a free death-risk-benefit @15% to 25% onfulfillment of certain terms and conditions;  vi) Principal amount is repatriable.

Eligibility to purchase these Bonds: Non-resident Bangladeshis are eligible to purchase US Dollar Investment Bond and US Dollar Premium Bond with the foreign currency sent to his F. C. account or with the cheque/draft in foreign currency (after collection of cheque/draft).

Income Tax Facilities for Non-Resident Bangladeshis: The National Board of Revenue (NBR) of the Bangladesh Government has undertaken various initiatives in the income tax rules for Non-Resident Bangladeshis to increase the flow of remittances. The Government has taken the following steps to provide income tax rebate to nonresident Bangladeshis.  The amount of remittance transferred by a non-resident Bangladeshis through banking channel enjoys full exemption from income tax (Finance Law, 2002). No Tax Identification Number (TIN) Certificate is required upon purchase of fixed assets by non-resident Bangladeshis (Finance Law, 2002). From July 01, 2002 to June 30, 2005; within this time the sources of capital for investment in business, industries and commerce will be accepted without any query for sources of investment capital and this rule is also applicable for non-resident Bangladeshis (Finance Law, 2002). From July 01, 2002 to June 30, 2005; within this period, the agricultural processing industry is fully tax exempted. This advantage is also applicable for same industries established by non-resident Bangladeshis (Finance Law, 2002). The interest income of non-resident Bangladeshis from ‘non-resident foreign currency deposit account’ is fully exempted from tax. The ‘Wage Earners Development Bond’ purchased by non-resident Bangladeshis is exempted from income tax as well. The non-resident Bangladeshi and foreign passport holders Bangladeshis and their family members don’t require income tax clearance before leaving the country after visiting Bangladesh.

 

Remittance Regulatory instruments:  Foreign Exchange Regulation Act, 1947is the primary regulatory instrument of Bangladesh with respect to all kinds of foreign exchanges including that of a foreign currency transfer like remittance.

General:The term "Inward Remittances" includes not only remittance by T.T., M.T., Drafts etc., but also purchases of bills, Travelers' Cheques, drafts under Travelers' Letters of Credit etc.

 

Inward remittance no restrictions:The Authorized Dealer(AD)s  may freely purchase foreign currencies or raise debits to non-resident Taka Accounts of the respective bank branches and correspondents. Remittances equivalent to US$ 2000 and above should be reported in From C. However, declaration on From C by the beneficiary is not required against remittances sent by Bangladesh nationals working abroad. The purpose of remittances should be clearly stated on the From C. Where the country of origin of funds and currency in which remittances received are the same, the ADs may submit a consolidated From C in respect of those remittances attaching therewith a separate list showing details of remittances comprising the amount reported on From C.

 

Reimbursement in foreign currency for taka bills and drafts: There is no objection to the Ads in obtaining reimbursement from non-resident banks in freely convertible foreign currency in respect of Taka bills and drafts purchased by them under instructions from such a non-resident bank whether under Letters of Credit or under other arrangements.

 

Cancellation of inward remittances:  If an inward remittance already reported to the Bangladesh Bank is cancelled, either in full or in part, because of non-availability of beneficiary, the ADs must report the cancellation of the inward remittance as an outward remittance on a TM from. The return in which the reversal of the transaction is reported should be supported by a letter giving the (a) reference of the return in which the inward remittance was reported (b) name and address of the beneficiary (c) amount and the reason for cancellation and (d) amount of the purchase as effected originally.

 

In Bangladesh, worker remittances are sent through two types of institutions; these are private foreign exchange house and the representative office of Bangladeshi bank at overseas. Both of the institutions have to take prior permission from BB as per sub-section 03 of section 04 of the Foreign Exchange Regulation Act 1947 Presently worker remittances are sent to Bangladesh in two different process one is Electronics Fund Transfer and the other is Draft. As per section 05 of chapter 02 of Volume 02 of the Foreign Exchange Guidelines, Authorized Dealers shall report to the Bangladesh Bank particulars of all their foreign exchange transactions, i.e., all outward and inward remittances affected, whether through their accounts in foreign currencies or through the Taka accounts of non-resident banks.  In Bangladesh, only commercial banks are eligible to make an arrangement with a foreign exchange houses to receive and deliver the worker remittances to their relatives. Besides this, the banks are given permission to open overseas branches/subsidiaries/exchange houses for the same reason. In both cases Bangladesh Bank framed a set of guidelines for the banks.

