A substantial amount of remittances is still being lost because of high transaction costs because of failure by governments to allow more institutions to carry out international money transfers.
A new report by the International Fund for Agriculture Development (Ifad) says as much as 20 per cent of the cash is lost, money that could be invested to create wealth.
The study said most of the remittance recipients who save do not use the formal channels.
“Bringing these funds into the formal financial system can increase their impact dramatically.”
It advocates the licensing of microfinance institutions, which reach the majority poor and more companies licensed to engage in the business.
It is only in Kenya, the Democratic Republic of Congo, and Ghana where microfinance institutions are allowed to carry out international money transfers.
Except for less than 10 countries in the continent, lack of competition is being blamed for the high costs.
And, because they do not operate in rural areas, the recipients incur extra costs in travel and more often are exposed to mugging.
Ifad found that only two major money transfer companies control 65 per cent of all remittances and that 80 per cent of African countries restrict institutions to offer the service.
The huge charges for transfers to Africa has previously been cited as forcing people in the Diaspora to use informal means of sending money.
Ifad recommends that financial reforms be undertaken to allow for more financial institutions to enter the business to increase competition.
Exclusivity agreements between the firms and the local banks should be phased out, Ifad says.
“[Such] contracts that prevent agents from forming partnerships with other providers block competitors from entering the market,” said the report.
The fund has also recommended that institutions be innovative to provide other financial services to remittance recipients like insurance and savings products to strengthen the link to development.
If the transfer charges were manageable, the report says, would lead to savings, which can be used for other development activities and encourage Africans in the rich countries to send more cash.
In most African countries including Kenya, the World Bank says the bulk of remittances are in consumer goods, leaving less for savings.
Kenya receives an average of Sh3.7 billion each month through the formal channels such as commercial banks and authorised international money transfer avenues, said Njuguna Ndung’u, the governor of the Central Bank of Kenya.
The study by IFAD, was released on Thursday in Tunisia, a day before the African Development Bank and the France government establishes a trust fund on remittances from migrants.
The institution will help migrants to understand how to send money home, support for regulatory reforms for these transfers, the development of financial products, and the development of investment environment at home.