Sending money abroad a key economic activity for Dubai's migrant workers and the financial system

Given the importance of expatriate workers in the UAE, remittances are a key part of both the economy and the financial services sector. They are also an aspect of the global financial system that has received greater attention of late. Remittances now surpass the value of total foreign development aid and are fast approaching that of foreign investment, according to a 2014 study conducted by the Wharton Business School. Financial services firms and governments in the world’s key remittance corridors are paying close attention.

A growing expatriate population and favourable exchange rates have supported growth in Dubai’s remittance industry, though India’s recently introduced service tax could affect volumes in the emirate. At the same time, new regulations introduced by the Central Bank of the UAE (CBU) in 2014 are expected to spur a wave of consolidation among exchange houses, dampening short-term growth prospects but supporting sustainable long-term expansion in the segment.


According the World Bank, remittances to developing countries were estimated at $404bn in 2013, up 3.5% year-on-year. Growth in flows to these countries is expected to average 8.4% per year to 2016, to reach some $516bn. Most remittances are processed through exchange houses, which act as a sort of shadow banking system, handling billions in transactions each year and expanding to offer services and products in the UAE, including ATM remittance transactions, as well as internet and mobile payment platforms.

Exchange houses, which make their profit from fees, have branched out to offer products sold by other financial companies, including investment bonds and other savings schemes. Of the 139 foreign exchange and remittances companies operating in the UAE as of the end of 2014, 62 are currently members of the Foreign Exchange Remittance Group (FERG), which is licensed by the Dubai Chamber and operates under the wider umbrella of the CBU.

The UAE’s remittance industry has shown strong expansion in recent years. UAE Exchange, which holds a 6% share of the global remittance industry, reported in April 2014 that its customers sent an estimated $14bn through its UAE-based exchange houses in 2013, a 6% increase over 2012. UAE remittances to developing countries expanded by a further 8-10% in 2013-14, supported by more favourable exchange rates for currencies such as the Indian rupee. Expatriate remittances totalled $49bn in 2006-10, according to the Arab Monetary Fund, and now stand at an estimated Dh110bn ($29.9bn) per year, with HSBC forecasting growth on the order of 7-8% in the UAE in 2014-15.

The main destinations for UAE remittances include India, Pakistan, Bangladesh and the Philippines. In Pakistan, the UAE was the second-largest source of remittances after Saudi Arabia for the year to end-June 2014, with $3.12bn, up from $2.75bn one year earlier. “GCC countries are expected to continue to see a significant influx of new migrant workers from South Asia, with the UAE being one of the largest markets,” Jean Claude Farah, president of Western Union for the Middle East, Africa, Asia Pacific, Eastern Europe & CIS, told OBG.

Patterns Developing

The study of remittances reveals several important factors in Dubai, including Ramadan. Outflows tend to increase in the months before the holiday, as workers help families back home prepare for the festivities, and then tend to fall during and after it. Ramadan is a somewhat less lucrative period for workers in Dubai. Muslim workers typically earn 2.4% less during the holiday and overall remittances drop by 3.4% for the month, according to the Wharton study. The effect is more muted for non-Muslims – their earnings tend to fall by about 0.6% and the amount sent home declines by around 2% on average.

Wharton’s study also found that remittances from individual workers tended to decline over time, as they settled into their jobs and received salary raises, though did not necessarily transmit that news to families in home countries. Each additional 10 months of tenure in the UAE came with a 9.6% fall in remittance, with that money more likely to be spent than saved. The survey cited a 2011 study of 1000 individuals in the UAE, in which 78% said they had not used a bank account for saving in the previous 12-month period. For Dubai, this indicates that an expatriate population that has spent more time in the emirate should translate to more money circulating in the domestic economy.

New Laws

This growth will be a boon for the industry, which was impacted by regulatory reforms rolled out in January 2014. Following its first major review of the remittance industry since 1992, the CBU raised minimum capital requirements for exchange houses and tightened business licence categories. The reforms came after the licences of two exchange houses – Al Hilal Exchange and Asia Exchange Centre – were revoked for major regulatory violations in May 2013.

The regulations stipulate a two-year grace period for existing companies to comply and increases in paid-up capital requirements, to Dh2m ($544,400) for unlimited liability exchange houses; Dh5m ($1.36m) for those wishing to offer remittance services inside and outside the country; and Dh10m ($2.72m) for those paying wages by connecting to the CBU’s system. This will likely spur a wave of consolidation across the industry.

A tighter regulatory environment will support sustainable long-term growth, while short-term expansion will benefit from the dollar’s solid performance of late. The dollar had gained over 7% against emerging-market currencies by the end of 2014, and rose against all other major currencies in 2014 for the first time since the turn of the century. Remittances made in dollar-pegged dirhams will offer increased purchasing power and benefit the emirate’s remittance industry.

Cost Control

A move by the recently elected Indian prime minister, Narendra Modi, to introduce a 12.36% tax on the fees and commissions charged on remittances to India in November 2014 was met with criticism in both countries. In January 2015, FERG appealed to the Indian government to reconsider the tax, arguing it will increase costs for low-income expatriate workers who form the bulk of its customer base, and could lead to a rise in parallel money remittance services. The same type of tax was proposed in 2012 and subsequently shelved due to similar outrage. For now, it does not appear to be impacting Indian expatriates. As Gulf News reported in early January 2015, Indian agents were not yet passing the tax on to customers, as they expected it would be repealed as in 2012.

For the development community, a primary objective is lowering the cost of sending money. According to the World Bank, the goal is for transfer costs to fall to 5% or less for a $200 transfer across all remittance corridors and with more than one reliable service provider for each. Of the 220 remittance corridors studied by the World Bank in 2009 and 2013, 7% were at or below the target as of the first quarter of 2009, with that number rising to 20% by the fourth quarter of 2013. One example of where these costs have successfully fallen is between the UAE and the Philippines.


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The Report: Dubai 2015

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