Malaysia-Indonesia Remittance Corridor by gzn12524

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									The Malaysia-Indonesia
Remittance Corridor
Making formal transfers the best option for
women and undocumented migrants




                      East Asia Social Development Unit
                   Financial Market Integrity Unit (FPDFI)
                                         The World Bank
Content


 Global Remittance Trends

 Indonesian Migrants:
  Vulnerability and Use of
  Remittances

 The Malaysia-Indonesia
  Migration and Remittance
  Corridor

 Transfer of Remittances

 Implications for Policy

                             2
Global Migration Trends:
The number of migrants continues to increase

 More than 190 million people – or about 3% of the world’s
  population are living in countries in which they were not born

 IOM (2005) notes that:
    – There is a shift in destination countries
    – A rise in undocumented labor flows
    – An increasing feminization of migrant workers


 In 2005, East Asia and Pacific Region accounted for $45 billion,
  or 17% of global recorded remittance inflows

 Indonesia has 4.3 million citizens working overseas mostly in
  Middle East and Asia Pacific. Migration is increasingly
  feminized and increasingly undocumented.

                                                                   3
Global Remittance Trends:
Recorded remittance flows continues to increase
$ billion                              Private debt
275                                    and portfolio
                                       equity

225

                                 FDI
175
                                             Recorded
                                             remittances
125


 75                                        ODA


 25


 -25



                                                   4
Global Remittance Trends:
Poverty Reduction

 Evidence from a few household surveys shows that
   remittances reduce poverty

 Cross-country evidence shows that a 10% increase in per
   capita remittances leads to a 3.5% decline in the share of
   poor people

 Remittances also finance education and health expenditures,
   and ease credit constraints on small businesses


  However, qualitative evidence suggests
    this may not be the case in Indonesia


                                                                5
Indonesian Migration
 In 2005, remittances were estimated at US$5.3 billion, making
  remittances the second highest forex earner after oil and
  around 1.5% of GDP
 This is lower than China ($22 billion) or Philippines ($14
  billion)
 680,000 workers left on contracts in 2006, almost 80% were
  women, 88% of whom work in informal sector and come from
  poor rural areas




                                                               6
Map:
Migration and Remittances in Indonesia




                                         7
Vulnerability of Tenaga Kerja Indonesia
(TKI)
TKIs migrate primarily for financial reasons, but migration is risky
 for several reasons:
 Indonesian laws and regulations exacerbate migrant vulnerability
  (concentrate power in recruitment companies)
 Malaysian laws and regulations weaken position of migrants (e.g.
  employers retain passports)
 The cost of migration is high and migrants must borrow to finance
  migration
 Lack of institutional framework
  and capacity for effective monitoring
 Little or no accountability mechanisms
 Weak support mechanisms for
  migrants in sending villages and
  destination places of work


                                                                   8
Indonesian Migrants:
Use of Remittances
 Estimated 45% of wages earned are sent back as remittances to
  families
 Remittances used to pay debts, and for day-to-day living and
  consumption expenses of family left behind, for house building
  and improvement, and luxury consumer goods
 Fewer migrants invest in health and education, or in productive
  activities
 There is rarely a plan for investment of remittances and migrants
  have little control over the use of remittances while they are
  away (although they regain control when they return)
 Families become dependent on remittances, and with few
  sustainable livelihood improvements, migrants get trapped in a
  cycle of migration

 Main Challenge: How can the impact on poverty
     reduction be improved and sustained?                      9
           The Corridor:
           Major Destinations for Indonesian Migrants

                     350,000
                                                                                           Saudi Arabia
                     300,000


                     250,000
                                                                                      Malaysia
number of migrants




                     200,000


                     150,000


                     100,000


                      50,000
                                                             Taiwan            Hong Kong
                                                UAE                                         Kuwait

                          0
                               1997   1998   1999     2000     2001   2002   2003   2004    2005     2006


