Understanding Informal Remittances – Central Bank


The size of remittances and their macro and microeconomic impacts and development outcomes are well documented. A concrete example: official remittances to low- and middle-income countries (PRITIs) in 2021 are expected to reach $587 billion, three times official development assistance and 50% more than foreign direct investment (excluding China).

However, the volumes and sizes of informal (or unrecorded) remittance flows have received relatively less attention from central banks than formal remittance flows and other sources of external finance, because of their informal nature and the paucity of data. Greater digitization of remittances, significantly accelerated during Covid-19, has made it possible to understand and formalize remittance flows. Today (June 16) is International Day of Family Remittances – a good time to reflect on the matter.

Covid-19 has reduced PRITIdependence of banks on informal remittances due to lockdown measures, greater digitalization and lower commission fees, leading to a shift in behavior from informal to formal remittances. During the pandemic, this increase in formal remittances was attributed to travel restrictions and the rising cost of sending and receiving informal remittances, which had reached prohibitive levels.

The pandemic has demonstrated the critical importance of remittance flows in mitigating shocks in developing countries and underscored the role of digital channels which seem to work better in the new normal than agent- and cash-based models.

Need for greater formalization

Despite the positive aspects of informal remittances, the formalization of informal remittances, particularly following the availability of digital financial channels, is important for central banks to consider for several reasons.

More importantly, the frequent use of informal channels tends to keep people outside the formal financial system, limiting their ability to save and borrow money through formal institutions, which has an impact on the financial inclusion and financial sector deepening. According to several development agencies, a condition for migrant remittances to be better harnessed for development is that they be channeled through formal mechanisms.

The huge size of informal remittance flows – estimated at 35-75% of recorded remittance flows – is still not reflected in the formal remittance system, impacting their integration into policy-making, monitoring and estimation of precise financial indicators, such as foreign exchange. foreign exchange reserves and the sovereign’s credit rating.

Lack of information on informal remittances, for example, limits the availability of economic data, adversely affecting monetary policy decisions and hampering the channeling of remittances to productive sectors of the economy such as India. investment, business creation, real estate investments and microcredits, among others. others.

Capturing data on informal remittances and accurate data on remittances in general can have a positive impact on components of sovereign credit ratings of remittance-dependent countries, such as balance of payments (account current), the size of the economy, economic growth and external financial flows.1

For central banks, of course, the main objectives are to maintain price stability and the safety of the financial system. It is therefore important to emphasize that until alternative channels are available to provide affordable access and trust in formal financial services, the reduction of informal remittance systems may cause difficulties for migrants and remittance recipients. , especially in underserved and conflicted corridors. Authorities should proceed with caution, being aware of the many factors that determine consumer preferences for informal remittance channels, among which the main ones are:2

  1. High fund transfer fees. Official remittances are expensive for several reasons, including regulatory compliance, exchange rates, and financial infrastructure. Excessive compliance requirements around currency transfers, banking laws, access to payment infrastructure and anti-money laundering rules increase remittance transfer costs, as do high rates Effects conversion costs. For example, large differences between official and black market exchange rates in countries of origin are critical to the success of informal remittance systems. Mandatory requirements for remittance service providers to access bank payment infrastructure also increase costs.
  2. Inadequate financial market infrastructure on sender or receiver side. Banking and financial infrastructure in PRITIs are often weak and in some cases non-existent in rural and remote areas, resulting in considerable travel and other costs. As a result, there is increasing reliance on local informal remittance systems. For example, at the root of the strong preference for informal channels in parts of sub-Saharan Africa is an inadequate formal financial system, particularly when it comes to facilitating intra-regional remittance flows. . Moreover, in regions that have been devastated by natural disasters or war, a non-existent financial infrastructure leaves consumers entirely at the mercy of an informal money transfer system as the only viable option. This is the case of Afghanistan and this was the case of Somalia, although the revival of the Somali interbank payment system can help.
  3. Profile of migrants. Migrants are among the groups that find it most difficult to access financial services due to their legal status, literacy, length of stay, language, culture and socio-economic position. Workers who have migrated through irregular channels are unlikely to use formal modes of bank transfers due to “know your customer” requirements and fear of being discovered by law enforcement. Short-term migrant workers travel home frequently and may take money or goods with them. Low-wage migrants transfer smaller amounts of money and prefer informal channels with lower transfer costs. Low levels of literacy and language deficiencies also lead to anxiety and distrust of formal financial systems.


Policymakers, including central banks, need to better understand the nature of the problem. Central banks and other institutions should assess whether informal remittances are a problem for a specific region, country or migration corridor. This would involve estimating the size, nature, direction and use of informal remittances. This would also lead us to the question: are there other effective formal channels for digital remittances or mobile money transfers?

In addition, it is imperative to understand the role of public and private sector actors who can play a critical role in encouraging this shift from informal to formal channels. This will include their ability to provide a more conducive policy and regulatory environment, a better developed payment and financial infrastructure, openness to innovation, and a better understanding of the financial needs of migrants and their families.

Financial and digital literacy is another crucial ingredient. Central banks and other stakeholders can educate migrants about formal remittance channels and their benefits, including through digital and financial literacy. Pre-departure linkages between migrants and financial institutions/banks and recruitment agencies can be a good starting point.

Digital channels can be a major enabler. As central banks know, the digital economy offers unique advantages to compete with informal remittance channels. Its unique attributes include convenience, cost reduction, transparency, financial inclusion, security, and access to a wide range of digital financial services to maximize the benefits of remittances. Digital remittance channels can therefore serve as a gateway to financial inclusion for migrants and their families. Additionally, digital cash can meet the needs of underserved populations such as rural households, women, migrant workers and refugees.

The case of mobile money, which is becoming a widespread channel for particularly inexpensive fund transfers, can provide an illustrative example for central banks. According to a 2018 report, mobile money-enabled remittance services were available in 184 corridors connecting migrants from 35 “sending” countries to their families in 40 “host” countries. Studies in sub-Saharan Africa have shown that people who own and use a mobile money account are less likely to send funds through an informal channel.

Moreover, mobile remittances are also the most affordable way to transfer money between countries. For example, sending $200 via mobile money costs 3.5% in Q3 2020, 47% less than the world average. This marks significant progress in achieving the UN Sustainable Development Goals, as 65% of mobile money transfer corridors already meet SDGs 10c: Reduce the transaction costs of migrant remittances to less than 3% by 2030.

Next steps

The important takeaway here for policy makers is the evolving role of technology and business models, often facilitated by non-bank financial institutions with a focus on underbanked and underserved segments, towards formalizing remittances funds through affordable channels.

Understanding the channels and volumes of informal remittance flows is also essential for policy makers. Beyond policy and regulatory efforts to formalize remittance flows, central banks should consider developing more robust models and methodologies to estimate informal remittance flows. The UN Capital Development Fund works to assess existing methodologies and support central bank capacity building efforts to better capture and estimate remittance flows. This will be the subject of a future UNCDF the blogs.


  1. Currently, data on remittances are collected according to the methodology/classification defined in the Balance of Payments Manual of the International Monetary Fund, the most recent version of which is MBP7. However, this does not include entering data on informal remittances.
  2. See, for example, What determines the choice of transfer channel for migrant remittances? The case of Moldovaand Labor Remittances in Africa: Reducing Barriers to Development Contributions.

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