What is Remittance?
Remittance is the transfer of money from one place to another place or one account to another account. Difference means can be used in remittance. Remittance is a non-funded and less risky business where there is no physical movement of money. There are at least 4 parties are involved while remitting the fund.
Remittance in the context of Nepal
Remittance is one of the primary contributors in the national economy of Nepal. Money sent by migrant workers competes with international aids as one of the largest financial inflows for Nepal. Remittance plays a vital role in capital flows not only for Nepal but for labor-exporting countries.
Transfer of funds, usually from a buyer to a distant seller via the different instrument of transfer such as cheque, draft.
Main four parties of Remittance
- Sending Agent
- Receiving Agent
Types of Remittance
|1)||Formal (using Bank and Financial Institutions)|
|2)||Illegal (by means of Hundi, Individual person)|
Significance/Benefits of Remittance
Remittance inflow from foreign employment has been playing a major role in developing countries like Nepal. The major benefits of remittance are as follows-
1) Remittance has a direct impact on individual householders
Individual householders are directly benefited from the remittance as they are getting money from another country. Remittance increases the recipient household’s resources, smooth consumption, provide working capital. In fact, remittance can be taken as one of the poverty-reducing factors.
The World Bank study suggests that remittance has helped to decrease poverty in many countries.
2) Remittance has an impact on long term growth potential
Long term growth potential depends on how remittance is used. If remittance money is channeled to productive uses of investment then it may stimulate in the economic growth of the country. Most studies show that the large proportion of the remittance is used for human capital development such as education, health care, nutrition. It has been proved that there is a long-term benefit of human capital development.
3) Increase Financial Activity
Remittance increase the low-income household to be involved in financial activities. Which ultimately leads to formal financial services. Remittance promotes financial deepening.
4) Remittance tends to be more stable than capital flows
Remittance is less volatile than most capital sources of foreign exchange earnings, In countries affected by political conflict, they often provide an economic lifeline to the poor.
The benefit of Remittance for Banks
- Margin/fee and commission
- Increase in the bank deposit
- Increase in a financial transaction
- Customer retention
- Increase baking business
The benefit of Remittance for Country
- Helps in positive GDP. As a result, it increases economic growth
- It narrows down the social unrest and crimes
Risks/Disadvantages of Remittance
- If the remittance is large, the recipient country could face the risk of real exchange rate appreciation. It may make it’s economy less competitive internationally.
- The remittance, especially from the skilled manpower is brain-drain which means due to the export of skilled manpower, country face the shortage of skilled manpower. Which ultimately affect the entire development of the country.
- Remittance also creates dependency.
- Migrant workers have to be far away from their family.
Modes and instrument used in remittance business
- SWIFT (Society for Worldwide Interbank Financial Telecommunication)
- Card – debit and credit
- Demand Draft
- Fax Transfer
- Tested Email
- Mobile Banking/Email Banking/Online Banking
- Letter of Credit (LC)
- Cheque clearing (Bills collection)
- Travellers cheque