The value of workers' remittances

The value of workers' remittances

Paul Sutaryono, Jakarta

There is a business opportunity besides tragedy in illegal
migrant workers. Every month most migrant workers send money to
their spouses or relatives in Indonesia. In banking terminology,
such a transaction is called remittances. How are the national
banks competing to win the handling of those remittances?

Today, there are some five million Indonesian migrant workers
abroad (mostly in the Asia Pacific and the Middle East), each
receiving an average monthly salary of US$250. This means
remittances of about $1,25 billion per month or about $15 billion
(Rp 135 trillion) per year. Obviously, this means huge foreign
exchange earnings for the state.

The remittances are today the focus of national banking. Why?
The remittances are pleasant and attractive earnings.

If we look at both the trend and progress of international
banking carefully, retail banking is the prime model for
achieving operational income. The question is what exactly is
retail banking.

Retail banking is a subset of commercial banking. Retail
banking refers to the provision of banking services for
individuals. This includes deposit taking, consumer lending for
home, car and other purchases, credit card services, transaction
services and even insurance and investment management services
for individual clients.

Retail banking brings operational revenue for banks. National
banks also enjoy such an income. It is called fee-based income.

The point is that the fee-based income is meant to offset the
competitive decline in traditional corporate lending services.

In fact, remittances are one of the retail banking businesses.
So what's the story? Indonesia is the biggest source of migrant
workers throughout the world. Indonesia sends them to Malaysia,
Singapore, Brunei Darussalam, Taiwan, Japan, Thailand, Hong Kong,
Kuwait, Bahrain, Qatar, Saudi Arabia, Oman, Jordan, Greece,
Yemen, Cyprus and United Arab Emirates (UAE).

The remittances sent by Indonesian migrant workers are usually
in U.S. dollars. The question which will follow is how the
national banks can earn the remarkable income?

Firstly, charges. When the relatives of Indonesian migrant
workers take the funds through the national banks, they will be
subject to administrative charges. This is one of the various
incomes for the national banks. The charge is relatively small.
It, however, will form a mound. It can be said that Malaysia
ranks second as the source of remittances following Saudi Arabia.

Secondly, the difference in exchange rates. The remittances
are mostly sent in U.S. dollars. So, when their relatives take
the funds in rupiah, they will be charged in lieu of exchange.
What does it mean? This means they are regarded as selling the
U.S. dollar and buying rupiah. They will receive the exchange
rate of the U.S. dollar against the rupiah in line with valid
board rates. The difference in the exchange rates is relatively
tiny in the beginning. But it will grow bigger and bigger. The
key word is that it will increase in size to become attractive
revenue for national banks.

Unfortunately, the Malaysian ringgit (MYR) is not allowed to
go out of Malaysia. This policy has made Malaysian banks send
remittances to Indonesia in rupiah.

Thirdly, the growth of funds. National banks also enjoy the
funds of the remittances that go directly to their saving
accounts.

There are few banks involved in handling the remittances. Let
us take Bank Mandiri, BCA, BNI, Bank BRI, Bank Danamon, BII, Bank
Permata and Bank Niaga as concrete examples.

Bank Niaga is one of the interesting examples to pay close
attention to. The majority of Bank Niaga's shares or 52.82
percent are owned by Commerce Asset-Holding Berhad, Malaysia as a
holding company. Thus, Bank Niaga as their sister company in
Indonesia will receive a lot of the remittances sent by
BumiputraComerce, Malaysia one of commercial banks of the holding
company.

The same step was also taken by Malayan Banking Berhad
(MayBank), Malaysia, which owns 91.2 percent shares of a
subsidiary in Jakarta, PT Bank Maybank Indocorp. Such a business
relationship is a windfall. It was followed by BNI and PT Pos
Indonesia (Posindo) that agreed to work toward cooperation in
handling remittances. This step is very strategic in
strengthening future cooperation.

The bank can increase their market share in remittances. Why?
Because Posindo has about 3,500 offices scattered in Indonesia.
Posindo exists in all villages. By having a channel of
distribution, the bank will be able to compete more in
remittances.

In sending the remittances to remote areas in Indonesia,
foreign banks called correspondent banks are often confused. Let
us take Bank BRI, which has thousands of village units throughout
Indonesia, as an example. The village units are under a branch.
Usually, Indonesian migrant workers who are going to send money
only know their villages close to the Bank BRI Village Unit --
without mentioning the names of either the city or regency. Such
data may result in a delay in the payment of remittances.

Here, the correspondent banks need staff members who know
those areas well. The staff members are called remittance
representatives. They are basically the employees of national
banks who are placed in their correspondent banks. Principally,
they are responsible for marketing this remittance transaction
abroad.

Fundamentally, the national banks not only place remittance
representatives in their correspondent banks abroad, but they can
send relationship managers as well. The latter, of course, will
have more responsibilities than remittance representatives.

These strategies are potent and effective weapons to win the
competition in gaining the remittances, which is growing fiercer
and sharper. However, it does not end there. The more important
thing is how to build the value of Indonesian migrant workers in
the future?

The manpower ministry and one state-owned bank, BNI, have
agreed to work together in posting, protecting and empowering
them. The agreement was signed on May 26, 2004. It will enable
Indonesian migrant workers to monitor their own funds opened in
the bank.

Each of them is obliged to open a saving account at the bank
before leaving Indonesia for abroad. By having the account, the
money they send will go into the account concerned or straight
through processing (STP) as mentioned above. The funds are
expected to grow for a longer time to earn interest.

The main objective in the long run is that when the holders of
the accounts have returned home they will have enough savings to
be used as capital to start a business. Such a scheme is hoped to
be able to create a better quality of life.

The Indonesian government through the bank intends to have a
one-stop banking system in managing the funds sent by Indonesian
migrant workers. The main point of this is to improve their
welfare and the safety of their funds; improving their value to
be able to enjoy a brighter future.

The writer is a banking analyst.