Financial Sector Analysis for South Caucuses

Transcription

1 Financial Sector Analysis for South Caucuses Introduction The third phase of this report presents the results of a regional and comparative study of the flows of remittances to Azerbaijan, Georgia and Moldova and their relationship to the financial sector, its industry and marketplace. The study analyzes the inflow of unilateral transfers known as remittances in connection with different economic sectors. Specifically, the study focuses on macroeconomic dynamics, payment system modernization, the market for transfers, cross sale of financial services, securitization and bond issuing if possible, remittance and financial literacy, regulatory balance between payment systems and migration management and the macroeconomics of finance. Among the main findings of this study, we identify issues relevant to development and policy intervention in key areas of finance and regulatory policy. Specifically we find that: Remittances represent an non-negligible source of foreign earnings amounting to US$1.5 billion but reflect varying impacts depending on the economy of the country; Notwithstanding differences across countries, the inflow of these transfers is distributed across the population whereas nine to twenty percent of people are remittance recipients; The banking industry, an almost exclusive payer of remittances, competes with a relatively important informal sector (estimated to average one third of all flows), and money transfer payments account for revenues that represent up to twenty percent of the financial institution s net income; Payment competition is often affected by the concentration of a few banks and by restricted participation of non-banking financial institutions, such as credit unions, which exhibit a strong presence in rural areas; Industry competition, measured by volume of transfers, is determined mostly by the number of branches and services offered rather than by the number of money transfer partners; Financial intermediation through cross sales of products to remittance senders or recipients is relatively absent with some exceptions despite the fact that remittance recipients demonstrate strong links with bank account ownership and demand for financial products. Remittance flows have several effects and dimensions in the financial system of a country s economy. From a macroeconomic standpoint, these aggregate flows influence national reserves, foreign currency exchange and saving and credit ratios. At the financial industry level, not only do these flows represent revenue streams from international payments, but they are also resources with leveraging potential as a means for securitization, loan backing, or as instruments for modernization of the payment industry through the adoption of advanced technologies. Moreover, from a consumer banking perspective, remittances are a source for asset accumulation, credit history and collateralization. The intersection between remittances and finance is thus threefold: these transfers interact with financial macro and micro dynamics, as well with individual participation in the banking sector. As foreign savings, these unilateral worker transfers are a substantial inflow that supports national income and holds up the financial sector. Second, through intermediation, these flows provide added revenue as well as a venue for modernized payment systems. Third, the beneficiary of the flows attaches a relationship to finances insofar as he/she uses these resources as mechanism to build savings and assets. 195

2 The effects that remittances can have with these three levels, macro, micro and intermediation, depend on the ways in which these flows interact with the local economies and their enabling environments. The study presented here is based on fieldwork in Azerbaijan, Georgia, Moldova and Russia, including primary data collection, interviews with government officials from the National Banks of each country and interviews with heads of international payment units of banking institutions and microfinance institutions. The comparative analysis uses data from three nationwide surveys conducted for this study about the profile and determinants of remittance reception and financial resources. The study was conducted with research assistance from research associate Jill Reifsteck. 196

3 1. Economic growth, migration and remittances in the South Caucasus Although migration during the time of the Soviet Union was predominantly from Russia to the satellite countries, an inverse mobility developed with the formation of the Community of Independent States (CIS) in the early 1990s. The contemporary movement of CIS citizens into Russia and other countries occurs partly as a result of positive economic conditions and population decline in Russia and Western Europe and poor economic performance in many of the CIS countries. According to figures from the United Nations, there are 1.3 million Azeris abroad, 1 million Georgians and 0.6 million Moldovans (see Table 1). Between sixty and forty percent of migrants from these countries have moved to Russia. In fact, migration into Russia is mostly from CIS countries: more than 90% of migrants in Russia have come from the CIS. Table 1: Geographic Distribution of Migrants from Three South Caucasus Countries WORLD Azerbaijan Georgia Moldova Russia 846, % 628, % 277, % Ukraine 122, % 95, % 222, % Greece % 71, % 6, % Armenia 152, % 70, % % Germany 26, % 30, % 14, % Israel 23, % 17, % 14, % Azerbaijan - 0.0% 12, % - 0.0% Kazakhstan 38, % 2, % 9, % Other 161, % 106, % 118, % Total 1,370, % 1,035, % 663, % Source: United Nations, obtained from Development Research Centre on Migration, Globalisation and Poverty (Migration DRC). Poor economic performance during the transition of these economies partly explains the migratory flows. As the table below shows, per capita GDP fell over the first ten years in the 1990s, accompanied with rising rates of income inequality and little modernization. The transitional economies, that still have predominant rural sectors, have struggled to increase productivity and wealth, except in Azerbaijan. The case of Azerbaijan as an exporter of oil in the global marketplace, growing in 2006 at 35%, separates it in large part from many CIS countries. 197

4 Table 2: Economic Indicators for Three South Caucasus Countries GDP growth (annual %) GDP per capita (constant 2000 US$) Rural population (%) Income Inequality Azerbaijan Georgia ** Moldova ** Source: World Development Indicators. World Bank, 2006 Simultaneously Russia s declining demographic growth rates as well as an increasing economic boom led to a demand for foreign labor from countries that were historically linked under the former USSR. This economic boom has been fed by growth in a variety of sectors including agriculture, construction, and oil. In the agricultural sector, there has been increased growth in food processing and heavy machinery. The construction boom in Moscow has created an elevated demand for foreign labor. Furthermore, high oil prices have fostered a favorable economic environment for migrants. 1 In turn, one of the resulting outcomes has included an increasing flow of foreign earnings from migrants, which for 2006 the World Bank has estimated to amount to more than US$2 billion for the three countries combined Figure 1: Russia: economic and demographic growth (5.00) (10.00) (15.00) GDP Growth Population growth (annual %) (0.20) (0.40) (20.00) (0.60) 1 Morgan Stanley Research Note. Western Union. April 24,

5 $1,400,000,000 Figure 2: Remittances to Georgia, Moldova and Azerbaijan $1,200,000,000 $1,000,000,000 $800,000,000 $600,000,000 Georgia Moldova Azerbaijan $400,000,000 $200,000,000 $ a) Data collection on remittances and their measurement reported by the Central Banks In measuring remittances, the World Bank reports figures from Central Banks. The Central Banks follow the typical methodology issued by the IMF. The National Bank of Georgia (NBG) and the National Bank of Moldova (NBM) in particular define migrants remittances as the sum of two credit items: Compensation of Employees (from the income account) and Workers Remittances (from private transfers). A third item, referred to as Migrants Transfers, is taken from the capital account and represents the movement of household goods and other financial items that result from migration and is therefore not considered part of migrant remittances in its traditional definition. What distinguishes Compensation of Employees from Workers Remittances is the amount of time the individual sending money stays abroad. For instance, if an individual works abroad for more than one year he is consequently considered a non-resident and the money sent back to Moldova is treated as a transfer from a non-resident to a Moldovan resident for balance of payment purposes. This describes how the term Workers Remittances is technically defined. On the other hand, when an individual spends less than one year outside the country, he continues to be considered a Moldovan resident and thus the money he transmits is part of the compensation received from a non-resident employer. However, the figures presented by Central Bank offices are different from those reported by the World Bank. For example, in 2004 the Central Bank of Georgia reported that remittances were US$254 million (doubling to US$555 million in 2006) against US$303 million reported by the World Bank. Similarly, the Bank of Moldova reported US$221 million for 2004 (tripling to US$602 million in 2006) against US$700 million by the World Bank. Although Central Bank officials follow typical Balance of Payment methodologies to record remittances, they agree that it is difficult to estimate these flows because they rely mostly on what banking institutions report. In the CIS countries banking institutions are the only legal entity allowed to pay remittances. It is important to stress that the Central Banks in Georgia and Moldova also use household surveys to account for informal flows and further improve their methodologies. But accuracy in estimating the flows escapes their control because there are intrinsic difficulties in often distinguishing personal from commercial transactions, for example. This situation however is not unique to this region but is a typical problem worldwide. 199

6 Given these differences it is difficult to reliably analyze the macroeconomic dynamics of remittances. Therefore using these numbers requires precautions as to the extent of the generalizations emerging from the analyses. The survey conducted in this study presents results that partly coincide with the figures offered by the Central Banks. The table below shows the different available estimates for Table 3: Estimates of Remittances to three South Caucasus countries, 2006, (US$) Georgia Moldova Azerbaijan Bendixen and Associates 418,000, ,000, ,000,000 Central Bank 1 555,000, ,000,000 N/A World Bank 393,000,000 1,201,000, ,000,000 1 Figures provided by the Central Banks of each country. b) Remittances and their relationship to the economy 2 Although the economies of Azerbaijan, Georgia and Moldova share some characteristics, such as low per capita income, high levels of inequality and high rural ratios, they also are significantly different economies. Azerbaijan is increasingly consolidating as an oil exporting economy, where oil represents 70% of exports, and is experiencing fast and large growth rates. Moldova, on the other hand, is a predominantly rural and agriculture-based economy, accompanied by a significant labor export dynamic to countries like Russia and Italy. Georgia is somewhere in the middle of the spectrum of these two other economies. It does not rely exclusively on one single commodity or sector, as in Azerbaijan or Moldova, and it registers high growth rates. These flows follow independent patterns, which often mirror a behavior associated with the demand for foreign labor in the host countries or the labor migration relationships that exist between two or more countries. The figure below shows quarterly movement of transfers and transfer variations across quarters in Georgia and Moldova alongside Russia s quarterly GDP patterns. Quarterly flows to Moldova are markedly high during the third quarter until 2005, when flows began to follow a more incremental growth. However, in the case of Georgia, where a larger number and share of migrants go to Russia, there is greater correspondence between the inflow of remittances and GDP performance in Russia. 3 2 This section relies on comparative statistics from the Central Banks offices except with Azerbaijan, where we rely on the World Bank figures. Therefore we caution the reader about the reliability of the estimates. Although there are some discrepancy in the figures, Central Bank remittance figures for Georgia and Moldova offer important data points for comparison with other indicators and are supported by their BOP methodologies. Moreover, the differences between this report s survey and the Central Bank are relatively small. 3 There is particularly a statistical relationship between remittances and inflation in the home countries. 200

