Informal remittances

Definition

Informal remittances refer to money sent by migrants to their home countries through unofficial channels, such as friends, family, or informal money transfer services, rather than through traditional banking systems. This form of remittance is often less regulated and can provide critical financial support to families in the home country, contributing significantly to local economies. These remittances can help cover basic needs, healthcare, and education expenses for families, acting as an essential lifeline in regions where formal banking services may be limited.

5 Must Know Facts For Your Next Test

1. Informal remittances can often be faster and cheaper than formal methods, making them attractive to migrants looking to send money home.
2. This type of remittance is crucial in many developing countries where access to formal banking is limited or non-existent.
3. Informal remittance networks are often built on trust and community ties, relying on personal connections for transfer.
4. Estimates suggest that informal remittances can represent a significant portion of total remittances sent home by migrants, sometimes even exceeding formal channels in specific regions.
5. Governments and organizations are increasingly recognizing the importance of informal remittances and are looking for ways to incorporate them into national economic strategies.

Review Questions

• How do informal remittances impact local economies in the home countries of migrants?
  • Informal remittances significantly impact local economies by providing vital financial support for families, which can help meet basic needs like food, healthcare, and education. This influx of funds can stimulate local businesses and contribute to economic stability in communities that rely heavily on these funds. Moreover, since informal remittances are often unregulated, they can quickly reach recipients without the delays typically associated with formal banking systems.
• Compare and contrast informal and formal remittances in terms of their reliability and accessibility for migrants.
  • Informal remittances tend to be more accessible for migrants, especially in regions with limited banking infrastructure. They can offer quicker transfer times and lower costs compared to formal channels. However, the reliability of informal remittances can vary due to the lack of regulation and potential risks associated with using unlicensed services. In contrast, formal remittances are generally more reliable due to regulatory oversight but may involve higher fees and longer processing times.
• Evaluate the implications of relying on informal remittances for long-term economic development in migrant-sending countries.
  • Relying heavily on informal remittances can have mixed implications for long-term economic development. While these funds provide immediate support and boost consumption in local economies, they may also create dependency among recipients, limiting incentives for local economic growth and self-sufficiency. Additionally, without proper regulation and integration into the formal economy, informal remittances may lead to challenges such as financial instability and lack of data for policymakers aiming to develop effective economic strategies.

Related terms

formal remittances:

Money transfers sent through official banking systems and licensed money transfer services, typically subject to regulatory oversight.

migrant workers:

Individuals who move from one country to another for employment, often sending remittances back home to support their families.

money transfer operators: Companies that specialize in transferring money across borders, which may operate within formal or informal frameworks.