                                                                                                   10
The Corridor:
Indonesian migrants in Malaysia
 Malaysia is second highest recipient of Indonesian migrant
  workers after Saudi Arabia and the number is increasing
 17% of Malaysia’s workforce are from overseas: more than
  60% of these are from Indonesia
 Approximately 1.3 million documented and 700,000
  undocumented Indonesian migrants worked in Malaysia in 2006
 60% of documented Indonesian migrants in Malaysia are
  women
 Undocumented workers travel without visas, overstay visa/work
  permit, change jobs without necessary procedures
 They have no legal protection and are often exploited by
  Malaysian employers due to their illegal immigration status


                                                                11
The Corridor:
Remittance Characteristics
 Fees to secure jobs can be several
  hundred dollars
 Other formal costs borne by domestic
  workers migrating from Indonesia to
  Malaysia total about $340
 Monthly salary between $145 and 200 for
  domestic workers
 Average remittance amount is estimated
  at $115-$150 per transaction

 In 2005, Indonesia received about $5.3
  billion (IMF) in remittances of which
  about $2.7 billion was from Malaysia

 Only about 20% total remittances arrive
  in Indonesia through formal channels,
  and even less - about 10% of
  remittances arrive in formal channels
  from Malaysia
                                            12
The Corridor:
Remittance Trend
 While the number of documented TKI in Malaysia have been
  increasing, the remittances sent to Indonesia through the
  formal system decreased both in real terms and as a
  percentage of total remittances
 Outflows to Indonesia as a percentage of the total decreased
  from 35 percent in 1997 to 13 percent in 2006
                    2,500



                    2,000
                                                                                Grand Total
  millions of US$




                    1,500

                                                                                      Other
                    1,000



                     500
                                                                                       Indonesia
                                                 Singapore            United States

                       0
                            1997   1998   1999   2000   2001   2002     2003    2004      2005     2006
                                                                                                          13
Source: Bank Negara Malaysia, based on bank and RSP reporting
The Corridor:
Disparity in formal and total remittance flows
                    6


                    5


                    4
  Billions of US$




                    3


                    2


                    1


                    0
                               Total          Remittances       Remittances             Total
                           remittances     from Malaysia to       reaching       remittances into
                        leaving Malaysia       Indonesia       Indonesia from       Indonesia
                                                                  Malaysia

                          Calculated from migrant stock       Recorded through formal channels

                                                                                                    14
Transfer Mechanisms
                                   Costs and risks of remitting
                                    funds are considerable in
                                    proportion to TKI salary
                                   Bank channels make up 90
                                    percent of formal channels, but
                                    represent a slim percentage of
                                    total remittance flows

 An unregulated industry has arisen
  to facilitate remittances in situations
  where remitting funds through formal
  channels is difficult
 This industry includes account
  mediators, migration agents or
  agencies, and informal channels that
  are part of formal enterprises (money
  changers)
                                                               15
Transfer Mechanisms – Cont’d

 Migrant workers – especially
  undocumented ones have more
  incentives to use informal
  remittance channels

 Returned TKIs have a generally
  clearer understanding of the
  costs and benefits of the
  different channels of remitting
  funds

 Financial literacy among TKIs is
  low




                                     16
   Comparing Incentives of Remittance
   Channels
                                                           Remittance Channels
                                                Postal
                                                                             Money        Informal
                                  Bank         (money             MTO
                                                                            Changer       Channels
                                                order)
               Access
                                    no            no               no           yes          yes
              without ID

             Geographic
             coverage in          limited        good            limited     unknown        good
Incentives




              Malaysia

             Relative price
                                  variable    inexpensive       expensive   inexpensive   unknown
                of fees


                Speed         moderate-slow      slow             fast         fast        variable


              Language
                                  variable      variable         variable     variable      none
               Barrier

               Minimal
                                    no            no               no           yes          yes
              Paperwork

