How Can Nigeria Divert Remittance Flows to Formal Channels?

Remittances play an instrumental role in Nigeria’s economy, serving as a major source of financial support for families across the country. Exceeding $20 billion in 2023, they originate mainly from Nigerians employed abroad in various sectors, such as healthcare, education, and technology, particularly from the US and UK.^{1, 2} These funds have surpassed the country’s foreign direct and portfolio investments ($2.9 billion in 2022) and go beyond bolstering the national foreign exchange reserves.³ Remittances are vital for household economies, directly supporting daily expenses, healthcare, education, and small business initiatives.⁴ The impact of these funds is most pronounced among children and the elderly, who benefit from enhanced access to education, healthcare, and a safety net in old age, driving forward not just economic but social prosperity.⁵ Through this lens, remittances are seen not only as a financial mechanism but as a fundamental contributor to the welfare and growth of Nigerian society, underpinning the importance of these funds in achieving broader economic and social objectives.

Yet, an estimated 50% of remittances to Nigeria are channeled through informal networks, chiefly due to the stark divergence between the official and parallel exchange rates.⁶ Informal channels provide more favorable exchange rates to senders than formal ones, though at the cost of reduced customer protection and limited access to further financial services (Box 1). Politically, reducing this divergence poses significant challenges. Efforts to align these rates can be met with resistance due to concerns over inflation, potential impacts on foreign investment, and the interests of powerful stakeholders who benefit from the status quo.⁷ Furthermore, such reforms could lead to short-term economic instability as prices of many dollar-linked, basic goods including transportation fuel will sky-rocket following the reforms, making them a less attractive option for policymakers who must balance immediate economic pressures with long-term financial health.⁸

Consequently, this complex interplay of economic and political factors in Nigeria necessitates pragmatic alternative strategies that are politically and administratively feasible means for improving the uptake of formal remittance channels. These include expanding the current scope of the remittance licensing regime, supporting innovative remittance products such as digital peer-to-peer (P2P) remittance platforms, and expanding financial access through agency banking with the continued roll-out of the National Financial Inclusion Strategy (NFIS).⁹

Box 1: Hawala Explained

One informal remittance channel that many Nigerians turn to is ‘hawala’, an unregulated network of agents.

Say a Nigerian worker in Qatar wants to send 500 riyals to her family in Nigeria. She gives the 500 riyals to a hawala agent in Qatar at a negotiated exchange rate and pays a small processing fee. The agent gives the worker a code, which the worker sends to her family. The family finds a local agent in the same hawala network, provides the code, and receives the agreed amount in Naira. No money immediately leaves Qatar, and no banks are involved. Hawala agents periodically reconcile transactions among themselves and settle any unpaid balances with transfers of funds.

This system can prove hard to beat for workers and families with little access to formal payment channels, and even for those who do have access if exchange rates are more favorable to receivers than rates in formal channels. The hawala channel comes with notable risks such as limited recourse for failed transactions or fraud and inadvertent exposure to illicit activities facilitated by some agents. Illustratively, the United States government in 2015 imposed sanctions on certain individuals involved in a hawala network with ties to Afghanistan and Pakistan, after investigations revealed that the network aided the transfer of funds to terrorist organizations and the money laundering of proceeds from drug trafficking.¹⁰

Expanding the Remittance Licensing Regime

A pivotal step in enhancing formal remittance channel uptake is the expansion of the Central Bank of Nigeria’s (CBN) remittance licensing guidelines to include a wider range of FinTechs and micro-finance institutions.¹¹ This approach is aimed at delivering competitive fees and convenience comparable to informal channels. FinTech companies, characterized by their low-cost digital transfer services, offer greater flexibility in disbursement methods such as bank accounts, mobile money accounts, and virtual wallets. These innovations, along with digital user verification processes (which reduce time to validate users from weeks to seconds), streamline remittance transactions, thereby boosting efficiency and user experience.