   

Money Laundering Prevention Act, 2002also acts as an instrument for regulating remittance. According to this guideline each bank and financial institution shall preserve correct and full information of their customer. In case of a request to remit money through draft/T.T from any person other than the account holder, correct information with regard to full name and address of the person requesting for such remittance should also be preserved.   There are provisions for giving punishments in case of violation of both the acts –Foreign Exchange Regulation Act, 1947 and Money Laundering Prevention Act, 2002.

 

Delivery of remittances by receiving banks: For preparation of this report, we have studied two major banks in Bangladesh on how they deliver the foreign workers remittances to their beneficiaries. We have chosen one nationalized and a private sector bank to understand the process. we studied Sonali bank in nationalized sector and National bank limited in private sector.

 

Sonali Bank: Sonali bank is the largest bank in Bangladesh having 1184 branches all over the country; it has 02 overseas branches in India. The bank has 15 subsidiaries/booth in UK and USA and 03 repetitive offices in KSA. As per Sonali bank, it covers 30% of the total remittance of Bangladesh. Sonali bank receives 60-70% of its total remittance from Middle East. The system used for receiving foreign remittance by Sonali bank is mainly SWIFT message and as per Sonali bank’s information, out of 1186 branches 300 branches are presently on line. The wage earner branch of Sonali bank takes necessary steps for delivering the remittance. It is to be mentioned that presently Sonali bank receives 50% of the remittance through EFT and 50% through DD. The bank has a special arrangement with 05 other banks for remittance clearing. To deliver such remittance to its beneficiary the following steps are required:

 

EFT Remittance paid through Sonali Bank: Sonali bank receives a taka remittance through EFT & it is to be paid to a branch of sonali bank, sonali bank delivers the remittance within 24 hours of receiving the remittance (as per Sonali bank’s information). Sonali have an arrangement with Bank Al Raji .Any draft from a Bank Al Raji the draft is directly paid by the beneficiary’s branch (Sonali bank branch) after verifying the specimen signature.

 

Remittance received by Sonali Bank and paid by other bank’s branch: Sonali bank receives a taka remittance & the remittance is to be paid to a branch of another bank, the bank then makes a taka draft and sends the same to the beneficiary’s bank branch on the next day of receiving the remittance, by courier if the branch located in Dhaka urban area .Sonali sends the draft by messenger. If they fail to locate the branch it sends the draft to the nearer district/thana level branch. Here approximate time taken to deliver the instrument 2-3 days if the draft sent directly to the beneficiary’s bank branch, it takes 3-4 days to reach the beneficiary’s bank branch if the draft is sent through the nearer district/thana level branch.

                

Sonali bank receives a foreign currency remittance and the remittance is to be paid to a branch of another bank:  Sonali bank makes a counter foreign currency (F.C) draft and sends the same to the concern bank’s foreign currency branch/designated branch for wage earner’s remittance on the same day of receiving the remittance by messenger if the amount is equivalent 2000 USD. If the amount is more than 2000 USD Sonali bank sends a letter of intimation with from-C to the beneficiary’s branch. After receiving the from-C signed and fill up Sonali bank issues an FDD to the beneficiary’s branch.

