Cashing in: The emirate’s large expatriate population means lucrative opportunities for banks in the remittances segment

While the volume of remittances worldwide fluctuated wildly during the recent financial crisis, Dubai has routinely bucked regional trends and benefitted from a stable flow of remittances over the past few years. According to the World Bank, worldwide remittances are estimated to have reached $406bn in 2012, up 6.5% over 2011, while the UAE saw a 9.5% increase in remittances during this period, from Dh41.2bn ($11.2bn) to Dh45.1bn ($12.2bn). According to World Bank data from October 2013, 30% of the remittances Bangladesh received in 2012, or $466m, came from the UAE. Egypt came in second as remittances from UAE accounted for 22% of the total, receiving $931m in 2012. India was the third-largest recipient of UAE remittances, which represented nearly 4.5% of the total annual foreign inflows to the country in 2012 at $15.6bn. “As the migration map of Dubai continues to evolve, so too do business opportunities, as well as risks,” Jean Claude Farah, Western Union’s senior vice-president for the Middle East and Africa, told OBG.

The Market

The UAE’s remittance market has been dominated by money transfer offices (MTOs) that vary in size, price and reliability, as well as informal halawa houses. There were 122 moneychangers with a total of 690 branches in the UAE in 2012, compared to 119 main offices and 628 branches at the end of 2011, according to the Central Bank of the UAE (CBU). Dubai had the highest number of moneychangers’ head offices (80) and branches (323). It is a crowded field that has become very competitive and even established players have lowered prices, according to Sultan bin Kharsham, the managing director of UAE exchange house Wall Street Exchange. “The market is already firmly divided between the top 10 exchange houses,” Kharsham told OBG. “In pursuit of increased market share, the larger exchange houses are beginning to aggressively drop rates, which is in turn eroding profitability.”

Although the UAE’s banking sector has boosted efforts to gain a greater share of the market by leveraging existing branch networks, traditional MTOs still dominate, according to a 2011 report by MasterCard, which focused on two of the most important “remittance corridors” in the world, one of which is funds sent from the UAE to India.

Stiff Competition

In 2008 India was the largest recipient of remittances in the world, receiving $49bn, 12% of which came from the UAE, according to MasterCard. While 75% of the remittances that pass through the lucrative UAE-India corridor flow into Indian banks, the sending side in the UAE is still MTOs or exchanges, and hawala houses have an estimated market share of 20-25%. While banks provide the most reliable remittance services in the UAE, they are typically not as competitive as other providers in terms of price, speed, customer service and convenience. Hawala houses, which provide doorstep service and do not charge tax on remittances that are received in the UAE, are the cheapest way to send money out of the country and the easiest way to receive funds that come in, according to MasterCard, but have come under scrutiny in recent years due to concerns over money laundering.

MTOs are the fastest way to send remittances outside of Dubai and have the best customer service, though they are more expensive than hawala houses and the amount of money that can be received in India through them is capped at $2500.

“The dominance of MTOs on the sending side becomes clearer in light of the competitive landscape. In terms of consumer needs – the end-to-end payments process, service reliability, and customer service – MTOs outperform their competitors and are uniquely positioned to serve blue-collar workers, especially with regard to customer service and local language support,” according to the MasterCard report. “As a result, banked senders remitting to banked receivers represent the most promising prospects for banks seeking to take market share in remittances. However, even banked customers will send remittances through MTOs due to better infrastructure on the sending side.” Banks charge between 12% for sums below Dh1000 ($272) and 2.5% for more than Dh7000 ($1905), while the rate charged by MTOs for similar sums ranges from 3.7% to 1.91%, and hawalas charge between 2.85% and 1.06%.

Entering The Market

Globally, remittance costs appear to have stabilised in 2013 at an average of 9%, but the World Bank reported that banks in many countries have begun imposing additional “lifting” fees of up to 5% of the transaction value and some international banks have started closing down the accounts of money transfer operators because of money laundering and terrorism financing concerns. In the UAE, the average remittance cost was 4.5%, making it the second-least-expensive sending country in the world after Saudi Arabia, where the average cost was 3.7% of the transaction’s value, according to the World Bank.

Since rates for sending remittances are inversely proportional to the amount of money sent, banks can best compete with MTOs for a bigger share of the high-value, white-collar remittance market. The MasterCard report said, “By moving consumers who do not require high-value services to online channels or alternative products, banks can reduce these pricing discrepancies while maintaining the exclusivity of the branch. Leveraging online channels – without the costly service infrastructure that MTOs have put in place – can give banks a cost advantage that should allow them to offer lower prices than MTOs.”

Some banks are partnering with existing exchange houses in order to gain a foothold on both the sending and receiving side of one of the world’s most valuable remittance corridors. For example, in October 2013 Dubai Islamic Bank (DIB) partnered with Terminal Petikemas Surabaya to launch its own remittance disbursement service in Pakistan, known as the Remittance Processing Solution (RPS). In Pakistan, documented remittances increased from $1bn in 2001 to a projected $14bn in 2013, according to the World Bank, but receiving remittances through established channels remains a major challenge. “The line between banks and exchanges has been blurred as banks begin to acquire or open their own exchange branches, but most cannot compete with the added value traditional exchange houses can offer,” Kharsham said.

Going Strong

Top exchange houses are increasingly branching out into financial products, savings schemes and other services traditionally offered by conventional banks. The CBU introduced a direct debit system in 2013 that is likely to support the banking sectors’ further entry into the remittance market by boosting the volume of non-cash payments.

One thing that is not expected to help banks take a larger share of remittance flows is a potential tax on remittances. In September 2013 the UAE Ministry of Finance sent a circular to the banking industry to solicit its feedback on a potential remittance tax in Dubai.

The initiative was widely dismissed as unfeasible by the banking sector in multiple media reports due to the difficulty of implementing and enforcing a remittance tax at the local, rather than federal level, and the potential negative consequences the law could have on Dubai’s economy, which is driven by and dependent on expatriates. A remittance tax would either come in the form of a tax on wages – effectively an income tax – or a duty imposed on senders at MTOs, both of which would discourage people from sending remittances through official channels.

A remittance tax would also undermine efforts to crack down on money laundering through MTOs. In May 2013 the central bank revoked the licences of two MTOs, Al Hilal Exchange and Asia Exchange Centre, for “major regulatory violations”. The following month, the bank announced it was considering raising the minimum capital requirements for exchange houses.

The current limit is based on a 1992 law and requires exchange houses with unlimited liability to have a minimum capital of Dh1m ($272,200) in order to operate as a money exchange business, and Dh2m ($544,400) to work as a money exchange and remittance business. For limited liability companies, the minimum capital requirement is Dh50m ($13.6m) under the current rule.

Dubai’s preparations for Expo 2020 are expected to create up to 270,000 new jobs, many of which will be filled by foreign labour. This in turn will help stimulate remittance growth, with wages being sent to workers’ home countries. As the segment continues to evolve, guiding rules and regulations may need to be reviewed.

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The Report: Dubai 2014

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