Understanding Remittance: The Advantages and Disadvantages

Remittances have become an essential component of the global financial system. A remittance, in the most basic sense, is a money transfer from one person to another, generally from an overseas worker to their family back home. Remittances have been an increasingly common means for workers to assist their family and communities as global mobility has increased and digital technologies have become more widely available. In this primer, we’ll go over the fundamentals of remittances, how they function, and why they’ve become so crucial to millions of families throughout the world.

What is Remittance?

First off, let’s start by understanding the meaning behind the word. What is a remittance? Remittances are the exchange of payments between parties as a bill, an invoice, or even a gift. However, “remittance” also refers to cash sent by migrants to their families in their home country while working and living abroad. These are also known as migrant or labour transfers.

Remittance literally means “send back.” In most cases, a remittance is the transfer of funds to a receiver who resides outside of the country. Most households in under developed and slow-growing economies rely mainly on remittances as their primary source of income. Foreign workers typically transfer a percentage of their earnings to their relatives back home.

Remittance Transfers

How are remittance transfers done? The majority of money transactions are now completed electronically. You can do this by using a money transfer service or a bank’s electronic payment system. The individual sending the money pays a charge for the transfer via this method. Because digital transfers often take less than ten minutes and save time, they are frequently the most popular method of sending money abroad.

People in tiny, developing nations with poor economic growth rely heavily on remittances because family members who work abroad give them a large portion of their income. For example; when a natural catastrophe strikes, money brought home from overseas is critical because it helps fund recovery operations. These factors significantly raise living standards in developing nations with modest economic growth. People in less developed nations can create bank accounts using these remittances, which is beneficial for economic progress.

In this article, we’ll take a look at the advantages and disadvantages of remittances and why they have become such a popular way of sending money globally.

What are the Advantages of Remittances?

  • Financial Inclusion

Remittances serve to improve financial inclusion, particularly for people who are unbanked or underbanked. Even though they do not have a bank account, individuals can access and spend monies received from overseas.

  • Family Support

Remittances are an important source of assistance for families and communities. Workers overseas frequently send money home to help their families and meet basic requirements such as food, shelter, and education.

  • Economic Stimulation

By boosting the flow of money into the nation, remittances can promote local economies. This can lead to job creation and support for small enterprises, both of which contribute to economic growth.

  • Convenient and Accessible

With the development of digital technology, remittances have grown easier and more convenient, allowing individuals to send and receive money swiftly and conveniently. This has enabled employees abroad to assist their family without having to wait weeks or months for funds to arrive.

What are the Disadvantages of Remittances?

  • High Fees

Workers who are already making little income may find it difficult to pay the high fees that some remittance firms demand to transmit money.

  • Exchange Rate Fluctuations

If remittance recipients are receiving funds in a different currency, exchange rate swings might cause large losses.

  • Lack of Financial Education

Many international workers and their families do not possess the financial literacy and know-how necessary to manage the money they receive in remittances. These issues usually result in the partial loss of the said financial resources. 

  • Dependency

An excessive dependence on remittances can foster a culture of dependency in which families rely only on the money they get from abroad rather than building their own local economies and seeking other sources of income.

Remittances have grown to be a significant source of income for countless families all over the world. They provide a number of benefits, like enhanced financial inclusion and assistance for families, but they also have significant drawbacks, including hefty fees and fluctuating currency rates. However, remittances will continue to play a significant role in the world’s financial system as long as people move for employment and need to provide for their family back home.

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