             Source: World Bank


                                                                                                17
Migration Costs
 Annual Cost of Migrating and Remitting Funds for an Indonesian
 worker in Malaysia
                                                                                             domestic
                                                            construction      plantation        work

 average monthly salary a                                            170             80         157.5

 average salary for a year                                          2040            960          1890

 average amount remitted in one year b                               918            432         850.5



 average migration cost c                                           -475           -363          -343

 yearly remittance cost (to send from Malaysia) d                      -7             -7            -7

 yearly remittance cost (to receive in Indonesia)                     -20            -20           -20

 total cost                                                         -502          -390           -370
 a.   Average salary for a year was found by taking the average monthly salary in US dollars (provided
      by the Malaysian Ministry of Home Affairs) and multiplying by 12
 b.   Average amount remitted is based on Bank Indonesia estimate that a TKI remits approximately
      45% of his or her salary
 c.   Average migration cost and yearly remittance costs (in US dollars) are based upon World Bank
      primary interviews with TKI and RSPs
 d.   Salary yearly remittance cost is based upon the assumption that workers remit twice a year
      through bank channels                                                                          18
In Summary

 The number of migrants to Malaysia is increasing, increasingly
  feminized, and many undocumented migrants
 Migrant workers are increasingly choosing non-formal means to
  transfer remittances because:
   –   Identification: they can’t meet the requirements
   –   Access: they ( or the recipients) can’t reach the banks easily
   –   Cost: High cost of remitting through banks
   –   Competition: other means of transfer are more responsive to their
       needs
 However, qualitative evidence suggests that improvements are
  needed for remittances to have a greater impact on poverty
  reduction
 Possible security implications of large flows of unrecorded
  remittances



                                                                    19
Avenues for Policy Consideration

I. Make the formal sector accessible and responsive to
   migrant workers, while recognizing the need to establish basic
   requirements for transparency and regulation, through:
    –   Enhancing Security and Reliability of Identification
           Strengthen the reliability of passports by ensuring the same
            number is not issued and by assessing the use of biometric
            information (ie. fingerprints etc)
           Issue new ID cards for migrants, recognized by both countries and
            financial institutions
    –   Promoting Customization of Products and Organizational
        Structures
           Encouraging banks and postal systems to develop financial
            products tailored to TKIs
           New rules allowing Malaysian money changers to act as RSPs
            should be tailored to their economic and institutional capacity




                                                                          20
Avenues for Policy Consideration

II. Facilitate migrant workers access into the formal sector, via:
    – Expanding Financial Education
           Financial Literacy Programs could be implemented at the pre-
            departure stage in Indonesia, and when foreigner cards are issued in
            Malaysia
           Awareness raising programs for female TKI, through employers of
            female TKI and leaders of TKI communities, to promote
            empowerment and financial literacy
    – Ensuring Better Assessment Techniques of Data and Regulatory
      Changes
           Longer period of observation to comprehensively assess market
            responses to recent regulations adopting new registration system for
            RSPs in Indonesia
           Improved data quality, gathering and reporting procedures, to
            expand existing knowledge of available data to create better
            informed policy choices for TKI




                                                                           21
Avenues for Policy Consideration

    – Involving Relevant Development Actors to Facilitate Migration
           MFIs and NGOs could be convinced to finance migration for formal
            and informal TKIs, under the condition that only formal transfers are
            used for future remittance transfers
           Collateral for Migration could be guaranteed by local communities

III. Formalize and regulate the informal providers, while
     maintaining their accessibility to migrant workers, through:
    – Enabling strategic partnerships between formal and informal
      remittance service providers
           The enhanced private sector participation would reduce transfer
            costs and expand remittance flows
           Account mediators should be part of the formal channel for
            distribution because these informal operators access rural
            communities in Indonesia where no banks have a presence
           Recent regulatory legislation allowing individuals and informal
            corporate entities in Indonesia to legally provide remittance services
            should be properly monitored and implemented



                                                                             22
Thank You for Your Attention!

								
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