This is the fourth post in a series on remittances. The previous blog in this series discussed the scale of the remittance flows between Russia and Tajikistan and the huge potential for linking them with other financial products. Stefan Staschen works regularly as a consultant for CGAP’s Government and Policy Team and is an Associate with Bankable Frontier Associates.
You can probably understand our excitement when CGAP learned about the initiative of two banks to leverage the large remittance flows between Russia and Tajikistan. Agroinvestbank in Tajikistan offers three such linkage products in cooperation with Russlavbank in Russia, which operates the CONTACT money transfer system.
The following three products are offered:
- A “Road Loan” where migrants (before they leave Tajikistan) can receive loans up to US$1,000 mainly to cover travel expenses for their trip to Russia. The migrant, once in Russia, uses the CONTACT system to make repayments from Russia at a preferential commission rate (i.e. a lower rate than charged for remittances). In April 2011, Agroinvestbank had 6,000 road loans in its portfolio with an outstanding loan balance of US$3.2 million. (This is the only product which is also offered by a number of other banks.)
- “Hamvatan” (meaning “compatriot”) is a basic deposit account offered by Agroinvestbank, which can be opened remotely at Russlavbank branches in Russia and can be replenished through the CONTACT system. Only the migrant can withdraw money from this account (and only once he has returned to Tajikistan). So in a way it’s a savings account in Tajikistan replenished by a remittance from Russia. As of mid-2011, only 38 accounts had been opened with an aggregate balance of US$30,000. Most clients close their account once they return to Tajikistan as they would rather deposit the money in an account earning a higher interest rate.
- “Family Card” is a current account with two debit cards – one for the migrant and one for his family. The migrant worker opens the account in Tajikistan before he travels and he can replenish it from Russia through the CONTACT system at a preferential commission rate. Unlike the Hamvatan account, family members can withdraw money in Tajikistan even before the migrant returns home. (No data on number and volume of accounts was available for this, but I assume the banks would have touted the success if there was anything to tout.)
What are the reasons for the low take-up of these products, even though the potential seems huge, and what can be done to make them more attractive? The following are a few indications, although more detailed research would be required to provide definite answers to these questions.
- General lack of trust in the Tajik banking system: This lack of trust has to do with concerns about the solvency of banks, but also about banks sharing customer data with the government. There is the need for customer education initiatives, as the lack of trust also has to do with low financial literacy and capability of clients, many of whom still prefer to save in-kind (gold, cattle, etc.) rather than keeping money in a savings account.
- Poor product design: The savings products seem to lack flexibility as migrants might neither be interested in family members having access to all the money (Family Card) nor in them not having any access (Hamvatan). Migrants, as most poor savers, are likely to be able to save a bit of money once in a while, and prefer a product with convenient access, yet where they are still in control about who can access the account.
- Household consumption needs: Many clients need the bulk of the money immediately for consumption and can’t afford to save substantial amounts. This is one of the reasons for low take-up that is the hardest to change. According to an annual survey by the National Bank of Tajikistan (central bank), this is the main reason for the lack of interest. In 2010, among the 26,000 respondents only 12.5% were in favor of transferring remittance flows into deposit accounts. The main reasons for the lack of interest were that they needed all the money for consumption (45.5%), were not satisfied with the interest rate on deposits (8.9%), and did not trust the banks (7.4%).
- Lack of integration: It would be important to directly link the (mostly web-based) systems of money transfer operators with the core banking system of the recipient bank, which makes it much easier to link the remittance transaction with direct transfers into bank accounts.
- From “branch-based nonbanking” to branchless banking: On the sending side (in Russia), the central bank has recently permitted the use of “payment agents” (such as cash acceptance terminals that are ubiquitous in Russia) for amounts up to US$500, which is a first step to increase accessibility. On the receiving end (in Tajikistan), non-bank agents could be used instead of banking outlets and thus increase the footprint of current money transfer operators. The offices of microfinance institutions – which number in the hundreds in Tajikistan, and exist in every part of the country – could be of particular interest in this regard. Finally, the potential of mobile banking has been all but ignored so far. Mobile phones could not only be used to transmit information, but potentially also to hold virtual accounts (to the extent that this is permitted by current regulation or that policy makers could be convinced to make it so).
It can be concluded the Russia-Tajikistan corridor offers some interesting insights on how one might link financial products to remittance flows, but it also provides insights on the basic challenges accounting for why no significant scale has yet been reached. I still believe the potential is huge, but making this link is far from automatic.
More details on the emerging landscape for international remittance deployments through mobile money are available in the full study. - Stefan Staschen
Tajikistan is indeed an interesting case and there is definitely need for more “sticky” financial products in the market. However, I think it is important to highlight that low levels of financial literacy with regards to the products already on offer is also a key factor behind the high “unbanked” rates.
At Developing Markets Associates we are currently implementing a financial inclusion programme that is funded by the European Bank for Reconstruction and Development (EBRD) through the Early Transition Countries (ETC) Fund in both Tajikistan and Kyrgyz Republic. We are currently working with five banks in Tajikistan to provide one-on-one financial education directly to remittance recipients in the banks’ branches. The project has now been running for 4 months and in this time over 16,000 people have been educated and 6.5% converted into banked customers. Already the programme has attracted more than USD1 mn in deposits.
One of the aims of the project is to demonstrate to the banks the value and importance of remittance recipients and to feedback to the banks the profile of their customers and their needs. The programme also aims to demonstrate the important role that financial literacy has to play in actually getting people to use the products that are available to them.
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