Cheaper Remittances: How Malaysia and the Philippines Paved the Way

Millions of working people worldwide face the unfortunate truth that sending money abroad to family members in need doesn’t come cheap. In fact, customers pay an average fee of 6.9 percent on remittances – a controversial practice that has led the United Nations to set a 3 percent target in its Sustainable Development Goals. In recent years, the cost of sending remittances between Malaysia and the Philippines has dropped to near (or by some reports below) the U.N. target, and we believe this has to do with smart regulations that other countries can emulate.

Bakery in Malaysia. Photo: Liak Song Teo, 2016 CGAP Photo Contest
Bakery in Malaysia. Photo: Liak Song Teo, 2016 CGAP Photo Contest

The remittance corridor between Malaysia and the Philippines is one of the largest in Asia due to the high number of Filipino migrants working in Malaysia. In 2016, the remittance flow from Malaysia to the Philippines represented $1.86 billion, with only minor flows in the opposite direction (less than $1 million). CGAP partnered with MacMillan Keck to analyze the regulatory conditions that have helped shape this thriving remittance market. We focused on the treatment of nonbanks, which are the providers most frequently used by migrant workers and the people receiving remittances.

A number of policy actions contributed to the corridor’s success (the full report is available here), but three offer particular insight for policy makers globally.

1. Policy makers used simplified licensing requirements for remittance providers to shape a vision for the market

Nonbank remittance providers have helped drive down the cost of remittances between Malaysia and the Philippines, and regulatory requirements proportionate to risk facilitated their entry into the market. New regulations in both countries streamlined registration processes for nonbanks and improved monitoring. In Malaysia’s highly competitive remittance market, the regulator decided to allow only new remittance providers that can clearly demonstrate a value proposition for customers. In this way, it used policy to actively shape a robust market. In both markets, smaller players that were unable to comply with the new rules were encouraged to become agent networks for larger remittance providers rather than exit the market altogether.

2. Regulators made it easier for remittance providers to enter into cross-border agreements

Effective partnerships are essential to the cross-border remittance business — whether direct agreements with providers in other markets to form “corridors” for passing funds or agreements with remittance platforms that open a variety of corridors to a service provider. Whereas many markets in Africa approve nonbank corridors one at a time in a process that can take weeks or months, Malaysia and the Philippines entrust remittance providers to conduct their own due diligence of partners at the other end of the corridor. The regulators rely on strong monitoring of industry operations, giving remittance providers the freedom to expand rapidly while still managing market risk. Regulators in both countries also recognize the important role that remittance platforms play in allowing local remittance providers to connect to a wider range of foreign partners. Malaysia’s central bank does not require a separate license for such hubs as long as they do not undertake retail activities, while the Philippines has introduced a Remittance Platform Provider category that simply requires registration and some basic reporting.

3. Regulators planned and established purposeful dialogue with industry

Regulators in both countries have taken deliberate steps to foster dialogue with market participants and have worked with industry bodies to improve skills and capacity in the market. In Malaysia, the regulator works with the Malaysia Association of Money Services Business (MAMSB) to share best practices and implement regulations. Licensed remittance providers are required to join MAMSB, and the organization serves as the primary conduit for training and certification in the market. These actions have improved regulators’ ability to provide effective oversight without overburdening providers with compliance activities. Effective dialogue has also ensured a level of regulatory clarity essential for business planning.

Despite these successes, a few challenges remain for the Malaysia – Philippines corridor. Purely digital remittances remain rare. Most international transfers are received over the counter – that is, they are received in cash at an agent location rather than through a digital account that is used for subsequent transactions. And while bank account penetration is high in these markets, the e-money providers facilitating a healthy cross-border business for migrant workers have not made significant progress toward finding a domestic market (e.g., with merchant payments or domestic remittances). Bridging the gap between a largely banked middle- to higher-income citizenry and the poorer, largely unbanked users of international remittance services will take more effort.

The Malaysia – Philippines corridor is only a single data point in a large and increasingly complex global remittance market. However, the actions that these two countries' regulators have taken to shape their markets and drive down prices should be considered instructional. The regulators have made efforts to engage market participants in constructive dialogue, simplify compliance and shape a thriving market through clear and intentional policy.

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