In sub-Saharan Africa, remittances have become a major economic lifeline. But this is no surprise as we see an increasing number of migrants in search of greener pastures. These migrant workers eventually need to transfer money to their loved ones back in their home countries. This situation inevitably leaves the migrants at the mercy of third-party institutions such as banks and money transfer operators that charge exorbitant fees. But blockchain technology and cryptocurrency now offer hope to radically transform the African remittances industry in favor of migrant workers and their families.

On average, it costs about 9.3% of the value to be transferred to send an equivalent of $200 to sub-Saharan African, the most expensive region in the world for remittances.

For regions predominantly constituting of mostly developing countries, one would expect that the remittance rates charged would be lower or at least fair, but the reverse is the case, according to the World Bank. In South Asia, the region with the lowest average, consumers still pay about 5% for international money transfers. But regional figures obscure the huge variations between countries. In Russia and Central Asian countries, money transfer fees account for only 1.3 to 1.7% of the cost of remittances.

EAP = East Asia and Pacific; ECA = Europe and Central Asia; LAC = Latin America and the Caribbean; MENA = Mid-dle East and North Africa; SAR = South Asia; SSA = Sub-Saharan Africa. Sources: Remittance Prices Worldwide database, World Bank. 

See related article: How TransferWise is Shaking up Remittances

The high cost of international money transfers has become a big issue as migrant workers and remittances play an increasingly important part of national economies. In sub-Saharan Africa, there is now a high level of migration within the region. A considerable part of the population is engaged in south-south migration, with about 70% of migrants now coming from other sub-Saharan African countries. This increase in the number of economic migrants in Africa and other regions have helped fuel the rise in global remittance flows. Around the world, remittances to low and middle-income countries (LMIC) are increasing at a rapid pace. From 2017 to 2018, total remittances to LMIC globally jumped by almost 10%, to $529 billion. Remittances to those countries are now expected to be higher than foreign direct investment.

It is, however, encouraging to see that exorbitant transfer fees could be greatly reduced through blockchain technology and cryptocurrency. 

In sub-Saharan Africa, there is a drastic reduction of as much as over 90% in transaction fees when sent through crypto-based fintech firms such as Bitpesa, LocalBitcoin and Paxful, to name but a few. This margin could get even better with the recent launch of the behemoth cryptocurrency exchange platform Binance in Africa, to incorporate more African fiat pairings to its platform. With a deposit fee of about 1.4% for its Naira pair, Binance is also part of the effort to lower the high remittance rates charged by traditional financial institutions and help make remittances more seamless.

Growth of remittances to the region

Sources: World Bank staff estimates, World Development Indicators, and the International Monetary Fund (IMF) Balance of  Payments Statistics. 

In sub-Saharan Africa, remittances amounted to $42 billion in 2017 and are expected to exceed $50 billion in 2020. This upward trend seen could be explained by strong economic conditions in high-income economies where we see most of the Sub-Saharan African migrants earn their income. 

The money getting sent back home by migrant workers also represents a considerable percentage of Sub-Saharan African economies. According to the World Bank, remittances make up over 10% of some countries’ GDP. In Comoros, the Gambia and Lesotho, remittances make up about 19.1%, 15.3, and 14.7% respectively of their GDP. Nigeria, the largest remittance-recipient country within sub-Saharan Africa, received more than $24.3 billion from official remittances in 2018 — or 6.1% of its GDP that year.

Current remittance system exploits users

Notes: FDI = foreign direct investment; ODA = official development assistance; e = estimates; f = forecasts. Sources: World Bank staff estimates, World Development Indicators, and the International Monetary Fund (IMF) Balance of Payments Statistics.

Where do remittances go? The money sent back by Africans working abroad supports their families back home in countless ways: to pay for children’s education, build houses and pay for other everyday needs. The funds sent back home are sometimes crucial for the survival of families in Africa, where the economy is often unstable. But traditionally, too much of that money is being taken by financial companies through transfer fees.

According to the World Bank, banks are the most expensive agents for sending money to sub-Saharan Africa, charging a whopping 10.2% in fees, on average. This is closely followed by 7.7% from money transfer operators and post offices at 5.5%. This indicates that there is still a long way to go, as it is by far too costly. It is now a World Bank Sustainable Development Goal to cut money transfer costs by 2030 to within 3% of the total transaction value.

Cryptocurrencies as a less costly alternative

Recently, some people in sub-Saharan Africa have started putting their hopes on the use of cryptocurrencies to escape the many constraints faced when using regular remittance services, which include not just cost but also speed and convenience. A good number of crypto-fiat platforms have recently sprung up to rival the traditional remittance firms. Here are three of the largest, most established and most popular for the region.