7 Q 00-2Q 00-3Q Figure 3: Remittance Flows to Georgia and Moldova, and Russia's GDP Russia (US$ billion) Moldova (in millions) Georgia (in millions) 00-4Q 01-1Q 01-2Q 01-3Q 01-4Q 02-1Q 02-2Q 02-3Q 02-4Q 03-1Q 03-2Q 03-3Q 03-4Q 04-1Q 04-2Q Source: World Development Indicators. World Bank, Q 04-4Q 05-1Q 05-2Q 05-3Q 05-4Q 06-1Q 06-2Q 06-3Q 06-4Q These transfers exhibit different characteristics both at the macro- and microeconomic levels. In relationship to national income, remittances account for nearly 20% for Moldova but less so for the other two countries, with Georgia in the middle. However, the significance of these transfers for Azerbaijan is also noteworthy even considering the oil-driven boom in the economy at US$20 billion (US$9.5 billion of which comes from oil exports). The nearly US$700 million in remittances estimated by the World Bank reflects a substantial amount that has been growing during the economic boom. This situation may raise questions as to what factors other than economic growth explain international labor mobility. Despite the differences, remittances vis-à-vis national income are increasing annually in the three countries. Table 4: Remittances as Percent of GDP Georgia Moldova Azerbaijan Source: For Georgia and Moldova, Central Bank; Azerbaijan, World Bank. Within the current context of a global economy, relying more on foreign income as a source of growth and wealth generation is key to enhancing a country s performance. Thus, earnings such as remittances can have a relevant influence to that end. As the table below shows, the participation of remittances as part of other sources of foreign earnings, particularly foreign investment, aid, tourism, and exports is noteworthy. These transfers represent an increasingly non-negligible percent of foreign income, particularly for Moldova and Georgia. Foreign earnings in fact are a major source of national income for many of these countries, and policies leveraging these flows play an important role in further enhancing growth opportunities to expand a country s productive base. While most countries have policies and strategies on exports, foreign cooperation, foreign investment, international tourism, it is uncertain that they have concrete approaches to the earnings emanating from migrants transfers

8 Table 5: Remittances and other foreign earnings Remit. % Reserves Remit. % of Exports Remit./Total Foreign Income Moldova Georgia Azerbaijan Moldova Georgia Azerbaijan Moldova Georgia Azerbaijan Source: World Development Indicators. World Bank, 2006, and National Bank of Moldova. Given the macroeconomic significance of these aggregate flows on the national economies of these countries, remittance policy considerations are decisive to leverage these transfers to enhance economic growth. As remittance flows grow, their interaction with the local economy requires government and private sector intervention to maximize and capitalize from these flows. Cues to those considerations include an understanding of the sources of these flows, the profile and characteristics of recipients, as well as the participation of the financial sector in managing and leveraging these flows. One of the most important links of remittances to an economy is the financial sector because these flows go through the financial system and interact with the recipient in the context of a demand for financial services. The other two links include the impact of remittances to reduce poverty and to diversify the productive base of the local economy. The rest of this section points at the origin of the flows and characteristics of recipients. Section Two of this report analyses the extent of competition and intermediation of money transfers, and Section Three explores and analyzes the interaction of these flows with the financial sector. c) The geography of remittances and characteristics of remittance recipients: A brief profile There is an important correspondence between the places where migrants are and the places where remittances come from. According to surveys conducted in the three countries, the main source of remittance flows is Russia, which is the location where most migrants are living. Survey results show that Russia is predominantly the destination of Azeri migrants, against 45 and 41 percent for Georgians and Moldovans. Moldova, however, distinguishes itself from the other countries in that its migration is scattered to more than one country. Italy is a primary destination for many Moldovan citizens. Greece is also an important destination for Moldovans and Georgians. 202

9 Table 6: Remittances and Geographic origin of transfers Azerbaijan Georgia Moldova Russia 79% 45% 41% Italy % USA 2% 8% 3% Greece - 15% 3% Portugal - - 3% Other Countries 15% 32% 17% Source: Bendixen and Associates, Survey of the South Caucasus This section identifies characteristics among remittance recipients in the three countries and finds differences in remittance reception. First, not all of the study countries receive remittances in similar percentages relative to their population. Second, recipients in all three countries exhibit low income earnings. Third, their age range varies across groups and countries, but contrary to other remittance recipient societies, a small percentage includes people over sixty years of age. The number of remittance recipients varies from nine to twenty percent. Moldovans are the largest remittance recipient group of the three countries. A simple majority of remittance recipients in Azerbaijan are female (52 percent) and unemployed (61 percent). With regards to Georgians, a relative majority of remittance recipients are female (55%) and live in urban areas (53%). The majority of remittance recipients in Moldova are also female (61%). Table 7: Percent of people who are remittance recipients Azerbaijan Georgia Moldova Source: Bendixen and Associates, Survey of the South Caucasus Income The household income of the majority of Azeri recipients (61 percent) is between approximately USD$0 to $100 per month, with 14 percent in the $101 to $140 category, 15 percent in the $141 to $230 bracket, and 10 percent in the $231 and up bracket. In the case of Georgians, household income among recipients spans principally from nothing to USD$500 per month, with 28% in the USD$51 to 100 category, 23% in the USD$101 to 250 bracket, and 20 percent in both the USD$0 to 50 and the USD$251 to 500 brackets. Among Moldovans, the characteristics are similar to the two other countries. Age Most recipients fall into a variety of different age groups, but unlike recipients from other societies, recipients in these countries are younger. For example, among Azeris the groups with most recipients are the 35 to 49 bracket (31 percent), followed by approximately 20 percent each in the 18 to 24, 25 to 34, and 50 to 64 brackets. Only 8 percent of Azeri recipients are 65 and over. Recipients from Georgia also fall into a variety of different age groups, with the most in the 35 to 49 years bracket, followed closely by 24% in the 18 to 24 bracket, and approximately 15% each in other age groups. Among Moldovans there is no dominant age range, most being under the age of 50. This condition raises questions about the opportunity to bring policies on health and education for younger cohorts that can benefit from incentives to improve their social condition. Given that these recipients are still active labor force individuals, they can also benefit from incentives to establish small enterprise activities. 203

10 Education The majority of remittance recipients from Azerbaijan have achieved at least a secondary education (over 90 percent). About 40 percent have no more than a secondary education, while 28 percent have achieved specialized secondary and 25 percent have a higher education. Family members of recipients overwhelmingly live in Russia (79 percent). Less than 10 percent of remittance recipients have relatives in Ukraine (4 percent), Turkey (3 percent), and the United States (2 percent). Education levels of remittance recipients in Georgia is relatively similar to Azeris, few have a primary education: 37% having graduated from college, another 31% having completed secondary school, and 27% having completed some college or technical school. In the case of Moldovans education shares the same pattern with the other two countries; over 70% of remittance recipients have at least completed secondary school and about 43% have pursued more advanced education. Recipients and non-recipients There are only a few notable differences between recipients and nonrecipients in Azerbaijan. A higher percentage of non-recipients are unemployed: 73 percent of nonrecipients are unemployed compared with 61 percent of recipients. Among Moldovans, over half (approximately 66%) do not work and this percentage is more or less the same in looking at male and female recipients. 35% receive from their son or daughter. Nearly half have been receiving remittances between 1 to 3 years, which shows a more recent remittance trend. 2. Issues and Patterns in the Marketplace of Remittance Transfer Businesses This section analyzes the marketplace of remittance transfers by looking at trends among money transfer operators (MTOs), payers, and extent of competition. Payment intermediation, the process that immigrants use to send money and have their families receive, varies depending on the players providing the transfer service, the applicable regulations and the extent of competition in the marketplace to attract those customers. Overall, there are three kinds of remittance-sending intermediaries: non-bank financial intermediaries (NBFI), banks (and credit unions or other depository institution) that provide remittance sending services, and informal intermediaries such as non-formal couriers or even friends who take or facilitate the sending of money from sender to recipient. Depending on what part of the world one is considering, the proportion of sending via these three means varies. The first two players are authorized to perform money transfers, whereas the last is a process that occurs outside the system resulting from a variety of factors including a lack of accessibility to the formal transfer mechanisms, cost or restrictions on legal status of the individual. To perform the delivery of the transaction, remittance companies also need agents or distributors on the receiving side. There are important national and regional differences in who these agentdistributors are and how they operate. In the CIS countries, the regulatory environment allows banks and in some cases non-banking financial institutions to perform the payment of money transfers. In the countries studied in this project most transfers take place in the formal or licensed money transfer system through a network of banks existing in each country. Informality was identified to be greater in Moldova and Georgia. Moreover informal reception is greater in rural areas than in the urban sector (see Table 8). 204

