A week before Najmus Saqib was kidnapped, BR Research met him at his office, where, quite tragically, he said the following words near the end of his interview: 'we are cracking down against those involved in illegal transfers of foreign exchange and we may be at risk from these people'. The following are excerpts from the interview.
BR Research: Remittances have continued to increase at a rapid pace. Is it solely because of the PRI initiative, or are there other reasons such as the whitening of black money, interest rate differential or tax avoidance?
Najmus Saqib: There is lack of objective research on this issue. There are two elements. One, if someone wants to send money to Pakistan, factors influencing their decision are many; a dependent family, small investment, etc. Secondly, once the decision is taken, then the method of sending money is decided.
We normally talk about PRI and their efforts in the latter context, and not about the decision to remit. Decision and propensity to remit should be a separate issue and means of remitting another one. The question is whether we can comment on the decision to remit based on the means of remitting. Can we assume the means of remitting to be constant? There is a disconnect here because remittance flows are not completely recorded.
According to the World Bank's GEP study on remittances, which is also known as the 'Bible of Remittances', 50 percent of remittance flows are unrecorded globally. And any analysis is not possible unless these data are recorded. Pakistan's remittance growth has been phenomenal. We cannot say for sure that the increase in remittances in Pakistan was because people were sending money home for saving or because of the global crisis until we have complete data.
BRR: How long will it take to document the data completely? NS: We are averaging a billion dollar a month. So by next year, we'll reach $12 billion. But I think we are still far behind. I think once we've reached $16 billion, which is our potential, according to a 2009 World Bank report; our remittance growth will not be as high. Personally, I believe the size can be $20 billion.
We target a growth of 20 percent every year. So, in about 2-3 years we can reach $16 billion. Right now, we assume that a huge chunk of remittances is still not recorded in Pakistan and is coming through informal or unauthorised channels. PRI's current focus is on 'remitting via the right method' and not on 'remit to Pakistan'. The latter is a step for a later stage.
For example, a recent report by PIDE on remittances between Saudi Arabia and Pakistan, 38 percent of the total remittance inflow into Pakistan is remitted through banking channels, 28 percent via hawala and hundi, 17 percent through friends and family and 15 percent carried by the person himself. You can not conduct a good analysis on factors affecting remittances using such scattered sources of remittance inflows?
BRR: But we can still tell if it is the size of payments that is growing or the number of payments?
NS: It's the number of transactions. 85 percent of remittances from the GCC are less than $1000. Out of these, 67 percent are less than $500. How can it be black money being whitened? These are individual-to-individual transactions, like family remittances.
In accounts, compliance is very important. From Pakistan's perspective, 63 percent of the money lands in accounts and this is a big achievement for Pakistan. This was 30 percent two years ago. PRI's target is 80 percent remittances via the bank accounts within one year.
We believe this is a key step towards documentation, and this also has effects on inflation with respect to how the money remitted is used when it enters the system. SBP's report says that remittances have an important influence on banks' liquidity.
BRR: It is claimed that most remittances are used for consumption rather than investments into small business initiatives. What is your view?
NS: This is phase-I of the PRI. Phase-II will focus on savings. In India, a major flow of remittance inflows goes into investment by NRIs. In our case, most of the money that is remitted is used for day-to-day consumption. And the amount of each inflow is not large enough to be set aside for investment anyway.
BRR: How is the situation in countries other than those of the GCC?
NS: Ever since the PRI has been initiated, remittance inflow from the UK has increased. From other parts of Europe, remittance inflows into Pakistan are not very handsome. For example Norway's largest expat community is Pakistani, but most remittances from there are not sent through banks. Similarly, money from Italy, Germany, and France is not sent via the PRI but through other channels.
BRR: What is the reason for that?
NS: It is the outreach. Remittances are sent via four ways:
One, banks have arrangements in other countries, for instance HBL, has a total of 95 branches overseas and most of them are in the Gulf region. This is not a very expansive outreach to encourage inflows from all the other countries. Secondly, there are the MTOs or moneygram companies. These are actually IT companies and not remitting companies. Their model is such, that an IT company shares its remittance systems with operators in overseas countries and with local operators. the earnings are shared between the IT company and the operators in various countries.
