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Remittances, Regulation, and Financial Development in Sub-Saharan Africa

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The Failure of Financial Regulation

Part of the book series: International Political Economy Series ((IPES))

Abstract

This chapter critically examines the financial regulations needed to leverage remittances into positive sustainable development outcomes in sub-Saharan Africa. Although remittances have been the fastest growing, most stable, resilient, and reliable source of private capital flows to the region since the 2008 financial crisis, regulations have not kept pace with their increased importance. Noting the context-dependent nature of the remittance-development relationship, the chapter focuses on financial development as a key context. Leveraging remittances into positive development outcomes requires a financial regulatory system that enhances complementarities along the remittance transfer chain. Regulations are needed to expand market access and competition, reduce financial exclusion, facilitate technological innovations in financial services, reduce high transaction costs and informal transfers, enhance accuracy in remittance reporting, and curb illicit financial flows.

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Notes

  1. 1.

    A major challenge for financial regulation globally and nationally is the pace of technological change.

  2. 2.

    For example, the flow of remittances tends to increase during periods of downturn in the economies of the senders’ home countries/communities, which occurs in large part because of the familial/community attachments, bonds, and obligations linking senders and recipients (World Bank 2016).

  3. 3.

    Such dependence constitutes a major challenge for the credit position of these countries. For a study of the impact of remittances on the sovereign ratings of low- and middle-income economies, refer to Avendano et al. (2011) and Ratha et al. (2011).

  4. 4.

    The African Union Commission (AUC), the European Commission (EC), the World Bank, the African Development Bank (AfDB), and the International Organization for Migration (IOM) collaborated to create the African Institute for Remittances (AIR).

  5. 5.

    A bond is a debt security instrument with a maturity of more than one year and is usually tradable in financial markets. A diaspora bond is one issued by a country specifically targeting its own diaspora to tap into the latter’s assets in their host countries (African Development Bank 2010a). A ‘remittance -backed security’ or ‘securitized remittance’ is a bond backed by the future flow of remittances into a trust account held by a banking institution or money transfer organization.

  6. 6.

    The practice of issuing diaspora bonds goes back to the early 1930s when Japan and China first issued them followed in the 1950s by Israel and later by India.

  7. 7.

    For a broader analysis on how moral hazard has distorted liberal capitalism and financial rules, see Gaillard and Michalek in this volume.

  8. 8.

    Early theoretical arguments supporting the role of financial development in promoting growth include Schumpeter (1911) and Hicks (1969).

  9. 9.

    For a specific focus on market failures, refer to Dobuzinskis in this volume.

  10. 10.

    The FATF is an inter-governmental body established in 1989 comprising 35 countries and 2 regional organizations, which develops and promotes policies and standards to combat money laundering and terrorist financing. See Financial Action Task Force (2012).

  11. 11.

    In fact, the inordinate power of MTOs may suggest that there is a substantial ‘regulatory capture’ problem in many sub-Saharan countries. For a thorough study of regulatory capture, see Cohn’s chapter in this volume.

  12. 12.

    They estimate the ‘super tax’ transfer by reference to two benchmarks. The first lower-bound estimate is the gap between charges for Africa and global average charges. The second benchmark follows a method used by the World Bank and others that estimate the gain that would accrue if charges were lowered to the 5% international target level.

  13. 13.

    In the broadest terms, ‘registration’ requires RSPs to identify themselves to the authorities and provide information about their services, with few or no conditions applied to the ability of the RSP to provide its service, while ‘licensing’ attaches substantive conditions. In practice, however, the distinction between registration and licensing is blurred (Bank for International Settlements and World Bank 2007, 22). The requirement of registration/licensing is in line with the FATF Special Recommendation VI, which called on countries to license or register informal remittance services and to subject them to all FATF recommendations that apply to banks and non-bank entities (FATF 2012).

  14. 14.

    A ‘contestable’ market is one in which there are low barriers to entry and where potential entrants therefore exert competitive pressure on incumbents, forcing the latter to be efficient to maintain their market position.

  15. 15.

    Evidence shows lower rates of savings for cash remittances than bank deposits and for many of the poorest households in sub-Saharan Africa, remittances are the only point of contact with the formal financial sector (Mohapatra et al. 2010).

  16. 16.

    Kenya’s M-Pesa digital financial service, with about nine million subscribers, is the best known, but similar initiatives are underway in many other sub-Saharan African countries including Tanzania, Rwanda, South Africa, Nigeria, Ghana, and Côte d’Ivoire.

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Acknowledgements

Ted Cohn, Norbert Gaillard, and Anil Hira

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  1. Department of Political Science, Simon Fraser University, Burnaby, BC, Canada

    James Busumtwi-Sam

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  1. Department of Political Science, Simon Fraser University, Burnaby, BC, Canada

    Anil Hira

  2. NG Consulting, Paris, France

    Norbert Gaillard

  3. Department of Political Science, Simon Fraser University, Burnaby, BC, Canada

    Theodore H. Cohn

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Busumtwi-Sam, J. (2019). Remittances, Regulation, and Financial Development in Sub-Saharan Africa. In: Hira, A., Gaillard, N., Cohn, T. (eds) The Failure of Financial Regulation. International Political Economy Series. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-05680-3_5

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