11 Table 8: Distribution of Formal or Informal Transfers Georgia Moldova Azerbaijan Urban Rural Total Urban Rural Total Urban Rural Total Informal Formal Total Source: Bendixen and Associates, Survey of the South Caucasus a) Competition from MTOs The transfer of remittances occurs predominantly through a well-established industry of money transfer operators (MTOs) based in Russia. As the previous table has shown, most transfers are coming from Russia, and competition is significant in that corridor. Money transfer operators in Russia, known as money transfer systems, are highly competitive and currently may be overcrowding the market. In fact, saturation of the outbound market may be taking place as a result of the mushrooming of many companies competing for a nine billion dollar market. Russian Central Bank officials have registered 17 MTOs offering remittance services. The main money transfer companies include Anelik, Contact, Fast Mail, Leader (formerly VMT), Migom, UNIstream and Western Union. Other relevant companies that operate with less than five percent market share are MoneyGram, Ria, Blizko, PrivatMoney, STB-Express, Travelex Worldwide Money Ltd, VIP Money Transfers and Strana Express. The level of competition has been marked predominantly through pricing (see next section). However, companies have frequently implemented marketing tools to attract new customers, particularly from the competition or from informal networks, when these are identified. Each of the main companies dominates a particular corridor or two and competes almost equally in the other corridors in the CIS. Unistream and Anelik for example have a strong presence in Armenia, whereas Contact and Western Union are strong in Tajikistan Figure 4: Remittances to CIS by quarters (millions) Transfers to CIS 2000 MTO and Post Transfers to CIS Q Q Q Q Q Q Q Q Source: Central Bank of Russia 205

12 Three main areas distinguish this industry for outbound transfers. First, the prevailing business models for money transfers are led by a unique banking strategy to compete in the payment industry outside of banking. Second, there are too many companies crowding out a market for an estimated nine billion dollar sector, and third, the industry is facing important developments that are indicative of a transition from an underdeveloped to a consolidating industry. Unlike other countries around the world, volumes and transfers as well as the main players in the money transfer industry in Russia are predominantly led by banks creating specialized Non-banking Financial Credit Institutions. Due to the regulatory environment demanding banks to be the only originators of wire transfers, several banks established separate legal and business entities to provide money transfer services instead of advertising their brand names for remittances. This business model is an interesting method that coexists within bank branches, but is legally separate from them. These include Migom (European Trust), FastMail (ImpexBank), Leader (IncredBank), Contact (Russlav Bank), Unistream (Unistrum) and Blizko (SviazBank). There are also typical money transfer operators, such as Western Union, Money Gram, and Ria, that compete in the market through the banks. However, the bulk of transfers is handled by what can be labeled as bank-backed MTOs. The second feature that characterizes the Russian outbound market is supply side saturation. The volume of transfers outside of Russia runs around seven billion dollars. Thus, no one in the industry controls more than twenty percent of the market. Although this feature would be a positive characteristic of a competitive market where monopoly or oligopolies are not present, the presence of this number of companies given prevailing profit margins makes it difficult for MTOs to further invest in marketing or new technologies. In fact, companies run on a revenue stream of no more than 2% of the volume transferred (at a likely 1%), with operating costs estimated between US$800,000 to US$1,500,000 (excluding marketing). In turn, average profits are less than ten million dollars, thus restricting investment and expansion plans. For example, introducing a new payment technology framework requires a minimum investment of one million dollars, making it difficult for many MTOs improve their technology. Table 9: MTOs operating in the outbound market from Russia MTO Annual Volume (in millions) Market share Revenue at 1% of volume Profit margins after operating costs Western Union % 12,000,000 10,000,000 Contact % 12,000,000 10,000,000 Unistream % 12,000,000 10,000,000 Anelik % 9,000,000 7,000,000 Fast Mail % 8,000,000 6,000,000 Migom % 8,000,000 6,000,000 Leader 350 5% 3,500,000 1,500,000 Money Gram 1 0% 10,000-1,990,000 Blizko 1 0% 10,000-1,990,000 Other (MTOs, PO, and swift wires) 550 8% 5,500,000 3,500,000 Total ,020,000 50,020,000 Source: Data estimates based on company interviews. 206

13 The third feature deals with a transition point from an underdeveloped to a consolidating market. 4 Some of the features distinguishing this stage include the improvement in company compliance with international regulatory instruments on money transfers or a standardization of transaction costs for sending money as part of local business model development. Most of the companies in this industry are in an earlier stage of business growth, and with few exceptions, have been in operations for less than six years. The main companies in the market are faced with one of two situations: some are aging while others are at a point of intensifying their growth through network expansion, technology adaptation, and investment. One of the companies facing an aging process is Anelik, which is perhaps the oldest in the market. This company is among the top five competitors and was created in the late nineties just after migration from CIS countries started. Anelik, owned and established by Anelik Bank in Armenia, has provided a critically important intermediation support to migrants across the Caucasus and Central Asia. However, according to some competitors, its business model and technology have gradually lost competitive edge. The company runs its operations through banks as agents in Russia, without its own banking network and much less capital and network strength of companies like Western Union. Moreover, its technology in international payments is outdated since its software platform lacks real time payments and only provides limited technical support to agents. As new companies enter the market with more capital, their own independent bank networks, and new software platforms capable of adapting any banking infrastructure and new payment systems including mobile banks Anelik is facing a downward turning point. In contrast, other companies are seeking to strengthen their capacity and are finding ways to stay strong in the market and to remain among the main competitors. Many executives believe that the decline of Anelik (which has been losing market share in several corridors for the past two years) may signal a process of consolidation in the market. One approach other companies are considering is technology development (see section on technology), and the other is to offer value-added products within the realm of the possible in a restrained regulatory environment that prevents access to most financial services by undocumented migrants. Pricing dynamics One critical issue emerging in the competitive landscape that merits special attention is consumer pricing. The region is predominantly characterized by three pricing models: economy of scale prices, standard percent, and special corridor pricing. In the first case Western Union and Money Gram use a fee schedule to charge and appear to be among the most expensive. Despite their cost, Western Union retains a high market share partly because of its marketing and network capability. The prevalent practice is standard percent pricing. Most companies charge 3% on the value of a transaction, which usually runs around US$350 and is sent eight times a year. The fee is shared among the two agents and the MTO in almost equal parts with variations depending on the partnership quality of the agent. Most of the transactions are made in US dollars. The third prevalent practice is marking down prices in special corridors by offering special deals. In the Russia-Armenia 5 corridor, for example, UNIstream has offered 1% charge if the transfer takes place at their own outlets outside of banking agencies. It also offers a lower cost if transferred in rubles and converted in Armenian currency. Leader has followed a similar path to compete with UNIstream. Recently, reports stress that Western Union has 4 To understand MTO competition it is important to situate their location in the stage at which they are found: underdeveloped market, consolidating, or maturing. The features that distinguish each stage are associated to at least nine factors that include compliance to regulations, marketing, advanced technology, investment accessibility, among others (see Orozco 2004). Russia is moving out of the initial stage. 5 Morgan Stanley Research Note. Western Union. April 24,

14 begun to compete more aggressively since the first quarter of 2007 by reducing prices between 20 and 50% in the Russian outbound corridors. Table 10: Cost to send 9000 rubbles via MTOs to CIS countries (main MTOs) Cost (%) (Rubles) Western Union % Contact % Unistream % Anelik % Fast Mail % Migom % Leader % Blizko % Interexpress % Source: MTOs tariffs. In fact, to most competitors in the industry, UNIstream is considered to be a loose cannon in competition because of subsidizing pricing below operating costs. Some experts argue that the reason they do that is to secure greater volume from clients and increase investment from shareholders since the company recently entered the IPO market. UNIstream s price decreases, now in effect for more than nine months, have pushed some to compete. However, most major players have retained their pricing and only lowered prices in certain corridors. However, further reduction of costs may be financially unsustainable and instead may cause risk in the market on both supply and demand sides. The most likely effect of this trend is that Anelik may face further losses and accelerate a potential sell while new entrants will have to continue to subsidize low pricing. Overall, however, major companies will retain their 3% standard, which on average may drop to 2.5% and stay there for the foreseeable future. b) Mapping the paying market The money transfer payment market in Georgia, Moldova and Azerbaijan is regulated by the National Banks of each country, which require that banking financial institutions be the payers of money coming from other countries. No other institution is allowed to do so. However, a non-banking financial institution, such as a micro-finance institution, can work as a subagent of a bank. The exception is Georgia, which allows micro-finance institutions to offer payments as primary agents. Azerbaijan The banking industry in Azerbaijan (see section 3 for details) is bifurcated between a single bank holding 50% of all bank assets in the country and 44 banking institutions with assets one tenth or less the size of this other bank. Therefore in terms of competition in the payment industry, significant differences also exist between the largest bank, which is the International Bank of Azerbaijan (IBA), and the other competitors. The table below displays the competitors in money transfers. Aside from Standard Bank or IBA, most banking institutions conduct less than five thousand transfers a month. Their low participation reflects 208

