UNITED NATIONS CAPITAL DEVELOPMENT FUND    Microfinance

Issue 14 / July 2005

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By Carlos Silva-Jauregui, Lead Economist, World Bank

Migration has always played an important role in the Middle East and North Africa (MENA) region, being a special characteristic of its permeable labor markets. Three types of migration are common: (i) residential migration, which occurs when a person (or household) changes its place of residence by moving from one neighborhood to another within the same local area; (ii) internal migration, which occurs when a household moves across large geographical distinct units, such as counties, states, metropolitan areas, provinces or regions, but remains in the same country; and (iii) international migration, when a household moves across national boundaries.

International migration flows in MENA are characterized by at least four important features: (i) the large scale of worker mobility between countries; (ii) the importance of economic factors, particularly oil revenues driving migration; (iii) regional conflict and insecurity as another source for migration; and (iv) the dominance of two magnets in attracting workers from the region, the Gulf, and the European continent.

Worker's remittances are directly linked to migration flows. Remittances are an important and relatively stable source of external finance for development countries. In the MENA region they represent over 2 percent of GDP, the second largest in the world (Table 1).

Table 1. Workers Remittances (inflows)

US billions	1999	2000	2001	2002
Total	67	66	72	80
East Asia and Pacific	11	10	10	11
Europe and Central Asia	8	9	9	10
Latin America and the Caribbean	17	19	23	25
Middle East and North Africa	12	11	14	14
South Asia	15	13	14	16
Sub-Saharan Africa	4	3	3	4
Percent of GDP	1999	2000	2001	2002
Total	1.2	1.1	1.3	1.3
East Asia and Pacific	0.7	0.7	0.6	0.6
Europe and Central Asia	0.9	0.9	0.9	1
Latin America and the Caribbean	1	1	1.2	1.5
Middle East and North Africa	2.2	1.9	2.3	2.2
South Asia	2.6	2.3	2.3	2.5
Sub-Saharan Africa	1.3	0.8	1	1.3

Source: World Bank, Global Development Finance.

MENA countries – especially Egypt, Morocco, Lebanon, Jordan and Yemen – are among the main beneficiaries of workers remittances flows in the world. Figure 1 below presents the top 15 development countries that are recipients of worker's remittances. It reveals how important remittances are in MENA.

Figure 1. Workers Remittances (Inflows), 2001

US billions

Source: IMF, Balance of Payment Yearbook.

The MENA region is also an important source of remittances to the world. In terms of absolute levels, only the USA exceeds Saudi Arabia as a net exporter of remittances (see Figure 2, world ranking in parenthesis). On a per capita basis, the four most important sources of remittances in the world are all from the Persian Gulf region (Bahrain, Kuwait, Saudi Arabia and Oman).

Figure 2. Workers Remittances (Outflows), 2001

US billions

Source: IMF, Balance of Payment Yearbook.

The economic effects of remittances are well known. Remittances increase recipient's incomes and consumption, as well as the recipient country's foreign exchange. They tend to have a positive effect on investments and savings. While remittances can have a positive effect on poverty, lifting people in recipient countries out of it, their effect on inequality is somewhat mixed.

Weaknesses in financial sectors impose large transaction costs on workers sending remittances home. These costs have been estimated at about 13 percent in Latin America and are likely to be as high or even higher in the MENA region. Improved banking sector technologies could reduce these transaction costs, increasing remittances, bringing a larger share of them into formal financial systems, and making more resources available for domestic finance.

Remittances and Microfinance

Banks in developing countries did not show much interest in remittances in the past because of the limiting branching networks and factors affecting transaction costs. However this is changing and more interest is being place in this important market for finance. Often recipients of remittances are the same people targeted by microfinance institutions. Connecting remittances and microfinance institutions directly could improve efficiency and lower transaction costs. As such, r emittances could benefit microfinance and recipient country's grassroots development if channeled directly through more efficient systems. Strengthening the link between remittances and microfinance may have important development implications.