             

Time frame to reach money to the beneficiary’s account:   As the remittance is within the bank, the beneficiary’s account is credited in 24 hours.  When the beneficiary’s bank is not Sonali & receive the draft from Sonali it takes it to the clearing house if the branch in participate the clearing house. After getting the draft cleared it credits the beneficiary’s account, it takes approximately 1-2 days for clearing. If the branch does not participate in the clearing house, then the instrument is sent to the district level branch for clearing, it takes approximately 3-4 days for clearing and crediting the amount to the beneficiary’s account. (Total time step1 & step2 =10 days)

 

Receiving Foreign Currency Draft:When a bank’s foreign currency branch/designated branch for wage earner’s remittance receives a F.C. draft, it informs the beneficiary’s branch to collect a fill-upped and signed from-C from the beneficiary, if the amount is more than 2000 USD. After collection of the documents from the beneficiary the F.C. draft is sent to the International Division (I.D) of the concerned bank. I.D. of the bank takes the F.C. draft to the Bangladesh Bank for foreign exchange clearing; it takes more than 04 days for BB clearing. After getting the draft cleared from BB I.D. of the concerned bank sends advice to the concerned branch. (Total time step1 & step2 =25 days).

 

Process for a remittance comes in draft from: As per Sonali bank, all of their branches have the specimen signature of the issuer of a draft from any exchange house with whom they have a drawing arrangement. When a draft is placed in a branch of  Sonali bank, the branch immediately checks and verifies the signature of the issuer and makes the payment. When a foreign Draft is drawn on a bank and it is presented to a branch of another bank, the time and process is the same for a cheque drawn and presented on two different bank branches. Time and cost depends on location of the bank branches.     

 

 

 


Licensing Requirements for Remittance Service Providers

 

Country

Net worth($)

Audited

 Financial

Required

Bond

Comments

United States

 

 

 

 

California

Min. $500,000 in equity

If available

 

Discretionary depending on size of business. Min. $200,000.

Fee $5,000 plus $50 per

agent

Florida

 

100,000 plus $50,000 per

location up to $500,000

 

Yes

 

1% of annual turnover, max $250,000; can be set at $500,000 in exceptional

circumstances; may be waived upon request

Application fee $500 plus $50 per agent; renewal $1,000 plus $50 per agent up to $20,000.

Illinois

 

Depending on locations:

1 _ $35,000

25_ _ $500,000

Yes

 

Greater of $100,000 or the

average daily outstanding for

12 months, maximum

$2,000,000

Fee $100

Licensing _ $100

$10 per location; $100

renewal

 

Massachusetts

 

None

 

No

 

$50,000 (or 2x amount of

outstanding transactions)

Fee $250

 

New Jersey

 

(1) Min. $100,000 plus $25,000 per location (or agent) in NJ up to

$1,000,000

(2) $50,000 for foreign money transmitter plus

$10,000 per location (or

agent) up to $400,000

 

 

(1) Not less than $100,000 and

not more than $1,000,000

(2) Foreign remitters: depending

on business volume, $25,000

to $100,000; commissioner

may require up to $900,000

In general: investments not less

than outstanding payment

instruments; this can be

waived by the commissioner

 

Application fee $1,000

Licensing fee up to

$4,000

Biennial fee $25 per

location up to max. of

$5,000

 

New York

 

Liquidity equivalent to

outstanding payments

 

Yes,

2 years

 

$500,000 unless the

superintendent lowers the

amount

 

 

Fee $500

Licensing _ $1,000

investigation.

 

 

Pennsylvania

 

$500,000

 

 

$1,000,000

Application fee $1,000

Renewal fee $300

Texas

 

$25,000 per location up to

$1,000,000

 

Yes

 

$100,000 for first location,

$50,000 for each additional,

max. $400,000

 

Fee $500 licensing _

$2,500 investigation

fee

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Country

Net worth($)

Audited

 Financial

Required

Bond

Comments

Virginia

 

$100,000–$1,000,000 as

determined by the

commission

 

$25,000–$1,000,000 as

determined by the commission

 

Licensing fee $500

Renewal fee $750

 

Wisconsin

 

“Suitable to conduct

business”

Should not be lower than

$10,000

No

 

$10,000 for 1st location _

$5,000 for each additional

Max. $300,000

 