15 the large presence of banks, most of which are involved in the payment of money transfers. Combined, the bank branches total 350 with operations predominantly in urban areas which represent their points of sale and payment of transfers. According to data provided by these institutions, market share is distributed almost in relationship to their branch numbers and financial position. Table 11: Transfers of remittances by banking institutions in Azerbaijan # Transactions/mo Volume/mo # Transactions/yr Volume/yr Market share IBA 50,000 12,500, ,000 31% Respublika 3,500 5,126,578 42,000 61,518,936 13% Azerdemiryol 1, ,375,000 20,000 28,500,000 6% Bank Standard Bank 10, ,083, ,25,000 25,000,000 5% Bank of Baku 2, ,780,116 24,984 21,361,392 4% Unibank 2, , ,000 7,289,834 2% AtaBank 1,000 1,000,000 12,000 12,000,000 2% Microfinance Bank 3, ,000 8,400,000 2% Mugan Bank 4, ,000 48,000 9,600,000 2% ParaBank , ,262 4,797,466 1% Nikoil Bank 1, ,000 12,000 2,400,000 0% YapiKredit Bank ,000 4, ,000 0% Other banks 50,000 12,500, ,000 31% Total 481,467,628 Source: Data estimates based on company interviews. Some of these banks are payers for more than 10 MTOs, but Western Union, Contact, Unistream, Migom and FastMail are the most active in the country, followed by MoneyGram with a smaller presence. The perception among banks is that competition is relatively saturated but there is still room to expand and attract new customers. Western Union dominates the market, with over 35% of inbound transfers. Although IBA controls a significant sector of the market, banks compare themselves against the rest of competitor banks in the industry. For example, Bank of Baku estimates that Standard Bank is the leader in payments because of its strong relationships with an international bank in Russia. According to company executives, the Bank of Baku is estimated to occupy 5% of the inbound market representing an increase from 2% in December 2006 after it began a marketing campaign to attract customers. Competition is even more complicated in Azerbaijan because loyalty to specific banks is low. Customers easily change where they pick up their money transfer. Bank of Baku s advantages are that it has a high percentage of branches outside the city and it offers promotional profit-sharing schemes on remittances. At Mugan Bank, company authorities expressed that banks do not disclose their numbers related to remittances, so there is no general sense of the market. However, in its work with the various MTOs, Migom is Mugan Bank s main partner in transfers from Russia. It also works closely with Contact on Russian transfers and with Western Union on transfers from other parts of the world. ParaBank is focusing on its competitive advantage by adding new systems to its existing services. It hopes to add Migom, PrivatMoney and ExpressMoney shortly. Moreover, it has made an agreement to provide Western Union services at over 2000 post offices throughout the country. In addition, it will 209

16 soon offer Contact at the post office locations. It is also seeking an agreement with Western Union to be the only bank to grant subagent contracts to financial institutions that do not have existing Western Union contracts. Atabank is improving its technology and services, but is not doing anything particular towards remittance recipients. Meanwhile, AzerDemiryolBank also sees itself as one of the top five payers of remittances in Azerbaijan. Through this bank, account to account transfers are very popular. It tries to offer lotteries and other incentives to attract customers, but so far, nothing has been focused on remittance recipients. Bank Respublika receives the highest volume from Western Union, then Migom, then Contact. It sees itself as fifth or sixth in money transfer payments behind IBA (ahead because of the number of branches), Standard Bank, and Unibank (speedier transactions). Bank Standard occupies 40% of the remittances market through the four money transfer systems that it provides. The bank offers promotional campaigns jointly with the MTOs to attract customers. Furthermore, its main advantage is customer service. Company executives expressed that there is overall consumer confidence in Standard Bank. Unibank, one of the largest and more innovative banks in the country, factors money transfer services when opening new branches. Its strategy has been to increase the number of MTOs. In fact, the bank is currently processing three more money transfer contracts with PrivatMoney, Leader and Travelex. Azerigaz, on the other hand, is of the opinion that the more systems, the more complications. Moreover, the services at Azerigaz are among the most expensive in the banking sector. The bank is aware that remittances do not play an important role in their bank. It tries to reach out to corporate customers more than retail customers. Opening branches might improve its competitive advantages, but opening branches in the regions is inefficient. The Microfinance bank is an innovative financial institution that has targeted customers in order to increase its volume. However, this institution is not concerned with the revenue base but with the expansion of its client base, and therefore aims at attracting clients into the bank and markets less on actual transfer payments. 210

17 Table 12: Market Share Composition between Banks and MTOs in Azerbaijan Financial Institution Western Union FastMail Contact MIGOM Etc. Yapi Credit MoneyGram Bank of Baku X X X Travelex, ExpressMoney Mugan Bank X X X X Travelex, Leader, QuickMoney Xalq Bank X X ExpressMoney, ParaBank X X X AtaBank X X X X PrivatMoney, Travelex AzerDemiryol Bank X X X X Travelex Respublika X X X X ExpressMoney, Travelex, PrivateMoney Bank Standard X X X X Unibank X X X X ExpressMoney, Faster AzerigazBank X X Microfinance Bank X X Source: Data estimates based on company interviews. Georgia Remittance payments in Georgia exhibit a similar trend to Azerbaijan because competition is constrained by the strong presence of the Bank of Georgia, which is the largest bank in the country. The remaining banks compete to attract flows among each other but face a large constraint from the monopoly role that Bank of Georgia plays. In terms of MTO presence, one quarter of payments originate from Western Union branches followed by Anelik and MoneyGram and then other companies with market shares below five percent. Table 13: Transfers of remittances by banking institutions in Georgia Monthly Transactions Monthly Volume Annual Transactions Annual Volumes Market share Rico Credit 2, ,000 32,400 6,480,000 1% TBB 1, ,167 16,450 3,290,000 1% Bank of Georgia 111,111 33,333,333 1,333, ,000,000 75% TBC Bank 2, ,000 34,800 8,400,000 2% VTB Georgia 3,499 1,288,165 41,984 15,457,975 3% Cartu Bank 2,765 2,212,000 33,180 26,544,000 5% Standard Bank ,000 9,000 2,040,000 0% Basisbank 1,407 1,000,000 16,884 12,000,000 2% Other 25,000 5,000, ,000 60,000,000 11% Total 151,503 44,517,665 1,818, ,211,975 Source: Data estimates based on company interviews. 211

18 There is a general perception that the market is growing, with over 80% of the turnover from Russia. The Bank of Georgia offers transfers through Western Union, Contact, and Anelik. As a direct agent of Western Union and Anelik, it grants subcontracts out to other banking institutions. Additionally, the Bank of Georgia has an extensive branch system, with 70 in Tbilisi and over 30 outside of the capital. TBC is one of the main competitors of the Bank of Georgia. TBC is the other direct agent of Western Union in Georgia and has with two subagents. TBC is one of the two largest players in the financial system and offers all of its services online. TBC identifies its advantage in the domestic market as its exclusive affiliation with Western Union. People s Bank on the other hand offers many different MTOs to make payments and is located in rural areas throughout the country because of its extensive role in paying pensions. Republic Bank offers transfers via Western Union, Travelex and Anelik with Western Union receiving the highest volume of transfers. Bank authorities identify MoneyGram as the main competition of these systems. Republic is looking to become a primary agent of Western Union in order to receive full commission amounts and be able to grant sub-contracts. The exclusivity clause with WU is a problem for subagents because of the shared commissions, which means a lower cut for subagents. Other competitors, such as VTB, are in the process of developing their own transfer system. VTB has also made efforts to improve customer service and attract new clients because of strong competition. For Cartu Bank, with 5-7% of the market, remittances are a very seasonal business. Volumes increase substantially between March and June because this is when the greens business increases. Moreover, Cartu Bank specifically reaches out to small business owners that send money from Russia. It currently does not focus its efforts on retail banking, and bank executives see remittances as a non-banking product. Similarly, Bank Standard acknowledges that it occupies only a small share of the market. It is comfortable as a sub-agent of TBC, but does not receive as high of a commission as with other MTOs. Also, there is a sense that MoneyGram is not as popular in Georgia, but that it is cheaper than Western Union. Other competitors among banking institutions include MFIs such as RicoCredit and TBB. These businesses offer specific competitive advantages. In the case of RicoCredit, 24-hour a day service is a major incentive to pick up a transfer. TBB on the other hand offers a variety of other convenient services at their branches such as bill pay and a loan investment scheme to attract small investors. Table 14: Distribution of Transfers by MTO in Georgia Western Union 26 MoneyGram 7 Anelik 16 Caucasus Express 1 Other

19 Table 15: Market Share Composition between Banks and MTOs in Georgia Financial Institution Western Anelik Contact Unistream Etc. Union Bank of Georgia Agent Agent X TBC Agent Republic Bank Sub-agent X Travelex VTB Georgia X X X MoneyTrain Cartu Agent X X QuickPost, ExpressMoney, IntelExpress Bank Standard X X Israeli transfers Basis Bank X X ExpressMoney Source: Data estimates based on company interviews. Moldova Unlike the previously reviewed countries, payment of remittances to Moldova exhibits a more competitive landscape. All banks in Moldova are paying remittances, although their participation in the market is more evenly distributed with some exceptions among the largest banks. However, the payments are distributed among the majority of banks and nearly correspond to their size. As in the other two countries, Western Union is the primary partner remitting the most volume to Moldova. Other competitors include Anelik, Migom, Unistream and ImpexBank. Table 16: Transfers of remittances by banking institutions in Moldova Moldova Monthly Transactions Monthly Volume Annual Transactions Annual Volumes Market share Moldova- Agroindbank 8,200 3,916, ,000 47,000,000 8% Banca de Economii 10,000 4,000, ,000 48,000,000 8% Victoriabank 25,000 12,500, , ,000,000 24% Moldindconbank 3,500 1,575,000 42,000 18,900,000 3% Mobiasbanca 9,500 5,000, ,000 60,000,000 10% Eximbank 6,300 3,150,000 75,600 37,800,000 6% Banca Sociala 20,000 10,000, , ,000,000 19% Fincombank 5,000 2,500,000 60,000 30,000,000 5% BCR. Chisinau 15,750 7,875, ,000 94,500,000 15% Unibank 1,200 70,000 14, ,000 0% Universalbank ,829 8,250 3,300,000 1% EuroCreditBank 2, ,000 28,800 10,080,000 2% Other 1, ,000 12,000 6,000,000 1% Source: Data estimates based on company interviews. 213

