The backroads of El Salvador – Central America’s smallest and most densely populated country – are plastered with billboards advertising Western Union, MoneyGram and a dizzying variety of lesser-known local wire transfer services. No wonder. This year, El Salvador will receive $3 billion in family remittances from the United States, the equivalent to 16% of its GDP. That makes El Salvador more dependent on these “remesas” than any other country in Latin America.

An estimated 2.9 million Salvadorans live abroad, a consequence of the country’s 12-year civil war that killed 75,000 people and forced a quarter of the population to flee. These hard-working expatriates, 95% of whom live in the United States, send an average of $1,000 a year to their families back home.
But as in the rest of Central America, the money has done little for El Salvador’s financial system or economic development.

“The banks are just acting like money transfer agencies,” says Donald Terry, head of the Inter-American Development Bank’s Multilateral Investment Fund. “They’ve gotten involved in transferring the money, but not offering the people bank accounts, so the money still stays outside the financial system, which is crazy.” He adds that the IDB is trying to change that. “We believe that, if given a chance, this can be a good business for the banks. We can turn these remittances into economic development programs,” Terry says. “You get more economic development when people become more credit-worthy. You get a much higher multiplier effect if people can get small-business loans or home mortgages.”

Remittance holder: your country needs you
The IDB predicts that migrants in the United States, both legal and undocumented, will have sent a record $45 billion in 2006 to support relatives throughout Latin America and the Caribbean. Such outflows would represent a 51% jump compared to 2004. The average migrant wires $300 a month to his family, with the bulk of remittances coming from California, Texas and Florida – all states with large Hispanic populations.

According to the IDB, before 2000 money-transfer operators kept 10% or more of each transaction as a fee while at least another 5% was charged through an ever-changing system of foreign exchange mark-ups. Since then, the average cost of sending $200 from the United States to Latin America has dropped considerably, to $11, or 5.6% of the cost as of mid-2006.

 ”This is an easy way for the banks to make some money, but there doesn’t seem to be much interest in getting these people as customers,” says IDB consultant Greg Watson. “We found that 54% of these funds are being distributed through a type of deposit institution,” Watson adds. “But in many of these cases, large banks are acting like a bodega for the money transfer companies. You’ve got 10 million families throughout Latin America coming in and picking up their remittances at a separate window, but these financial institutions aren’t offering these people bank accounts.”
The culprit is cultural and historic barriers, Watson says.

“There’s a perceived lack of profitability, a deficiency of product, and legal and regulatory obstacles,” he explains. “The main problem is a lack of commitment by management to serve these people, and cultural assumptions that the poor don’t save any money. Yet surveys we’ve done have shown that in the few cases where a concerted effort has been made to turn remittance customers into deposit-holders, they’ve had a 30% success rate.”

Retail Bank Boom
Extrapolating this, Watson argues, “If banks were to seriously approach the recipient market in the region and convert these people into deposit accounts, it could easily result in more than three million new clients and $1 billion in deposits every year – and this is a very conservative estimate.”
Sam Fox, senior director for Latin American structured finance at Fitch Ratings, says every one of those banks wants to increase their retail footprint for this segment of the population that receives remittances. However, that is not easy.

“These people don’t use banks. A lot of them don’t even have bank accounts,” Fox says. “They live their lives in a cash world. They’ll take the $200 they get in a remittance and buy food with it. What all the banks want to do is tie in that segment of the population and make them customers of the bank, and start offering them services. They think there’s significant growth potential among all these people who don’t use the banking system. They recognize the power of remittances, and all this cash that goes through this system but doesn’t stay in it.”

According to the IDB’s Watson, 85% of the funds wired to El Salvador in the form of remittances go to consumer spending on anything from groceries to TV sets, to cell phones to paying utility bills. “Surveys also show that about 10% of remittances are saved in some manner, outside of the formal financial system – like in a jar or a shoebox,” he adds. “We always thought that was because remittance recipients were not close to a bank branch, so they have to use money transfer companies and pick up their cash at a corner store. But that’s not true.”

He adds: “It’s really mind-boggling. Microfinance institutions tend to have a very low default rate, and we’re talking about the same population here.”
Yet when banks make the effort to tap this market, it works. The IDB cites as significant examples of this success Ecuador’s Banco Solidario and El Salvador’s Banco Salvadoreño. “In both cases, the institutions have consciously created products to meet the needs of remittance recipients, and have enjoyed increased deposits and market share,” says the IDB.

Another bank that’s making a difference is El Salvador’s Banco ProCredit, which is working with the IDB on a remittances project. Stefan Queck, the bank’s general manager, says ProCredit, with 28 branches throughout the country, handles 12,000 to 15,000 remittance transactions a month totaling $2.5 million to $3 million. This translates into roughly $200 per transaction. ProCredit has $170 million in assets, putting them around the number 10 slot in the domestic financial system.

“Essentially, we are trying to enhance customers’ possibility for using remittances. Some of these things are not overly innovative, but having a debit card and access to an ATM would be a new thing for these people,” Queck says. “You have a high degree of people here who live off family remittances. It’s a substantial part of their income. You also have a proliferation in the US of agencies that provide that service; they’re essentially sub-providers. Over the last couple of years, the traditional providers have looked for additional outlets, and a number of alternative conduits have sprung up.”

Queck says he’d like to offer his customers a safe conduit for their money to build a solid base for their future, noting that “our intent is to draw people who receive remittances into the financial system.”

Securitizing the Flow
On the wholesale side, there’s been some interest in securitizing assets held in the form of remittances, though it has slowed in recent years. This is mostly due to the bullish conditions for issuers who can raise ample cash either through plain vanilla bond deals at low coupons, the bank market or increasingly liquid domestic markets.

“Securitizing remittance flows . . . helps the institution by providing liquidity and reduces the need for additional equity,” says Queck. “Currently, we have no leverage constraints and no need to generate liquidity. We have $90 million in deposits from 127,000 depositors. Yes, we could engage eventually in securitizing remittance flows, but it’s only one option. I could equally securitize my loan portfolio.”

According to Fox, “In order to do a remittance securitization, you have to be one of the biggest and most important banks in the system, which means you have the biggest footprint. Smaller banks don’t have this level of sophistication.”

The structure has been popular over the last few years in Brazil and Turkey. The last MT100 from Central America was a $125 million Banco Salvadoreño five-year floater that closed in September 2006. The deal through Wachovia refinanced a 2004 issue and carried a coupon of 115 basis points over Libor. It was placed mainly with buy-and-hold investors and rated BBB.

The Central American deal flow is entirely unrepresentative of the potential, given exponential growth in remittances. Banks expect the structure to return when broader markets take a hit. “Some will keep it for a rainy day,” predicts a banker specialized in these transactions. LF