Third, banks have agreements with entities abroad for remittances, which are free of cost because they are subsidised and the remitter is not charged. This is the most popular model in Pakistan and the majority of our remittances come through this channel.
Fourth, is the swift model - which is bank-to-bank. But this takes a lot of time.
Our expats in Europe only have the swift method to send money home. Western Union charges a very high fee and the money doesn't even end up in accounts but is given in cash. We are trying very hard to facilitate agreements between international banks and local banks. The situation in Canada and the USA is similar where only a small percentage of remittances is coming via proper channels. We are mainly facing difficulty in finding partners for local banks. This problem is also faced in the Far East.
There is no empirical data to suggest how many Pakistanis are working abroad because while we do have data for those leaving the country, we don't have data for those returning to the country.
A majority of the remittances from the US are sent via illegal channels. It's not completely our fault, the mechanics of a 'hawala' system are very simple, but the problem starts from abroad. It is not legally binding by the local or international law, on the overseas remitting operator to send money to a licensed operator in Pakistan, even though they will give the customer a receipt.
BRR: What about the subsidy that you were talking about earlier where the government bears the banking fee? Tell us more about that.
NS: That scheme was initiated in 1985, but people are coming to know about it now when the PRI was initiated. But this is a separate scheme from the PRI and not related to it.
BRR: What is the benefit of such a scheme?
NS: There are many benefits. It acts as a counter to illegal and informal channels. You have to offer some incentives to the remitter to encourage the use of legal channels. Cost is an important factor, so this is an important initiative to help bring remittances to an optimal level.
BRR: What is the economic significance of bringing remittances into the documented fold?
NS: Without bringing the remittances in the legal chain, foreign exchange was not coming in the country which is a very important factor. As for the money which had to be remitted back to the country, but was not sent because of the existence of only illegal channels such as hawala and hundi; it could have impacted the exchange rate.
An unofficial exchange rate is issued daily by these informal channels; an unofficial market is simultaneously running. When the demand for sending money abroad increases, hawala managers offer a better rate to a remitter abroad, and charge a higher rate here at home, and the premium goes up.
The illegal market generates its own supply and demand. PRI timing and FIA action has had a significant impact on the illegal market. Progress of the PRI has been quite commendable of late, but nobody appreciates this at all. It is one of those policies that should be highlighted not only locally but also internationally. BRR: Has any study been conducted that highlights the impact of remittances on the economy, eg on the health, education or other social sectors?
NS: Unfortunately, no. Work has been done in pieces, but nothing holistic has been done. A very basic study has been undertaken by the PIDE which can be looked into. BRR: Would you like to say something about exchange companies? NS: It is important to first understand the remittance system. There are 2,200 active branches of post offices in the country. About 250-300 of these are automated while the others are manually operated. Post offices have a market share of 2 percent while their reach is quite large.
Exchange companies have around 550 branches but a market share of 14 percent. Banks have around 9000 branches and an 84 percent market share. It is important to highlight the outreach.
Exchange companies are playing a very significant role because of their efficient, personalised services. They have a competitive advantage because of services like extended service hours. So educating and communicating with people is very important. Banks have to make saving products for NRPs. They are not targeting that market and are not developing products to encourage remittances.
Secondly, there are capacity issues within basic payment mechanisms of our banks as well. Visionary people in banks are largely absent. By merely changing policies, and this applies to other sectors of the economy too; the desired effect cannot be obtained. Until SBP guides these banks in detail, nothing much can be done by the banks themselves.
BRR: What about mobile banking? NS: There are many misconceptions regarding mobile banking. If you have an account in any bank, and you wish to check the balance on that account, you can use the ATM, internet, and similarly for funds transfer.
The ideal scenario for remittances will be when a remitter and beneficiary both have cell phones and the beneficiary accesses funds from a particular source. This is happening in Qatar and Kenya. This model has yet to expand in the world and in Pakistan.