Fee $500 license (annual)

_ $300 investigation

_ $5 per location

(annual)

 

Canada

 

None

 

No

 

None

 

Reporting threshold:

Can$3,000

STR and CTR above

Can$10,000

France

 

Min. €2,400,000

plus capital to cover first

year’s expenses

 

Yes,

3 years

 

None

 

Full bank license;

the ownership

structure must be

adequate

AML procedures

scrutinized

Germany

(federal

legislation)

 

€125,000 capital

Net worth must be

sufficient to cover

exposures

 

Yes

 

None

 

Reporting threshold:

€2,500

STR; AML laws must be

followed; 2 managing

directors must have

suitable backgrounds

Italy

 

 

€750,000

Yes

 

None

 

Reporting threshold:

€12,500

STR; the license is only

required by the service

provider, not by his

agents

United Kingdom

 

None

 

No

 

None

 

Register normal business;

Moneys may not be held

for more than 3 days, as

a bank license (deposits)

would be required in

this event

Source: For United States, www.rubinsanchez.com; Canadian Bankers Association; French Central Bank, Banque de France, Comité des Etablissements de Crédit et des Entreprises, d’Investissement (CECEI), Committee for Credit Institutions and Investment Companies; German Financial Supervisory Board, Bundesanstalt für Finanzdienstleistungsaufsicht; Italian Law 106; Bank of England. Note: Licensing and registering approaches may differ. See FATF Typologies Report (FATF 2005). STR _ suspicious transaction report; CTR _ currency transaction report; SAR _ suspicious activity report; AML _ anti-money laundering.


Annex: Survey instrument

In the following are the main questions asked by the interviewers. In most cases, when a question asks how or what, the interviewer was also instructed to follow up with a why as well as inquire about associated costs. Many of the questions were followed by further explanations. The full instruction sheet can be obtained from the author. Note that, the questions below are not part of a written questionnaire. Developing a written questionnaire requires a different methodology than structuring oral interviews.

 

Questions about the company and its remittance operations:

1. What is the ownership structure of the company?

2. There are several steps in the chain of sending a remittance. Examples are: receiving money from remitters, disbursing to recipients in another country, exchanging currencies, providing settlement services across borders, carrying messages among the various participants in this process. Where does your company best fit in?

3. Some companies providing remittance services are independent, some are franchises, and some are part of larger corporations. Some operate only here in the US and have partners abroad; some also operate in the receiving countries. Which describes best your firm?

4. In which year did you start to provide remittance services?

5. Do you only provide remittance services, or do you also provide other services?

6. Are you engaged in remittance services in order to profit from these services directly – or indirectly through customers’ use of other services?

7. If you do not make a profit from remittances directly, what is the business that remittances facilitate?

Questions about how money is sent and received:

8. From which states can people send remittances through your remittance operation? To where can people send remittances from these locations?

9. What are the main “corridors” of transfers?

10. What is your primary strategy in having chosen these locations and countries?

11. From what kind of stores, outlets, branches, etc., can people send remittances through the remittance operation you are a part of?

12. In the remittance operation that you are a part of, how do the remitters send funds?

13. How and when does the agent/branch transfer money to the part of your operation that sends the funds on to the recipient country? How does the agent/branch notify your company that there is a transfer initiated?

14. What steps do u take, if any, documentation or verification is required to verify the identification of the individual sending the funds?

15.  Do you keep record for  remitters’ identity and/or the remittance transaction?

16. How many and which forms must the remitter fill in when sending money?

17. From the time the remittance transaction is initiated, how much time it takes to have the funds available to the recipient.

18. How does the recipient receive the funds?

19. What is the geographical extent of the network where funds can be received?

20. Do you require your partners not to work with other remittance businesses (exclusivity agreements)?

21. How does the recipient know that he/she is receiving a remittance and where to pick it up or how to go about receiving it?

22. Does the place where the recipient picks up the remittance, is there cross-sell of other financial products?

Questions about infrastructure:

23. How does the receiving remittance firm/bank that is going to disburse the remittance know that a remittance has been initiated at the sending remittance firm/bank from where the remittance was sent?

