Globally interconnected: The Kingdom’s international workforce offers remittance potential

Saudi Arabia’s demographic profile helps to explain the significant position of remittances in the nation’s current account. After a number of years of net emigration, the turn of this century saw a reversal of trend to produce a net immigration rate of 19.6 migrants for every 1000 people between 2000 and 2005, according to the UN Economic and Social Commission for Western Asia (ESCWA).

DIVERSE LABOUR POOL: The origins of these flows were widely dispersed. Males from the Indian subcontinent, the GCC and North African countries such as Egypt, and a significant number of females from South-east Asia, were the most prominent groups attracted to the Kingdom’s rapidly expanding economy. They secured positions across a wide range of sectors, from energy to health to education, as well as in the expanding service industries which grew on the back of an increasingly affluent population. The contribution of these different groups was just as dispersed in the vertical sense, with expatriates finding employment from the boardroom to the building site, and all stations in between.

This pattern remains in place today, with ESCWA estimating that an average of 1.2 people arrived in the country per 1000 population between 2005 and 2010, and that 9,060,433 international migrants were living in the Kingdom as of 2013, which represents around 31.4% of the total Saudi population. At the same time, revision to the labour code in 2013 (see Construction chapter) has also seen up to 1m migrants depart the Kingdom under an amnesty agreement completed in 2013.

The results of this phenomenon can be clearly discerned in central bank data. According to the Saudi Arabian Monetary Agency, remittances have been playing a major role in the Kingdom’s balance of payments since 2004, with SR50.8bn ($13.54bn) sent out of the country by its expatriate workforce. Remittance growth since that time has been constant, with 2009 seeing the single biggest year-on-year increase of 22%. By 2012, remittance flows had reached a new high of SR107.4bn ($28.63bn), a 3.7% expansion on 2011 and a figure that represented 11.6% of total private HEAVYWEIGHT: All this has served to establish Saudi Arabia as something of a remittance giant on the world stage. According to data from the World Bank in 2012, remittance flows from the Kingdom were the second largest internationally after the US.

In terms of destinations, India received the lion’s share of the 2012 total, with just over $8bn, followed by Egypt ($5.5bn), Pakistan ($3bn), the Philippines ($2.9bn), Bangladesh ($1.3bn) and Sri Lanka ($1bn). Data from 2013 shows that expatriate remittance flows continue to grow, with the first 11 months of that year seeing a 17% increase over 2012, with a total of approximately SR133.3bn ($35.5bn).

The size of the remittance market in the Kingdom makes it one of the most efficient in the world, with the average cost per $200 running at around 4.5%, according to the National Commercial Bank (NCB), ranking it alongside Russia as the most cost competitive in the global marketplace.

However, it is not only the scale of the remittance industry that makes it far cheaper to send money from Saudi Arabia than other markets such as South Africa (where the NCB estimates that costs can run to as much as 20%), it is also a result of the fact that the market has expanded beyond the money transfer services that grew out of the telegraph businesses of old, such as Western Union, to include an increasing number of banking sector players.

BANKS ON BOARD: A report issued in December 2013 by Aljazira Capital revealed the crucial role played by remittance activity in the balance sheets of some Saudi lenders.

Some 24.4% of Bank Albilad’s total banking income in 2012, for example, was derived from its remittance services business, the development of which has driven a 29.5% compound annual growth rate for fee income between 2007 and 2012. The bank’s remittance arm, Enjaz Banking Services, is a good example of how Saudi lenders can successfully step into the money transfer market, which in other jurisdictions has been dominated by dedicated operators such as Western Union, MoneyGram, TeleMoney and Xpress Money.

The Enjaz service is one of the largest remittance networks in the Kingdom, with 144 centres distributed around the nation as of 2012, which carry out business for 12 hours a day and 365 days a year. The bank has hired multilingual staff to reflect its international client base and inked numerous agreements with banks from across the globe in order to facilitate international money transfers to remote areas of destination countries.

Other lenders have followed suit. One of the largest is the Samba Financial Group – its SpeedCash centres can be found in locations across the country, and provide a channel by which clients can remit funds to bank accounts in a total of 12 countries, including Egypt, India, Bangladesh, Indonesia, Pakistan, Sri Lanka, the UK and the US. Transaction costs for the service are similar to those offered by dedicated money transfer companies.

NEW COMPETITION: The investment made by banks in personnel and infrastructure in order to capture remittance business has made the sector one of the most competitive in the world, and recent developments are likely to spur the contest still further.

In February 2013, the Saudi Postal Corporation (Saudi Post) made an interesting addition to the fray when it signed a deal with Alinma Bank to provide foreign remittance services at a nation-wide level.

According to the new agreement, Saudi Post will accept remittance funds through its network of more than 600 branches, which is larger than that of the nation’s largest bank, Al Rajhi, while the transfers will be accessible via electronic link provided by Alinma Bank, with the commission for the transactions split between the two organisations. Additionally, Alinma plans to open dedicated branches for remittance services, which – alongside its arrangement with Saudi Post – should help to establish it as a key player in the remittance market.

COLLABORATION: In December 2013, news of another market development hit the remittance sector. Riyad Bank (RB), one of the largest retail players in the sector with a network of more than 300 branches, struck a landmark deal with Western Union to offer remittance services through its new Eztransfer arm – the first branch of which is already open in the capital city of Riyadh.

The deal brings advantages to both parties, allowing the specialist money transfer operator to strengthen its network and provide increased accessibility to new and existing customers, while RB will be able to take advantage of Western Union’s expertise in adding to its portfolio of services.

Speaking at the announcement of the agreement, Jean Claude Farah, Western Union’s president for the Middle East, Africa Asia-Pacific, Eastern Europe and the Commonwealth of Independent States region, underlined the importance of the Saudi market to the company’s global business.

“Saudi Arabia is the largest and one of the important markets for Western Union in the region due to the sheer size of remittance transactions and volumes, mostly outflows though also inflows as well. With millions currently employed in the Kingdom, the need and demand for convenient and reliable money transfer services is continual. Growing our location base is fundamental to maintaining our market strength as well delivering on our service promise to our consumers,” Farah said.

Established players such as Western Union and the new market entrants of 2013 believe that there is room for expansion within the remittance business, and have taken key steps with investment. More banks seeking to boost their fees and commissions income are likely to follow suit over the coming years.