20 The money transfer market in Moldova exhibits a competitive context not only because there are more than ten MTOs actively remitting, but because unlike the other two countries studied in this report, there is greater geographic distribution of inflows. This situation in turn makes competition varied. For example, Russian MTOs offer less expensive services than Western Union, which is generally perceived as expensive, but its presence is strong because it also serves other corridors, such as from Italy and Spain. One strong competitor in the market is Victoria Bank. It identifies itself as third place in remittance payments after Agroindcon and Banca de Economii. EximBank claims to occupy between 5 and 7% of the remittance payment market. It cooperates with eleven money transfer systems, but overall prefers to focus on larger transactions as opposed to small worker remittances. EnergBank has about 15% of the market share. It understands that customers think that Western Union is expensive and is therefore looking to increase the number of MTO partners to reduce costs for transactions outside of the Russia market. It has been looking for partners in Europe, but European banks are not interested because of EnergBank s exclusivity agreement with Western Union. Moreover, like many other banks this institution seeks to engage in bank to bank transactions as much as possible. Banca Sociala sees itself as fifth in the money transfer market, but it has struggled to maintain that position since Italian banks bought Mobias Bank and other banks were acquired. Universal Bank identifies Western Union as the leader in money transfers, but bank executives say that the role of other competitors is changing due to price decreases. Universal Bank paid US$41m in 2006, but has seen its share decline partly due to the role of subagent networks. According to the management at Universal Bank, there is no aggressive competition in the banking sector; rather banks are concerned with ensuring customer attention and loyalty. To distinguish itself, Moldindcom Bank offers the advantages of exclusive transfer systems from Italy, Turkey, Greece and Portugal. Unibank perceives a high level of competition. It tries to offer bank services to recipients in order to differentiate itself from other banks. Similarly, FinCom Bank strives to incorporate more recipients as savings account holders. It also tries to distinguish itself by offering money transfers from more systems. 214

21 Table 17: Market Share Composition between Banks and MTOs Financial Institution Western FastMail Contact Unistream Anelik Etc. Union Mobias Bank X X X Migom Victoria Bank MoneyGram, VIP, MoneyExpress AgroindBank X X X Travelex, PrivatMoney EuroCredit X X X X EximBank X X X X Leader, Eleven Total EnergBank X Eight Total Banca de Economii X Banca Sociala X X X Universal Bank X X X Leader, MoneyGram, Inter-Express Moldindcon X Others FinCom Bank X X X X X MoneyGram Unibank X X X Migom Source: Data estimates based on company interviews. c) Determinants of competition In understanding what factors explain the participation of each bank in terms of size of payments, we analyze some determinants such as number of MTO partners, size of deposit collection, loan portfolio, number of branches and range of financial services offered. The results from an OLS multiple regression using monthly transfers as the dependent variable shows that number of branches is the strongest variable correlating with monthly transfers into a given bank, followed by the financial institution s deposit taking volume, and to a lesser extent by the number of financial services. MTO partners or size of loan portfolio are not statistically significant. Table 18: Determinants of competition Independent variable Unstandardized Coefficients Standardized Coefficients t Sig. B Std. Error Beta (Constant) Deposits Branches Number of MTO partners No. services Loans Dependent Variable: Monthly Transactions. R 2 = 0.9 adjusted R 2 =

22 This finding offers clues about policy initiatives on financial intermediation. Specifically, the negative sign and statistical significance of the deposit variable implies that deposit taking and remittance transfers go hand in hand more than bank lending (which usually occurs for large corporations), and that smaller institutions are competitive. Thus, these institutions can attract remittance clients and offer financial products to them. Moreover, rather than concentrating on a large number of payers, institutions may look for strategies dealing with cross sales and marketing. 3. Remittances and Financial Intermediation Financial assets and their accumulation are intersecting with the resources or stocks that migrants and their families raise in their effort to support their families. Migrant foreign savings and remittances in particular are a stock of predominantly economic and financial resources. They have become an important economic base for remittance recipient (and sending) households that may constitute the foundation for asset accumulation and poverty reduction. The principal reason being that these resources are unrequited transfers that reflect a stock of migrant income directed to cover a combination of daily needs and asset accumulation. Asset building (that is, stocks of savings, credits or risk mitigation tools, either formal or informal) is increasingly found at the intersection between finances and remittances. Specifically, migrants and their families exhibit a demand for financial services that include small savings, transfer of remittances, loans and insurance products. In some countries such demand is rearticulating the financial sector by modernizing it, moving it closer to the global economy and strengthening its financial health. In this section we review the ways in which remittances to Azerbaijan, Georgia and Moldova intersect with finances. We look specifically at the effect these flows have on the payment system and revenue of banking financial institutions, the extent to which these institutions are offering financial intermediation and the way that remittance recipients access to bank account ownership is influenced positively by remittance transfers. This section first looks at the institutional setting of banking institutions and reviews their position in the transfers of remittances. Second, it looks at perceptions of financial intermediation to recipients ans analyzes the characteristics and determinants of bank account ownership. a) The general context of financial institutions Financial institutions in this region and among CIS countries are relatively new. Although there was a banking infrastructure prior to 1989, it was only after the achievement of independence that these countries began to engage in establishing a financial network. The National Bank of Azerbaijan was established in 1992 and became officially independent in Its tight monetary policy helped staunch high inflation in the mid-1990s. However its supervisory performance has been less successful, and consequently, banking sector reform has progressed at a slow pace as it continues to be characterized by small, under-capitalized banks with non-performing portfolios. The central bank has overseen a process of closures, consolidation, and privatization under which the number of banks in Azerbaijan has decreased considerably, from 210 in 1994 to 44 as of April Despite the minimum capital requirement having been raised, many commercial banks remain under-capitalized. 6 Economist Intelligence Unit, Azerbaijan Country Profile

23 It is important to note that more than fifty percent 7 of the banking sector s total assets are in the hands of two state-owned banks, Kapital Bank and International Bank of Azerbaijan (IBA), which provide financing for most government departments and many of the state-owned enterprises, often at belowmarket rates. The dominance of these two banks has had a harmful effect on the overall health of the sector given that the development of commercial banks has been significantly hindered due to the inability to offer competitive interest rates. Thus, privately owned banks have had to rely on assistance from international financial institutions such as the European Bank for Reconstruction and Development (EBRD), which have extended credit lines to them in order to facilitate loans to small and medium-sized enterprises. Furthermore, foreign banks maintain a minimal presence. 8 While deposits and loans have generated revenue, to many banks the reliability of remittance payments constitutes a critical lifeline. Transaction revenues may represent twenty percent of net income in many instances for banks with a relatively solid presence. Even for large banks, revenue may account for ten percent of total bank income. Table 19: Banking institutions income and revenue from remittance transfers in Azerbaijan Bank name Net income Income as % of assets Annual Transaction Revenues Ratio of revenue per Transaction and net income Standard Bank $4,670, % $300, % Unibank $3,753, % $87, % Respublika $2,544, % $738, % Azerdemiryol Bank $2,778, % $342, % Bank of Baku $3,506, % $256, % Nikoil Bank $1,088, % $28, % AtaBank $79, % $144, % YapiKredit Bank $7,200 Microfinance Bank $(338,949) -0.60% $100, % Mugan Bank $922, % $115, % ParaBank $280, % $57, % IBA $29,261, % $1,800, % Other banks $926, % $1,800, % Source: EBRD banking information; revenue estimates based on interviews from financial institutions. Georgia s Financial Institutions While the banking sector in Georgia remains relatively small, the National Bank of Georgia (NBG) implemented significant reform measures in mid The NBG instituted bank consolidation and imposed increasingly stringent reporting and minimum capital requirements, consequently reducing the number of banks from 247 in 1995 to 21 in October In addition, Georgia established the Department for Supervision of Non-Bank Depository Institutions in 2002 with the objective of promoting the sustainable functioning of the financial and credit system, overseeing the activities of non-bank depository institutions and foreign exchange bureaus, as well as addressing regulatory issues such as the licensing of credit unions. Presently there are 43 licensed credit unions operating in Georgia. 9 7 Id. 8 Heritage Foundation Index of Economic Freedom 2007 located at 9 National Bank of Georgia website: 217