Money sent back by Africans working abroad supports their families and loved ones at home. Photo: Neil Palmer (CIAT)

Bitpesa

Founded by American political science graduate Elizabeth Rossiello in 2013, the company had initially focused on bitcoin-supported cash transfer between the U.K. and Kenyan citizens. The company has since then enlarged the scope of its operations to seven other African countries: the Democratic Republic of the Congo, Ghana, Morocco, Nigeria, Senegal, Tanzania and Uganda.

The company, based in Nairobi, provides a blockchain-powered platform where people in Africa can send or receive money from around the world at a fraction of the cost by traditional agents.

“We process our remittance payments with a blend of traditional and personal insurance such as pooling, as well as using cryptocurrency,” said Stephany Zoo, Bitpesa’s head of marketing. “Our fees are 1 to 3%, so it’s significantly lower than those mentioned in the World Bank report. A lot of our clients are money transfer operators that actually move the money and we are the underlying technology or software behind what they do as well as being their foreign exchange provider.”

LocalBitcoins

LocalBitcoins is a Helsinki-based company founded by Jeremias Kangas and his brother Nikolaus in 2012. 

The platform portrays its uniqueness in the flexibility of dealing with humans. This is quite different from the usual centralized and stock-exchange-like bitcoin-trading sites. Here, trades are made directly with another person. This makes the process lean and fast, given that there is no corporate overhead. A user can get bitcoins as quickly as the other party responds. Also, LocalBitcoins.com has been built to support almost every payment method its user community would have the need for. For every transaction, LocalBitcoins.com offers escrow or transaction service to protect the buyers/sellers.

As a widely used peer-to-peer crypto-fiat platform used in Africa, LocalBitcoins has been able to record an increase in the volume of transactions that would have gone into the local remittance industry. This is as a result of the fact that it provides a secure platform to convert Bitcoin to fiat and vice versa as well as transfer funds between African countries and in other parts of the world. It also supports a wide range of payment platforms, including mobile money transfers such as M-Pesa.

The LocalBitcoins system gives the advantage to traders with a high feedback score and level of trust by allowing them to conduct more trades on the platform. Registering, buying, and selling bitcoin is completely free but users who create advertisements are charged a 1% fee for every completed trade.

See related article: Cross-border transactions key to connecting a fragmented region | Opinion

Paxful

In 2014, Ray Youssef and Artur Schaback founded EasyBitz, which was then renamed as Paxful, headquartered in New York. The platform aims to provide a safe and reliable bitcoin wallet that aims to keep funds secure without any compromising privacy. The team had the goal to make bitcoin easier for everyone from businesses to merchants.

Sub-Saharan African is one of the most expensive regions in the world for remittances. Photo by Sincerely Media

Paxful has so far been focused on being a peer-to-peer bitcoin marketplace where buyers and sellers are connected for business.

Paxful also poses as one of the firms formidable in tackling the current exploitative reign of the banks in Africa. This is because one of the features of Paxful’s operations in the African marketplace is the ability of digital currencies such as cryptocurrency to operate outside the existing structure of financial institutions, given that this situation makes this medium extremely valuable to the unbanked, that is, people who don’t have a bank account for depositing or sending money, Paxful intends to take advantage of this to ease to flow of money into this region.

Added to that is the fact that cryptocurrency is far less volatile compared to the fiat currency of some countries that experience high inflation on a periodic basis, driving market uncertainty, which is inimical to progress. This is an advantage that has become apparent to the company’s user base of over 2.5 million customers all over the world, who are able to trade thousands of bitcoin a month, which moves millions of dollars through the Paxful site on a regular basis.

The platform provides over 300 payment methods, including PayPal, VISA, Mastercard, MoneyGram and bank transfer, and is available in Nigeria, South Africa, Kenya, Mozambique, Mauritius, Algeria, Egypt and Rwanda, among other African nations.

Conclusion

The Sub-Saharan African remittance market is expected to grow by 5.6% in 2020, according to the World Bank. There is a lot of optimism that crypto-based remittances business will claim a growing share of the market, to reduce consumer costs. Other countries outside sub-Saharan Africa also are finding that blockchain-enabled platforms are more effective, faster and easier to hold accountable than traditional institutions for remittances. We can see this already playing out as Egypt’s Biggest Bank recently delves into a blockchain-powered remittances partnership with Ripple.

Also, data from LocalCryptos — an African cryptocurrency exchange — has shown that Egypt has begun to record an increase in its transaction volume being the third highest. While this might not be a sufficient ground to ascertain speed at which the remittances of the country is turning towards blockchain for remittances, it serves as a good indication. For those in the sub-Saharan region and many parts of the world with little money to waste, these are all welcome developments.

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