Cross-border retail CBDCs can unlock financial inclusion

Pain points for migrant workers

A recent G+D white paper studies these issues in detail, with a special focus on the African continent. Dr. Roman Hartinger, Senior Business Analyst CBDC, and one of the paper’s authors, said, “Africa faces very particular challenges to the financial inclusion of its migrant workers: among other things, difficulties with digital and electrical access, and lack of interoperability between banking systems.” These issues aren’t limited to Africa. They can be found across the developing world, which is where most migrant workers tend to be from.

Even in countries with comparatively well-established correspondent banking systems, remittances through formal channels can be costly, time-consuming, and often opaque, especially regarding pricing and duration of transfer. For those with questionable legal status in their place of work, a lack of documentation is an almost insurmountable problem. Nor are all the issues on the payer’s side: payees might have to walk hours to a bank, post office, or other payment hub, and queue there for hours more, just to pick up their money. All these problems push migrant workers to use informal channels.² A World Bank study in Africa points out that remitting $200 from Tanzania to Uganda could cost the migrant worker almost 30%!³

Given the size of the global market and the numbers of people involved, these issues must be addressed.

Cross-border retail remittances in a global context

According to an OMFIF report, global remittances to low- and middle-income countries amounted to $540 billion in 2020.⁴ Over 200 million migrants, working across 40 countries, remitted money to a further 800 million people in 125 countries. This money came largely from high- and middle-income countries, with the USA, UAE, and Saudi Arabia topping the charts of where workers are remitting from.

On the receiving side, in countries like Lebanon, the Kyrgyz Republic, and Tonga, inbound remittances are between 25% and 50% of GDP. India, China, and Mexico received almost $200 billion between them as inbound remittances (given the size of these economies, the percentage of GDP is significantly less). On the African continent, inbound remittances are above 20% of GDP in Somalia, The Gambia, and Lesotho.

Given an average cross-border transaction fee of 6% (as we saw above, it can go as high as almost 30%; 6% is conservative), the potential for cost savings is immense. Not only would the migrant workers save money, but this can also be passed on to the people they are remitting to, with significant positive effects in the receiving economy. Take Egypt and Nigeria: inbound remittances to each nation could cost over $1 billion a year. Clearly, a significant portion of that money would be put to much better use if it were actually in the Egyptian or Nigerian economies, instead of being deducted at the point of transfer.

In this scenario, the benefits of cross-border retail CBDCs are immediately apparent: they can provide secure, reliable, cost-effective access to financial services for migrant workers globally. In other words, CBDCs offer them financial inclusion.

Africa illustrates both the issues that migrant workers face, and the potential that exists if CBDCs are considered as part of the solution by all stakeholders, including governments, central banks, and consumers. Many African central banks, with the active backing of their governments, are looking at issuing CBDCs. Nigeria and Ghana are leaders in this respect. The roll-out of CBDCs has the additional benefit of making remittances more accessible and affordable for migrant populations.

As Daniel Nagy, Business Analyst CBDC and the G+D paper’s other author, pointed out, “There is a real push in Africa to find innovative solutions. Central banks in the region are taking the lead with exploring CBDCs. Countries have entered into, or are discussing, common currency unions. With G+D’s decades of experience on the continent, we can say that the potential for retail cross-border CBDCs in enhancing financial inclusion is huge.”