Malaysia and the Philippines’ significant revamp of their remittance licensing regimes serves as a pertinent case study for Nigerian policymakers. The countries updated and streamlined licensing processes, which attracted new digital service providers and increased competition, leading to lower costs of remittances for senders (close to the UN’s target fee of 3% of the amount remitted).¹² Beyond streamlining licensing requirements, policymakers in Malaysia and the Philippines drove down remittance costs by collaborating with domestic industry bodies for capacity-building and certification and by simplifying approvals for cross-border partnerships among remittance providers.

Including micro-finance institutions in the formal remittance market can enable more remittance disbursement avenues. This expansion is particularly significant considering that micro-finance institutions serve over 13 million Nigerians, including 10 million who are otherwise unbanked, thus playing a crucial role in financial inclusion and enhancing the reach of formal remittance services.¹³

Supporting Innovative Remittance Products

Another potential solution involves policymakers advocating for formalizing innovative remittance products, such as digital peer-to-peer (P2P) remittance platforms and promoting the integration of add-on services like insurance products. By enabling transactions at user-determined exchange rates, licensed digital P2P platforms could offer more favorable exchange rates for remittance senders, even without state-led unification of parallel and official exchange rates, encouraging a substantial shift of remittance flows from informal to formal channels. Formalization will not only increase transparency in remittance fund flows but also enhance customer security in P2P trades.

Tailoring add-on product offerings in formal channels to common uses of remittances, such as healthcare, education, and construction, can further incentivize formal channel usage. By encouraging add-on products in formal channels through industry roundtables and lower regulatory barriers, policymakers can make formal channels more appealing. This strategy can draw inspiration from successful implementations in countries like Bangladesh, where remittance products are closely aligned with the needs of remittance senders and receivers.¹⁴ Syed Zain Al-Mahmood illustrates this for the Wall Street Journal, detailing how remittances platforms like bKash can be used for other important financial activities like savings and utility bill payments.¹⁵

Expanding Access through Agency Banking

One final potential strategy involves the CBN continuing to implement its National Financial Inclusion Strategy, which focuses on accelerating agency banking in Nigeria, especially in underserved rural areas. Agency banking is a model where traditional banks or financial institutions extend their services to customers through a network of licensed agents such as grocery stores and telecom kiosks, enhancing financial access in areas without bank branches. By leveraging existing lwocal infrastructures and businesses, agency banking can provide essential financial services including remittance payouts. The increased presence of agents can significantly reduce transaction costs and improve the reliability and speed of remittance services, further encouraging the shift from informal to formal channels.

Addressing Potential Challenges Ahead

While the proposed strategies to redirect remittance flows in Nigeria are practical, they are not without challenges. Market disruption from expanding the remittance licensing regime could lead to a fragmented market, but this can be managed by strengthening regulatory oversight with technology tools and risk-based audits. Additionally, counterparty risk (i.e., non-compliance with agreed terms) in digital P2P platforms is a concern; however, implementing robust verification processes, escrow services, and transaction monitoring can mitigate the risk.

Moreover, the potential for misuse of innovative remittance platforms, particularly for illicit financial activities, necessitates stringent regulatory oversight and advanced security protocols. French regulators found several instances of such misuse in 2021 during an investigation of payment service providers (PSPs).¹⁶ Some of the providers, mainly those offering “banking as a service,” had weak identity verification and transaction monitoring protocols in place, which enabled criminals to initiate fraudulent wire transfers with ease. To combat these vulnerabilities, regulators could mandate security procedures such as multi-factor authentication and “know your customer” (KYC) & “anti-money laundering” (AML) compliance checks before transactions can be processed. Such measures not only ensure the integrity of financial transactions but also bolster the overall security framework of remittance services, protecting them against exploitation for illicit purposes.  

With careful consideration and mitigation of these challenges, the proposed strategies can enhance Nigeria’s remittance flows through formal channels, thereby amplifying the impact of remittances on both the recipients and the overall Nigerian economy.

