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Leaving Transferred Money on the Table: Will Remittance-Linked Financial Products Add Value to Development Financing?

Mar 06, 2017

Lead Author: Ziyi Huang
Contributing Authors: Aron Betru and Jackson Mueller

Publisher: Milken Institute

For centuries migrant workers who send money home to their families have been a major source of inflows for developing countries. However, it is only in the past few decades that we have been able to put a number to these remittances. In some extreme cases, nearly a third of a country’s GDP comes from remittances. As a result, much has been written about the potential of harnessing these remittance flows for development purposes. Many economists have focused on lowering remittance transfer prices with the hope that this can lead to increased net money inflows for developing economies. However, basic consumption remains the primary use of such funds, often by necessity, and so remittances are not directed into long-term investments that could contribute to greater development impact. As a result, efforts are underway to leverage inflows from migrant remittances to provide their recipients with greater access to an array of financial products that could have greater development impact. Improving financial inclusion can promote economic growth as well as diversify and mitigate users’ overall risk.

In this paper we suggest that to keep up with the UN sustainable development agenda, there is a need to mobilize developing countries’ domestic resources to drive financial inclusion. Although currently untapped, remittance-linked insurance products offer great potential, given their intrinsic value in protecting the downside of at-risk populations while enabling the upside of fostering increased productivity and capital market growth. If executed prudently, remittance-linked insurance products could be a pilot for a donor-led intervention with the right incentives, with the recent advancements in FinTech (or better yet InsurTech) that allow scaling up of insurance. Nonetheless, there are challenges that will need to be overcome, namely financial literacy, efficient scaling, and regulatory issues, which donors can be critical to addressing in either host or home countries. In our next paper, we plan to take a look at the landscape of recent technology advancements (e.g.: InsurTech) and how they can facilitate the development impact of remittances in the emerging economies.