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Remittances between Russia and Tajikistan: branchless banking or branch-based nonbanking?

Date Posted: Tuesday, April 03, 2012

This is the third post in a series on remittances. Stefan Staschen works regularly as a consultant for CGAP’s Government and Policy Team and is an Associate with Bankable Frontier Associates. 

Tajik migrants, courtesy of Stefan Staschen

My colleague Olga Tomilova and I recently were in Tajikistan and Russia to learn more about the large remittance flows between these two countries. We were most interested in the potential to link remittances with other financial products, such as loans and savings accounts in order to increase access to finance on both ends of the remittance corridor.

Having lived and worked in Kenya for many years, I inevitably started comparing Tajikistan with Kenya, and I realized that this is actually quite an interesting comparison.

For example, taking one point of comparison, in Kenya there is a lot of talk about the high aid-dependence of the economy (5.7% of GDP). But it turns out that it is still small in comparison to the “remittance-dependence” of Tajikistan, which peaked at 50% of GDP in 2008 (i.e. just before the effects of the global financial crisis could be felt) and stood at 40% in 2010 (according to the World Development Indicators). Obviously remittances and donor funds are not the same, but if we are concerned about the changing mood of donors and its potential effect on Kenya, how much more should we be concerned about fluctuations in remittance flows to Tajikistan!

Such large remittance flows do not only benefit the recipients, but can also be great business for banks. (In the case of one bank, the revenues from commissions corresponded to 46% of its net interest income in 2009.) But they create the risk of precarious living conditions for Tajik labor migrants and expose the recipients and the Tajik economy as a whole to the whims of Russia’s immigration policy, which has already been tightened several times.

There is actually another analogy between Kenya and Tajikistan: in both countries remittances boom, only that in Kenya it is mostly domestic remittances exemplified by the run-away success of Safaricom’s M-PESA mobile money service. While every Tajik receives about $325 in remittances annually (of which at least 90% originates from Russia), domestic transfers flowing through the M-PESA system alone amounted to about $200 per capita in 2010. Mostly as a result of M-PESA, the percentage of the population excluded from formal financial services dropped substantially between 2006 and 2009.

Yet in Tajikistan the story is quite different. Even though the remittances mostly flow through the formal banking system, customers really only interact with banks when they deposit the money in Russia or withdraw the money in Tajikistan. Unlike in Kenya where M-PESA clients open a store-of-value mobile wallet account that they can operate from any of the 23,000 agents countrywide, most of the Tajik remittance senders and receivers do not have any kind of account in the formal financial sector. Yet they still need to go to a branch to be served. While Kenya is famous for its thriving branchless banking sector, in Tajikistan it would be more appropriate to talk of branch-based nonbanking. The banks are really only used as payment service providers that facilitate the cross-border transfer of funds and as liquidity providers when the recipients withdraw the money at one of their banking outlets. All the rest is done by one of 16 different money transfer operators (mostly Russian companies plus Western Union and MoneyGram).

The potential seems huge to make use of a promising mix of (i) people on both ends of the remittance corridor being in regular contact with banks; (ii) most of the senders and receivers still being unbanked; (iii) the banks having detailed records of remittance clients’ financial flows; and (iv) intense and growing competition among banks, which has led to declining fees for customers to remit money (having come down from about 3% in 2007 to 1% – 2% today).

This sounds like the ideal breeding ground for more sophisticated and more “sticky” financial products for remittance clients to move beyond pure payments transactions. But as I’ll discuss in my next post, the initiative of two banks– Russlavbank in Russia and Agroinvestbank in Tajikistan – to offer such products reveals a rather sobering experience to date.

- Stefan Staschen


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