1. World Bank and KNOMAD, “Leveraging Diaspora Finances for Private Capital Mobilization,” Migration and Development Brief 39, December 2023, https://www.knomad.org/sites/default/files/publication-doc/migration_development_brief_39_0.pdf. ↩︎
2. Andrew S. Nevin and Omomia Omosomi, “Strength from Abroad: The Economic Power of Nigeria’s Diaspora,” PwC, 2019, https://www.pwc.com/ng/en/pdf/the-economic-power-of-nigerias-diaspora.pdf. ↩︎
3. Yemi Kale, “Flashnotes: Light Not Yet at the End of the Tunnel for Foreign Capita?” KPMG in Nigeria Issue 13, January 5, 2024, https://assets.kpmg.com/content/dam/kpmg/ng/pdf/Flashnotes%20issue_Final%20+.pdf. ↩︎
4. Manuel Orozco and Bryanna Millis, “Remittances, Competition and Fair Financial Access Opportunities in Nigeria,” USAID, October 2007, https://www.marketlinks.org/sites/default/files/resource/files/ML5073_mr86remittancescompetitionandfairfinancialaccessinnigeria.pdf. ↩︎
5. Nnaelue Godfrey Ojijieme, Xinzhu Qi, and Chin-Man Chui, “Do Remittances Enhance Elderly Adults’ Healthy Social and Physical Functioning? A Cross-Sectional Study in Nigeria,” International Journal of Environmental Research and Public Health 19, no. 4 (2022): 1968. https://doi.org/10.3390/ijerph19041968. ↩︎
6. Barry Cooper and Antonia Esser, “Where Are the Flows? Exploring Barriers to Remittances in Sub-Saharan Africa,” Cenfri, April 30, 2020, https://cenfri.org/publications/where-are-the-flows/. ↩︎
7. Anthony Osae-Brown and Alonso Soto, “Navigating Nigeria’s Foreign-Exchange Maxe to Fair Value,” Bloomberg, July 13, 2020, https://www.bloomberg.com/news/articles/2020-07-12/a-user-s-guide-to-navigating-nigeria-s-foreign-exchange-maze?embedded-checkout=true. ↩︎
8. Elliot Smith, “Africa’s Largest Economy is Battling a Currency Crisis and Soaring Inflation,” CNBC, February 21, 2024, https://www.cnbc.com/2024/02/21/africas-largest-economy-is-battling-a-currency-crisis-and-a-crumbling-economy.html. ↩︎
9. Central Bank of Nigeria, “National Financial Inclusion Strategy (Revised),” Financial Inclusion in Nigeria, October 2018, https://www.cbn.gov.ng/out/2019/ccd/national%20financial%20inclusion%20strategy.pdf. ↩︎
10. Mohamed Abouzied, “The Hawala System: A Risky Alternative to Traditional Banking,” Acams Today, March 10, 2023, https://www.acamstoday.org/the-hawala-system-a-risky-alternative-to-traditional-banking/. ↩︎
11. Kinyanjui Mungai and Laura Munoz Perez, “Money Transfer Operators in Nigeria: Regulation and Licensing Options,” Cenfri, August 5, 2020, https://cenfri.org/articles/money-transfer-operators-in-nigeria-regulation-and-licensing-options/. ↩︎
12. Souraya Sbeih, William Cook, and Stefan Staschen, “Cheaper Remittances: How Malaysia and the Philippines Paved the Way,” CGAP, September 9, 2019, https://www.cgap.org/blog/cheaper-remittances-how-malaysia-and-philippines-paved-way. ↩︎
13. World Bank, “Nigeria’s Microfinance Bank Sector: Review and Recommendations,” December 2017, https://doi.org/10.1596/31320. ↩︎
14. UNCDF, “Migrant Money,” https://migrantmoney.uncdf.org/how-we-work/. ↩︎
15. Syed Zain Al-Mahmood, “Mobile Banking Provides Lifeline for Bangladeshis,” The Wall Street Journal, June 23, 2015, https://www.wsj.com/articles/mobile-banking-provides-lifeline-for-bangladeshis-1435043314. ↩︎
16. FATF, “Illicit Financial Flows from Cyber-Enabled Fraud,” November 2023, https://www.fatf-gafi.org/content/dam/fatf-gafi/reports/Illicit-financial-flows-cyber-enabled-fraud.pdf.coredownload.inline.pdf. ↩︎