24 The Georgian banking sector is now represented by 19 banking institutions, of which 17 are Georgian resident private commercial banks, and 2 are branches of Turkish and Azeri banks. 10 The eight largest commercial banks now comprise nearly 90 percent of total assets and gross loans. 11 Among the top five banks by size of assets and credit portfolio are TBC Bank, the Bank of Georgia, VTB, ProCredit Bank and Cartu Bank. However, these commercial banks remain risk-averse, and consequently, the majority of loans are primarily issued to finance trade resulting in insufficient access to credit for agricultural and industrial sectors. Despite the banking sector s limitations, the growth in credit and monetary aggregates from 2005 to 2006 has been impressive. Private credit grew at or above 80 percent for the first 8 months of 2006, and demand deposits have grown by over 70 percent since However, the ratio of money supply to GDP remains relatively low in Georgia, signifying the potential for credit aggregates to expand further. There remains a substantial degree of dollarization (roughly 70% of the total 13 of loans and deposits), although this trend has gradually declined. Year-on-year growth of the private credit sector cooled considerably at the conclusion of 2006, from 79.7% in the third quarter to 56.7% at the end of the year. 14 This slowdown may be attributed to deliberate measures taken by the NBG at the behest of the IMF to cool inflationary pressures that peaked in mid Nevertheless, the banking sector s balance sheet grew strongly in 2006 with total banking sector assets at US$2.4 billion, equivalent to 32% of GDP. 15 The proportion of total bank deposits denominated in foreign currencies remained relatively unchanged year to year at 71.7%. 16 This can be best explained by the narrowing of the gap between deposits denominated in Georgian lari and those in foreign currencies for the latter half of According to the IMF, demand and savings deposits grew robustly, in line with the bank s aim to increase the pool of domestic resources for the banking sector. Foreign investors including the EBRD, IFC, German Investment and Development Foundation (DEG), ProCredit Holding AG, as well as the Greek Emporic Bank, the Russian Vneshtorgbank, and the Kazakh TuranAlemBank are among the shareholders of 10 commercial banks. 17 In terms of foreign capital participation, the NBG reported that foreign-owned capital amounted to 58% of the banking sector s total assets in 2006, with foreigners holding more than 87% of capital in ten banks. 18 Furthermore, the NBG highlighted the increasing presence of international financial institutions in Georgia as providing more resources and financial products and services as well as improving the standard of banking management Annual Report, National Bank of Georgia. 11 Economist Intelligence Unit, Georgia Country Profile 2006, p Id. 13 Id. 14 Economist Intelligence Unit, Georgia Country Report 2006, p Id. 16 Id. 17 Investment Guide of the American Chamber of Commerce in Georgia: 18 Annual Report, National Bank of Georgia. 19 Id. 218

25 Although these are more capitalized financial institutions, these banks rely on money transfer revenue as part of their net income. The over five hundred million dollars in transfers the country receives from MTOs through banks, produce over 1% in revenues, excluding commissions earned from the foreign exchange. Table 20: Banking institutions income and revenue from remittance transfers in Georgia Bank name Net income Income as % of assets Annual Transaction Revenues Ratio of revenue per Transaction and net income Rico Credit $12,781, % $4,800, % TBB $14,850, % $100, % Bank of Georgia $4,237, % $185, % TBC Bank $7,596, % $318, % VTB Georgia $531, % $24, % Cartu Bank $1,351, % $144, % Standard Bank $3,191, % $720, % Basisbank $12,781, % $4,800, % Other $14,850, % $100, % Source: EBRD banking information 2006; revenue estimates based on interviews from financial institutions. Moldova s Financial Institutions The banking sector in Moldova, which is comprised of 16 commercial banks, is highly concentrated given that the 5 largest banks account for nearly 70 percent of all assets as of May Although deposits and lending have grown recently, deposits still account for a small percentage of GDP when compared to neighboring European countries. While financial intermediation in Moldova remains limited, it is still considered generally sound with respect to a number of indicators of banking sector health. In addition, banking supervision and regulation appear to meet international standards and profitability continues to be strong with returns at 4 percent for assets and nearly 20 percent for equities. 21 An area that draws concern is the dearth of major foreign strategic investors, which in turn limits the development potential of the financial sector, especially affecting the access to external financing. However, the government has recently made significant efforts to attract more foreign investment. Encouraging signs of progress include the privatization of several banks, including, Banca de Economii, among others, as well as the passage of legislation that will enhance transparency of bank ownership. 22 According to an IMF report, Moldova also seeks to develop its financial sector by strengthening the National Bank s capital position, modernizing relations between the National Bank and the Ministry of Finance and enhancing the Bank s accountability and independence. By the end of 2007, the Moldovan government plans to inject Lei 250 million in liquid assets into the Bank s capital stock. 23 Another important development is the proposed creation of the National Commission on the Financial Market (NCFM) 24 to supervise and regulate the non-bank financial institutions (NBFI). This new agency is designed to be operationally independent, preserve financial stability of the NBFI sector. 20 Economist Intelligence Unit, Moldova Country Report Id. 22 Id. 23 IMF Country Report, November 30, Id. 219

26 Finally, the NCFM will assume responsibility for the licensing of insurance companies and saving and loan associations, which were previously shared by various agencies in a decentralized and inefficient arrangement. Both the World Bank and IMF are to provide technical assistance to the new regulatory body. Although gradual progress on these fronts is encouraging, it will still be limited by weak administrative capacity and the presence of vested interests within government. While these institutions are consolidating their financial position, the revenue from remittance transfers is contributing to maintain stability among these banks, contributing to concentrate on their capitalization. As Table 21 shows, some banks net income earned from transfers is more than 10% of all expected income. Table 21: Banking institutions income and revenue from remittance transfers in Moldova Bank name Net income Income as % of assets Annual Transaction Revenues Ratio of revenue per Transaction and net income Moldova- Agroindbank $7,504, % $564, % Banca de Economii $5,547, % $576, % Victoriabank $4,194, % $1,800, % Moldindconbank $3,752, % $226, % Mobiasbanca $3,105, % $720, % Eximbank $2,191, % $453, % Banca Sociala $2,508, % $1,440, % Fincombank $1,882, % $40, % BCR. Chisinau $1,297, % $1,134, % Unibank $957, % $10, % Universalbank $465, % $39, % EuroCreditBank $287, % $120, % Other $2,574, % $252, % Source: EBRD banking information; revenue estimates based on interviews from financial institutions. b) Analysis of the extent of financial intermediation efforts by institutions Although banks are providing payment services to an increasingly important economic group in society, with greater economic clout and financial resources than the average person (see section c below), banks do not provide much cross sale of financial products. Little financial intermediation is found to exist in the banking industry of these three countries. We find however some important cases in each country that illustrate the relevance of financial service provision to this cohort. Financial intermediation efforts in Azerbaijan The banking system in Azerbaijan offers a mixed bag of institutions interested in providing financial products to remittance recipients and senders, but generally banks stress that they do not provide cross sales of financial services and do not perceive recipients to be targets of financial product marketing outside payment of remittances. One financial institution with an interest in leveraging remittance recipients resources through financial intermediation is Bank of Baku. Its policy requires that remittance recipients open bank accounts. Bank officials claim to be the first bank in Azerbaijan to recognize the potential of incorporating remittance recipients into the banking system. However, executives acknowledge that one of the major challenges is recipient understanding of bank accounts. 220

27 Azerdemiryol Bank also has the goal of offering deposit accounts and utility payment services to remittance recipients. As part of that interest, it began to focus its attention on remittance recipients by distributing a brochure on financial literacy and advertising to migrants and their families. Respublika Bank strives to increase the number of remittance recipients as customers, and it distributes standard financial education booklets. Microfinance Bank makes efforts to incorporate recipients into savings plans or other accounts. This is an innovative banking financial institution targeting rural Azeris that has implemented a marketing tool on television to educate remittance recipients about financial savings. Financial intermediation efforts in Georgia Banking institutions in Georgia see remittance recipients as important customers and have tried to offer financial services to them. The success of these efforts is not known partly because banks have not evaluated their approach or because they lack a well-defined marketing strategy. Moreover, the institutions argue that financial service provision often contrasts with lack of financial literacy among consumers or little or no savings capacity. In some cases, the lack of marketing tools may impede the supply of financial products. Standard Bank is a case that referred to this lack of financial literacy in customers. Bank executives stress that they have tried to address the recipient sector through marketing and education to customers about new services. Moreover, Standard Bank has identified attracting remittance recipients to financial services as one of its main goals; therefore, all recipients are offered bank accounts. The bank will be able to utilize its database to analyze characteristics of remittance recipients and then use tools to attract these recipients to other financial services such as consumer loans. However, it still lacks metrics or measures indicating the results of its efforts. TBC offers bank accounts to all clients. Its main selling point is that international account-to-account transfers are less expensive than transfers through money transfer systems. Moreover, it is able to use its database for cross-selling other products. VTB, on the other hand, tried to require remittance recipients to open savings accounts about five years ago, but found that customers did not utilize the accounts. The management attributed this to a lack of financial literacy. Rico Credit is a regulated micro-finance institution that offers small capital loans to individuals. This is a forward-looking institution interested in improving technology for transferring money (including card-based opportunities), offering more access to capital, and expanding branch network throughout the country. Rico Credit has a loan portfolio of US$3 million and 25,000 total clients. Sixty percent of those clients are remittance clients. Loans are offered based on proof of a steady income, including remittance flows. SME loans usually go towards market stands, agriculture, and landscaping projects. Until now Rico Credit s efforts have been focused on improving software rather than on marketing. Their software program can be used for cross-selling products and even though they have not focused energy on this, it is certainly an area of future interest. Financial intermediation efforts in Moldova Financial intermediation efforts in Moldova may be more substantial than in Azerbaijan and Georgia. Many banks cite remittance recipients as a market for deposit accounts and even credit products. Their marketing tools are not tailored to this cohort, but yet outreach to this sector is part of bank efforts to expand their market. 221

