Meaning and

Importance of Letter of Credit

Letter of Credit

A letter of credit is a letter from a bank guaranteeing that a buyer’s payment to a

seller will be received on time and for the correct amount. In the event that the
buyer is unable to make a payment on the purchase, the bank will be required to
cover the full or remaining amount of the purchase.

Due to the nature of international dealings, including factors such as distance,

differing laws in each country, and difficulty in knowing each party personally, the
use of letters of credit has become a very important aspect of international trade.

How a Letter of Credit Works?

Because a letter of credit is typically a negotiable instrument, the issuing bank pays
the beneficiary or any bank nominated by the beneficiary. If a letter of credit is
transferable, the beneficiary may assign another entity, such as a corporate parent
or a third party, the right to draw.

Banks also collect a fee for service, typically a percentage of the size of the letter
of credit. The International Chamber of Commerce Uniform Customs and Practice
for Documentary Credits oversees letters of credit used in international
transactions. There are several types of letters of credit available.

IMPORTANCE OF LETTER OF CREDIT

A letter of credit enjoys various advantages in executing an international trade

transaction. Some of the major ones are below:

1. Safely Expand Business Internationally

A letter of credit gives the trade partners an ability to transact with unknown
partners or in newly established trade relationships. It helps in expanding their
business quickly into new geographies.

2. Highly Customizable
A letter of credit is highly customizable. Both the trading partners can put in terms
and conditions as per their requirements and arrive at a mutual list of clauses. It can
also be customized from one transaction to another with the same trading partners.

3. Seller Receives Money on Fulfilling Terms

A letter of credit makes the issuing bank independent of the trading partners’
obligations and any disputes arising out of those obligations. The bank has to just
check whether the documents submitted by the beneficiary satisfy the terms and
conditions specified in the letter of credit, and pay the full amount.

4. WORKS as a Credit Certificate for Buyer

A letter of credit transfers the credit-worthiness from the importer or buyer to the
issuing bank. The importer can do multiple transactions at the same time when he
is backed by an established and larger institution such as a bank.

5. Seller is Free of Credit Risk

A letter of credit is safer for the seller or exporter in case the buyer or importer
goes bankrupt. Since the creditworthiness of the importer is transferred to the
issuing bank, it is the bank’s obligation to pay the amount as agreed in the letter of
credit. Thus, a letter of credit insulates the exporter from the importer’s business
risk.

6. Quick to Execute for Creditworthy Parties

A letter of credit is quick to execute. As per the initial terms and conditions, the
seller or exporter has to present the proof of material type and quantity along with
the shipping documents supporting his claim that the goods have been shipped.
The advising bank will verify the documents and give the full payment.

7. Payment Assured in Disputable Transactions

In the case of a dispute between the trading partners, the exporter can withdraw the
fund as agreed upon in the letter of credit and resolve the disputes later in the court.
The beneficiary’s right to the full amount is described in the phrase ‘pay now,
litigate later’ by the courts.

The importer cannot hold or deny the payment to the exporter by raising objections
on the quality of goods because the bank just needs to see the documents satisfying
the shipping terms and conditions as put in the letter of credit.

Types of Letters of Credit

 1. Commercial Letter of Credit
This is a direct payment method in which the issuing bank makes the payments to
the beneficiary. In contrast, a standby letter of credit is a secondary payment
method in which the bank pays the beneficiary only when the holder cannot.

2. Revolving Letter of Credit

This kind of letter allows a customer to make any number of draws within a certain
limit during a specific time period.

3. Traveler’s Letter of Credit

For those going abroad, this letter will guarantee that issuing banks will honor
drafts made at certain foreign banks.

4. Confirmed Letter of Credit

A confirmed letter of credit involves a bank other than the issuing bank
guaranteeing the letter of credit. The second bank is the confirming bank, typically
the seller’s bank. The confirming bank ensures payment under the letter of credit if
the holder and the issuing bank default. The issuing bank in international
transactions typically requests this arrangement.

An Example of a Letter of Credit

Citibank offers letters of credit for buyers in Latin America, Africa, Eastern
Europe, Asia, and the Middle East who may have difficulty obtaining international
credit on their own. Citibank’s letters of credit help exporters minimize the
importer’s country risk and the issuing bank’s commercial credit risk.

Letters of credit are typically provided within two business days, guaranteeing
payment by the confirming Citibank branch. This benefit is especially valuable
when a client is located in a potentially unstable economic environment.