24. Please describe how settlement takes place between your companies here in the US and the receiving company abroad (or your branch in the receiving country)?

25. How often does settlement take place?

26. When the money is paid to the recipient, how does the agent/bank that pays out the money have the funds (liquidity) to do so? Does the agent/bank that pays out the money wait for settlement, or does it pre-fund the disbursement?

27. Is there any float income in the remittance operation you are a part of, and who benefits from the float?

28. How much do you estimate that the float returned given last year & how it is normally invested?

29. How much of the total remittance volume that passes through your remittance operation. Do you estimate it is used for float at any time (%)?

30. How often do you experience that funds are lost (total lost funds as a percentage of transactions)? What part of this are fraud, and what part is due to technical and human error?

31. What are the main reasons of funds lost?

32. When funds are lost, who carries the risk?

Please explain the procedure for sharing losses:

Questions about currency conversion:

33. In what currencies are funds made available to the recipient?

34. Within the remittance operation that you are a part of, who performs the currency exchange operation?

35. How do you protect yourself against currency fluctuations?

36. How do you determine the exchange rate to offer for a transaction?

37. What is the exchange rate spread charged to the customer?

38. Does the remitter know the exchange rate before engaging in the transaction?

39. Does the recipient know the exchange rate?

Questions about price and volume:

40. How much does it cost to send remittances through your company, both for the remitter and the recipient? (For this question, a standardized data sheet was filled in by the respondent.)

41. Have the fees to the remitter or to the recipient have over the last three years?

42.  Are the remitter and recipient told explicitly about the fees before engaging in the transaction?

43. How much of the total fee and exchange rate spread accrues to you (as opposed to other partners with which you share the revenue)?

44. How many transactions do you process on average per month in numbers, and what is the total volume of remittances you process on average per month in dollars?

45. What is the country with the highest number of transactions, and how many transactions do you send there?

46. How much transaction volumes changed over the last three years?

47. How do you market your services to remittance senders?

Questions about firm structure and competitive environment:

48. Which companies do you consider your competitors?

49. In the U.S., is the market that you address, in other words your customers, dominated by some few remittance firms, or is it a field of many firms with similar services?

50. Has there been any change in the number or types of competitors to your business over the last three years? If so, what have the changes been and how has this changing competitive landscape affected your firm and the market?

51. Have these changes in the competitive environment made you start using any new technologies, or made you plan to start using any new technologies?

52. What are the advantages of your firm over your competitors? In other words, why do your customers come to you for remittance services rather than going to your competitors?

53. What are the disadvantages of your firm compared to your competitors? In other words, why do the customers that use your competitors prefer using them (competitors) to rather than using  your firm?

54. What are the barriers to entry in your segment of the remittance market? In other words, what prevents an entrepreneur from setting up a firm competing with you?

55. What is your market share?

56. What are the most important laws and regulations governing your remittance business?

57. Have any legal, regulatory changes over the last five years affected your business?

58. If there is a dispute between the remitter/recipient and your company, how do you resolve such disputes?

59. Do you believe money laundering is a concern for your business? What, if any, mechanisms do you have in place to avoid money laundering through your company?

60. The World Bank often advises governments on improving the environment for doing business. What would you like to see the government, regulators, state authorities – both in the U.S. and in the receiving countries – do for you to be able to provide better and less expensive services to your customers?

61. Lastly, let me see if I have understood where your revenue and your expenses come from.(Interviewers summarizes income statement)

62. What is the most important source of income among these?

63. What are the largest expense items (and what % of the transaction do they account for)?

64. What is the firm’s total after tax revenues and operating net income from providing remittance services for your most recent fiscal year? What percentage of total revenues and net income come from providing remittance services?

65. Finally, we would like you to indicate, on this sheet, how the listed obstacles to doing business affect your company. (Interviewer presents a written questionnaire with the obstacles)

 

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