28 MobiasBank is implementing cross sales through time deposits and savings accounts with higher interest rates to remittance recipients. It also offers credit products including mortgages by considering the history of receiving remittances. Moreover, the bank has begun advertising to the diaspora in Italy to make migrants aware of investment opportunities in Moldova. MobiasBank is also trying to offer products to meet the demands of senders by issuing cards with certain withdrawal limits. Victoria Bank has monitored the remittances that are retained into accounts which was about 60% in Remittance recipients are offered bank accounts as they withdraw their money, and most recipients are interested in savings accounts. EnergBank offers a variety of other services to remittance recipients, such as payments savings, and loans. Bank officials estimate that about 30% of recipients open deposit accounts. Moreover, the bank is organizing a marketing campaign with Western Union to attract more customers. Banca Sociala initially saw remittance recipients as potential clients and has seen the number of deposits increasing among these clients. It offers the service of depositing money into an account provided to migrants. It has also tried to offer debit cards and savings. MoldindconBank offers a remittance account that is a deposit express for recipients of non-mto transfers. It would like to continue to develop similar models that allow recipients to use other financial services. FinComBank advertises reduced prices for those who deposit the remittance money into an account. It also offers cards to recipients. The bank also provides mortgages and uses remittances as a base for credit history. Microfinance Institutions also play a role in financial intermediation in Moldova. The Moldova MFI Alliance has explored ideas in leveraging remittance funds to offer capital. Furthermore, it has promoted a product where people could identify projects catered to remittance recipients and senders. The project did not succeed because it was difficult to find good projects that were well-managed. Also, there is no legal infrastructure to guarantee the investment. Overall the main finding is that financial institutions lack appropriate tools and business intelligence about the financial preferences and capacity of remittance recipients (and senders), and therefore their efforts have been limited. Moreover, there is no public policy incentive to encourage these institutions to leverage remittance funds for greater financial benefits. The few efforts identified lack any metric that evaluates or assesses progress or results of their activities to bring clients into the institutions. As the section below shows, remittance recipients are often better off than non recipients because of the remittances received. Moreover, recipients exhibit a demand for financial products associated to remittances. In most of these financial institutions, the number of clients belonging to the banks is relatively small, yet in each country there are at least half a million recipients of remittances, the majority of whom pick up their money at banking institutions. It would seem intuitive that these institutions expand their financial services to a cohort that already offers financial benefits and demands further financial products. c) Recipient s relationship to banking and financial products: characteristics and determinants According to survey results, the percentage of remittance recipients with bank accounts varies greatly among the three countries. About 23 percent of Azerbaijan recipients have bank accounts, while only 11 percent of recipients in Georgia have accounts. Moldova falls in the middle, with 19 percent of recipients owning bank accounts. This section will explore other characteristics and determinants of remittance recipients and bank accounts. 222

29 Table 22: Recipients with Bank accounts Azerbaijan Georgia Moldova 23% 11% 19% Source: Bendixen and Associates, Survey of the South Caucasus Azerbaijan In Azerbaijan, 32% percent of male recipients have bank accounts while only 15 percent of women recipients have bank accounts. Twenty percent of people with household incomes of USD$0-$100 have a bank account, 23 percent of those with incomes of $101 to $140, 30 percent of those with incomes of $141 to 230, and 23 percent of those with a monthly income of $231 and up. The age group with the highest percentage of bank accounts is 50 to 64 (32 percent), followed by 65 and over (27 percent). About 20 percent each of the 25 to 34 and 35 to 49 age brackets have bank accounts. Only 13 percent of the 18 to 24 age category have bank accounts. Remittance recipients who receive money from abroad more frequently are more likely to have a bank account. For example, 33 percent of those who receive money once a month and 37 percent of those who receive money two times a month or more have bank accounts, while only 10 percent of those who receive money every 4 to percent months and 8 percent of those who receive once a year have bank accounts. Almost half of recipients with bank accounts (46 percent) have been receiving money for more than five years, while only 9 percent have been receiving for less than a year. Most receive $300 or less at a time, with 15 percent receiving $201 to 300, 32 percent receiving $101 to 200, and 36 percent receiving $100 or less. Recipients with bank accounts receive money fairly frequently. Almost half of those with bank accounts receive money once every 2 to 3 months (48 percent), and 35 percent receive once a month. Those without bank accounts tend to receive less frequently. Only 24 percent receive every 2 to 3 months and 18 percent receive once a month. The incidence of investments in Azerbaijan is low among remittance recipients with and without bank accounts. Seventy-seven percent of remittance recipients have no investments. Of the 12 percent with investments, 6 percent of recipients with bank accounts own property, while only 1 percent of recipients without bank accounts do. Three percent of those with bank accounts have invested in a business, compared to 2 percent of those without a bank account. Just over 75 percent of recipients own their home, but there is no difference in rates of home ownership between recipients with and without bank accounts. Georgia In Georgia, approximately eleven percent of remittance recipients have bank accounts. Recipients in urban areas are five times more likely than recipients in rural areas to have a bank account. Those recipients in higher income brackets tend to have bank accounts more than those in lower income brackets. Recipients with savings accounts tend to have other investments as well. For example, of those remittance receivers with stocks, 67% also have a savings account. For those with a property, nearly 29% have a savings account. For those with a business, 25% have a savings account. Only ten percent of those recipients who own a home have a bank account, while 23 percent of those who rent have a bank account. However, 68% of recipients with a bank account do not have investments in Moldova. Remittance recipients that receive money from abroad more frequently are more likely to have a bank account. For example, 40% of those who receive two times a month or more have bank accounts, while only 2% of those that receive about once a year own bank accounts. Furthermore, those who receive 223

30 more money per transaction have a higher rate of owning a bank account. In fact, 53% of those who receive more than US$500 per transaction have bank accounts. Of those that receive $51 to $100 per month, only 7% have an account. Over 60% of recipients with bank accounts are university graduates, and 16% graduated from technical school. In terms of age groups, 37% fall in the 35 to 49 category and 35% in the 18 to 24 category. One quarter of recipients with bank accounts receive month from a spouse, and another 25% receive money from a parent. In general people in Georgia have a positive opinion of banks in Georgia with 79% of recipients answering this way. Moldova In the case of Moldova only fourteen percent of people have bank accounts. Among remittance recipients the percentage is higher; 19% have bank accounts against 12 percent of those who do not receive remittances. Table 23: Moldovans remittance receipt and account ownership Has a bank account Receives No Yes remittances Yes 80% 20% No 88% 12% Source: Bendixen and Associates, Survey of the South Caucasus Of those who have taken some university courses, 29% have a bank account while approximately 40% of university graduates have bank accounts. Nearly thirty percent of those who are employed have bank accounts compared with 15% of those who are not employed. 27% of recipients in the bracket have bank accounts while 24% in the group have bank accounts. Of those who receive money from their spouse, 32% own bank accounts while 19% of those who receive from their children are bank account holders. Around thirty percent of respondents in each of the following three income categories have bank accounts: US$ per month, US$ per month, and US$ per month. The number of those who use formal methods to receive their money and have bank accounts (25%) is double the number of those who use informal transfer methods and have bank accounts. In Moldova, 24% of those who receive money once every two to three months have a bank account, while 18% of those who receive two times a month or more have a bank account. Around 19% of those in each of the time receiving brackets have a bank account. Those who receive more money per transaction are more likely to have bank accounts. 224

31 Of those who own bank accounts and receive remittances, 55% are female and 45% male. Nearly 30% of those who own bank accounts are university graduates while 23% only completed secondary school. Fifty percent are employed. Seventy percent of those with bank accounts are married. Income distribution of those with bank accounts is fairly even with around 20% in each of the groups. Similarly, age distribution is very even. Most remittance recipients with bank accounts use formal methods to receive their money. Thirty percent of recipients have family members in Russia, and another thirty percent in Italy. Nearly 35% receive money from a spouse while 32% receive money from a son or daughter. Nearly half of remittance recipients with bank accounts receive money once every two to three months. About 40% have been receiving money for one to three years. Twenty percent of those with accounts receive more than US$500 per transaction, while about 30% receive US$ and 15% receive US$1-100 per transaction. Of those with bank accounts, nearly 90% are either somewhat or very satisfied with the bank or company they use to pick up their remittance. d) Analyzing basic determinants banking access and financial interests The previous section provides an important descriptive profile, often pointing to differences among recipients and bank account owners. To what extent are remittances determining factors of greater financial access? Specifically, do remittance transfer amounts, length of time receiving or frequency of sending influence account ownership? Or are transaction amounts more likely to influence interest in investing in financial products, such as mortgages? The study explored two models of determinants of financial access. First, bank account ownership and second, interest to invest. Using household survey data for the three countries the model looks into whether account ownership is associated to existing assets, income, remittance reception, length of time receiving and interest to invest. Logit s model was run using bank account ownership as the dependent variable. The results show that in the three countries remittances are positively and statistically associated to the ownership of a bank account and already existing asset ownership. In Georgia there is also a statistical relationship with interest to invest. That is, those owning accounts are more likely to express an interest to invest in some asset building activity. The number of years of receiving offers different results, negatively associated in Georgia. (Azerbaijan also shows a negative relationship though no statistical significance). One reason is that a majority of Georgians have been receiving money for less than five years. Income is also statistically significant for Georgia and Moldova, but not for Azerbaijan. Table 24: Determinants of bank account ownership Georgia Azerbaijan Moldova B Sig. Assets or investments Interest to invest Income Years receiving Amount received Constant

