Adam Bornstein and Mehreen Khalid

Converting Short-Term Remittances Into Long-Term Investments: Global Fund explores ways to build in financial inclusion and sustainable funding for health care

One day last year I (Adam) was sipping coffee with our nanny, Grace, in our kitchen in Hong Kong. She made no secret of the fact that she helped support her family back in the Philippines, but I was still surprised to hear her ask: “By the way, can I take the day off next Tuesday? I want to send money home.”

I knew the Bank of the Philippine Islands was open on Sundays. In fact, that’s its busiest day, when all the nannies working in other countries have their day off and use it to do their banking.

Remittance from nannies like Grace is big business in the Philippines. In the first half 2014, the US $28 billion in remittance single-handedly pushed the Philippines’ current account balance into surplus and accounted for nearly 10 percent of GDP.

Globally, 2014 remittance flows are estimated to top $436 billion, three times more than official development aid, and almost two times greater than foreign direct investment (FDI) to developing countries (outside of China).

With such huge flows of capital exchanging hands, propping up developing economies and overshadowing just about any measure of donor aid, it is no wonder that international development organizations are focused on improving the developmental efficiency and effectiveness of remittance.

For a time, leading up to the 2009 G8 L’Aquila summit, remittance fees were excessive, if not criminally high. However, in the years since, thanks to greater competition and advances in digital payments, remittance fees are quickly becoming more rational; for example, over the past 12 months transaction fees have fallen about 11 percent to 7.9 percent.

Online services and peer-to-peer start-ups now account for 23 percent of the services available in the cross-border money transfer market, according a survey by the World Bank Payment Systems Development Group.

And yet, some international organizations continue to call for regulatory reforms in the EU and the U.S., coupled with parallel reforms in developing countries.

I’m wondering, though, where is the research that suggests lower fees equate to better efficiency and effectiveness? Would lower fees generate greater volumes of remittance, address domestic funding gaps or, in the case of Nanny Grace, solve her most immediate needs? I’m not so sure.

Back in the kitchen in Hong Kong, after a few more questions I learned why Grace needed that Tuesday off. Turns out, the real problem was her dad back home, who had his heart set on new chrome wheel rims for his Honda Civic.

Grace explained, “Sir Adam, if I send money on Sunday, it gets there on Wednesday or Thursday, but if I send money on Tuesday, it gets there on Friday or Saturday. My dad is not home on Friday or Saturday.”

Her dad, you see, was going to use her remittance to buy new wheel rims.

But the money was meant to pay for her brother’s school. The only way to ensure that would happen was if her father was away the day her remittance hit the account.

The big footprint of remittances

A recent paper published for the G20 Global Partnership for Financial Inclusion supports the notion that migrants not only value but also take advantage of opportunities to exert greater control over savings remitted home.

Furthermore, in a field experiment in Rome, researchers concluded that more than 27 percent of migrant workers demonstrated significant interest in a product to directly pay remittances to schools. Also, having the ability to direct savings to a specific function increased the amount of remittance by 15 percent.

In mid-October the UN’s Economic Commission for Africa’s Ninth African Development Forum was held in Marrakech. Delegates, faced with mounting pressures to identify additional sources of domestic financing, rightly asked: How can African governments convert short-term remittance flows into long-term investments?

In 2001, the British Treasury published a seminal report on the United Kingdom’s tax and benefit system’s modernization. The report surmised that low-income households needed to save more money to enjoy the benefits of asset ownership. The UK then made it a goal to ensure that all British children grew up “knowing that they have a financial stake in society” and to accomplish this by creating the Child Trust Fund (CTF).

Through the CTF, parents received a voucher for 250 British pounds to open a savings and investment account on their child’s behalf. Families below the poverty line received an additional 250 pounds per child. Children, families and friends were able to contribute up to 1,200 pounds initially each year to the accounts. The CTF belonged to the child, and at age 18 the CTFs would automatically roll over into a tax-free, adult savings account, but young adults could withdraw their funds to finance education, health care or other purposes.

In 2010, the government cancelled CTF and replaced it with a Junior Investment Savings Account. The fact that the CTF was cancelled is not reflective of its impact. As of April 2012, more than 6 million CTF accounts had been opened, with 21 percent of these accounts receiving annual contributions of more than 300 pounds.

Recently, Aspen Institute’s Initiative on Financial Security resurrected the ghost of CTF, calling for U.S. policymakers to contemplate implementing a similar structure, but without the government funding component.

What this could mean for health care

In the context of applying the basic principles behind the UK’s CTF in a low-income country setting, we see a massive opportunity to leverage the interplay between remittance, financial inclusion and sustainable funding for health care.

A Remittance Investment for Child Health (RICH) savings account is a promising solution, as it addresses Nanny Grace’s desire for control while offering a path to convert remittance savings into sustainable domestic financing.

Similar to CFT, a one-time cash allowance of $15 would be given by the government to a newborn child. Parents would use the cash voucher to open a RICH savings account on their child’s behalf.

Once the RICH account was established, the government would direct deposit $15 into the child’s RICH account every six months until the child was 2, thus seeding the RICH account with a total of $60. In parallel, family members could contribute up to a specific dollar amount each year. Indeed, this family allocation would ideally be channeled from abroad by regular direct cash-to-account remittance deposits; however, parents could also contribute locally through a mobile money account, such as m-Pesa.

Once the child reached age 5, assuming that the annual average non-governmental contribution was at least $25, the government would provide an additional inflation-adjusted cash payment.

The RICH account would belong to the child; however, the assets in the account could only be accessed at age 16, of which 50 percent would have to be used/reserved for health-related services. As the assets in the RICH account would be tax-free, whatever remained in the account would roll over into a tax-free account. Unique to RICH, segregated fixed-term sub-accounts (or mobile wallet) could be established for the purpose of pooling savings for education, for example.

Currently, in the context of our team’s work around identifying new sources of domestic financing for public health, we’re in the process of exploring how individual remittance and savings accounts can play a larger role as an innovative financing solution.

RICH seeks to embrace the desires of the Nanny Graces of the world for greater financial control, stimulate soft commitments by creating goal-specific buckets, while at the same time ensuring the next generation actively participates in the formal financial sector. It will be up to governments to decide if they want more individuals to control their finances or drive around in chromed-out Hondas. Let’s hope for the former.

Adam Bornstein is an innovation health financing specialist, and Mehreen Khalid is an analyst focused on innovative health financing, with The Global Fund to Fight AIDS, TB, and Malaria.

Education, Health Care
financial inclusion, poverty alleviation, remittances, savings