32 The surveys also asked remittance recipients whether they would be interested in investing in some asset building activity such as a mortgage loan. The percent of people who expressed a strong interest in such an investment ranged from one quarter to a third of all recipients. An OLS regression was used to estimate the determinants of investment interest. Table 25: Financial interest to invest on an asset such as Azerbaijan Georgia Moldova A mortgage or loan to buy or build a home 33% 28% 20% A loan to finance a university education 14% 26% 19% A savings account in a bank 23% 22% 15% A loan to finance a business 9% 32% 19% Health or life insurance for you or your family 28% 40% 19% Source: Bendixen and Associates, Survey of the South Caucasus The results show that in the three countries remittances received have an effect on the interest to invest. Moreover, owning some kind of assets is positive and statistically significant. As the extent to which people receive remittances in larger amounts is associated with an interest to build assets, business and policy strategies are prime opportunities to leverage the flows. In societies where an economy s productive base is weak, a cohort demanding financial services, whether in education, real state or business, demands policy intervention. The next section identifies some policy opportunities that can further maximize the impact of these flows energizing the financial industry. Table 26: Determinants of interest to invest Moldova Georgia Azerbaijan UC SC Sig. UC SC Sig. UC SC Sig. B Beta B Beta B Beta (Constant) Owning some assets Income Owning a bank account? Length of time receiving money Average received Dependent Variable: interest to invest 226

33 Issues and Recommendations As the study shows, the flows of remittances directly influence the national economies of these countries significantly delivering incomes to nearly one in ten people. Moreover, these flows have increased competition from international businesses in money transfers and contributed to the revenue of the banking industry. These flows also reflect a capacity and demand for financial services. Here we provide some recommendations for areas of intervention to further leverage remittances for development. Specifically we recommend attention to motivate financial literacy, savings and investment; encourage greater penetration in rural areas by reviewing regulatory constraints on microfinance institutions that complicate remittance payments; and advance the adoption of modern technologies such as mobile banking. Public policy: allow MFIs to pay transfers; create incentives for banks to offer financial product intermediation Technical assistance: introduce grant facilities on financial product design, marketing and IT Development, including mobile banking Private-public partnerships: strengthen and develop financial literacy Loan fund: establish a lending facility to provide different lending opportunities a) Public policy Allow MFIs to pay transfers and offer financial products to recipients Currently in some countries like Moldova the regulatory environment prevents microfinance institutions from paying remittances. There is no specific logic outlining why this is the case. Remittance payments are not deposits that require protection or guarantee because the funds are directly made available for disbursement. Thus, MFIs under clear conditions and requirements could participate in the payments. As surveys show, informal transfers are greater in rural areas, and MFIs have a stronger presence in those places where informality is higher. Therefore these institutions can play a role in mitigating informal flows by offering their services to remittance recipients or migrants returning home. Table 27: Percentage of Recipients in Urban/Rural areas using Informal/Formal methods Georgia Moldova Azerbaijan Urban Rural Urban Rural Urban Rural Informal Formal Total Source: Bendixen and Associates, Survey of the South Caucasus The role of microfinance institutions in remittances is twofold. First, allowing and enabling MFIs to pay remittances would level the playing field of this marketplace, while ensuring greater access in rural areas to remittance paying institutions. Second, as part of their role as financial institutions, MFIs participate as key financial service providers of savings, credits and insurance to populations that often have difficulty reaching out to banks (or having banks reach out to them). In Moldova, for example, many of the more than four hundred savings and credit associations indirectly serve remittance recipients but lack the legal tools to pay money transfers or the strategies to further provide and market financial products. 227

34 The areas of engagement with MFIs are through the support of a review of regulatory constraints, as well as technical assistance to enable the institutions to participate in the payment environment. Technical assistance can focus on developing MFIs competitiveness in the payment business by identifying competitive advantages and strengthening these advantages. Five particular areas include market research, financial product design, marketing and technology development and operational feasibility (the capacity to operate as payer). 25 The lessons learned from other countries suggest that the participation of MFIs in the payment system not only ensures competition but also guarantees greater access to financial institutions. 26 Thus, support to this end is of critical importance to each of these countries. Engaging banking institutions to provide broad financial services In addition to offering incentives to non-banking financial institutions to reach out to remittance clients, larger banks that offer remittance services should be targets for engagement. Access to banking service remains low despite the percentage of payments made by banks. The opportunity costs of banks working in rural areas have yet to be sufficiently explored by governments and donors. Furthermore, there should be efforts to increase opportunities for reinvestment in the community. Banks roles in distributing remittances in the region should be encouraged to move beyond simple remittance payments and consider strategies such as loan funds and securitization, financial literacy programs aimed at remittance recipients, financial product design or marketing and modernization of payment systems. Leveraging a portion of remittances into savings and investment in local communities has a positive effect in increasing savings ratios as well as access to financing for small enterprises. b) Technical assistance Grant facilities through projects with banks, microfinance institutions, credit unions and small banks are a critically important incentive to accelerate financial access. In particular, alternative financial institutions have demonstrated a key role in banking the traditionally unbanked and in transforming remittance clients into clients of other financial services. 27 Support of these financial institutions has been low despite their efforts to reach out to remittance recipients. Moreover, banking institutions in the South Caucasus are relatively weak and can benefit from grants that strengthen their capacity to reach out those with a demand of financial services, such as remittance recipients and senders. Specifically EBRD can provide financial assistance targeted to financial product design, marketing, and technology. Increasing the support and participation of these small financial institutions is of 25 This latter issue is perhaps the first and most important and involves assessing whether an MFI has the capacity to be a payer, that is, it has cash flow, meets international regulatory compliance requirements, has a geographic presence and has staff trained to deal with a different type of consumer. See also: Orozco, Manuel. Migrant Foreign Savings and Asset Accumulation. Reducing Global Poverty: The Case for Asset Accumulation, Edited by Caroline O.N. Moser. Washington, DC: Brookings, 2007; and Orozco, Manuel with Fedewa, Rachel. Leveraging Efforts on Remittances and Financial Intermediation. Institute for the Integration of Latin America and the Caribbean Working Paper 24, Buenos Aires, Argentina: December Orozco, Manuel and Hamilton, Eve. Remittances and MFI intermediation: issues and lessons. Remittances, Microfinance and Development: Building the Links, Volume 1: a Global View. Edited by Judith Shaw, Foundation for Development Cooperation, Brisbane, Australia: Orozco, Manuel and Eve Hamilton Remittances and MFI intermediation: issues and lessons. Remittances, Microfinance and Development: Building the Links, Volume 1: a Global View. Edited by Judith Shaw, Foundation for Development Cooperation, Brisbane, Australia:

35 crucial importance to increasing access to financial services and improving financial literacy and assets. In that line EBRD can join existing schemes implemented by other donors to leverage remittance flows. One example is the IFAD-EU-MIF facility. The International Fund for Agricultural Development (IFAD), a specialized agency of the United Nations, in partnership with the European Commission (EC), the Inter-American Development Bank (IDB), the Consultative Group to Assist the Poor (CGAP), the Government of Luxembourg and the United Nations Capital Development Fund (UNCDF), launched a US$10 million Financing Facility for Remittances (FFR) to reduce rural poverty and promote development. The Facility aims to increase economic opportunities for the rural poor through the support and development of innovative cost-effective and easily accessible international or domestic remittance services within African, Asian, European, Middle Eastern and Latin American countries. Its objectives are to improve access to remittance transmission in rural areas; link remittances to additional financial services and products; and develop innovative and productive rural investment channels for migrants and community-based organizations. Through a competitive process, the facility is awarding eligible institutions a maximum contribution per project of EUR 200,000 (or approximately US$260,000 for projects within the EU-LAC corridor) to implement individual projects. Research and practice has demonstrated that operationalizing projects to leverage remittances to maximize financial access through financial institutions does not represent costs above a quarter of a million dollars to banks or MFIs with an average of twenty branches. Through other experiences we have learned that banking institutions can transform on average 5,000 remittance clients as bank clients within two years. Moreover, such efforts would have demonstration effects on other financial institutions and encourage competition to increase financial services to this sector. c) Private-public partnerships Provide technical assistance on financial and remittance literacy The National Banks generally lack resources and capacity to provide basic financial literacy to their populations. Educating people about the role of finances is a critical step toward development and is also becoming important among remittance recipients. Financial and remittance literacy can be established in cooperation with Central Banks and financial institutions to reach out to the millions of remittance recipients. This technical assistance should consider information about the financial value of the transfers as a mechanism to build credit and assets and the use of alternative payments through electronic instruments such as debit and credit cards. d) Loan fund The EBRD can also establish a lending facility to provide different lending opportunities to remittance recipient clients or financial institutions themselves seeking to explore product innovation such as mobile banking or card based transfers. Loan funds are one incentive to banks where the EBRD can become a stockholder in the efforts to bankarize remittance recipients and senders. It can also jointly explore further efforts to modernize banking institutions interested in adopting banking tools that reduce cash transfers. 229