Documentation
Papers of L/CEXPORT
incentive
Exports are given priority in India and enjoy lot of incentives. However, the major
problem lies in the process of realizing them. Unfortunately, exporters have to
approach multiple organizations for seeking sanction. Each organization prescribes
its own exclusive method of documentation as well as procedure form the stage of
submission of claim till sanction. The documentation and procedures are diverse
with each incentive provided. This is not the end of their problems. Incentives are
available at post-shipment stage but they are connected with the documents
generated at the time of shipment. If exporter does not pay adequate care and
attention at the time and stage of export shipment in providing complete and
adequate information in the documents in a proper way, their claims for export
incentives are adversely affected. It is essential to the exporters to plan carefully in
respect of incentives, even at the time of shipment, though their benefits are
available only after completion of the shipment.

In the absence of adequate planning, it will upset their fund flow and equally the
total realization may not be remunerative for effecting exports. Exporters have to
draw a suitable plan of action for claiming incentives in a timely manner to avoid
delays and cuts in realization. Exporters have to understand the different
procedural formalities, connected with multiple and diverse agencies. This would
ensure proper compliance for availing of full benefit of incentives. In this area,
Government has to rationalize the incentives by opening a single window approach
for sanction of multiple claims.

EXPORT LETTER OF CREDIT

An importer issues an import letter of credit with the exporter being the
beneficiary. The same letter of credit, when received by the exporter’s bank,
becomes an export letter of credit. So, both the import and export letters of credit
are materially same, it’s just the perspective which is different. The exporter needs
to fulfil the terms and conditions and submit the required documents as mentioned
in the letter of credit before he can receive payment.

ADVANTAGES OF EXPORT LETTER OF CREDIT

It reduces the credit risk as the issuing bank is liable to pay even if the importer
defaults. Export letter of credit can be tailored to the needs of the exporter, hence it
provides flexibility in terms and conditions as long as they are fair and legally
binding. Since the exporter needs to submit documents as proof, an export letter of
credit enables the exporter to receive the payment before the shipment has reached
the importer. This capability improves the cash flow of the exporter.
DISADVANTAGES OF EXPORT LETTER OF CREDIT

Although the exporter is protected in case the importer defaults on payment, he

may still face credit risk if the issuing bank also defaults. He can get additional
protection by getting a confirmed letter of credit where the receiving bank
guarantees the payment if issuing bank defaults. This will add to the cost of getting
a letter of credit, which is already high.

Risk
and insurance

As an exporter of goods or services you will need to be aware of and consider

insuring against the risks of:

 Loss of or damage to goods in transit

 Non-payment for your goods or services
 The cost of returning to your premises any goods that a buyer
abroad refuses to accept
 Political or economic instability in the buyer’s country
 A new customer’s credit worthiness
 Currency fluctuations
 A fault that causes an end-customer to sue
If you are an importer, you may need to take into account:

 Possible loss of or damage to goods in transit

 Supplier problems, including failure to supply
 Transport delays and potential hold-ups at ports
 The risk of performance or health and safety problems
 Import duties
 Storage of goods in bonded warehouses
 Currency fluctuations

1. Foreign currency and exchange risks

When you trade internationally, you should also take steps to protect your business
against changes in the exchange rate. You will also need to consider when and how
best to make or receive payments in currencies other than sterling – see foreign
currency and exchange rate risks.

2. Loss or damage of goods

The goods you export or import must have insurance cover from the beginning of
their journey until their arrival with either yourself or the buyer. In some cases you
will absorb the cost of cover, in others the cost is passed on to the buyer.

3. Product faults
In exceptional circumstances, a fault with the product supplied may result in an
end user taking legal action against your business. Depending on the nature of your
product or service, you may need to take out insurance to cover this risk. Search
for an insurance broker with the British Insurance Brokers Association (BIBA).

4. Non-payment
You might not be paid in full for the goods or services that you export because:

 Your customer can’t or won’t pay

 War or a natural disaster prevents your goods from reaching the
customer, or you from completing your contract
 Political reasons prevent you from completing your contract, such
as an export Licence ban in the UK, or import restrictions or a
change in the law in the buyer’s country
 Currency problems prevent your buyer from getting the cash they
need to pay you

Benefits of Exports

There are many good reasons (or benefits) for exporting. These include the
following:

1. Increasing Sales
Exporting is one way of increasing your sales potential; it expands the “pie” that
you earn money from, otherwise you are stuck trying to make money only out of
the local market. In the case of South Africa, our market is relatively small in
comparison to the markets of North America, Europe and Asia. While the local
market may represent enough sales potential for smaller firms, for medium and
larger companies the local market is just too small and the only way to expand
sales is to export.

It should be said, however, if you are not yet selling regionally and nationally, then
you should first aiming at expanding your market share within the local market.
Once you have saturated the national market, only then should you look beyond
the borders of South Africa. It has been said that there are no sales barrier that
automatically begins where your border ends. Increased sales also impact upon
your profitability (although not always positively), your productivity by lowering
unit costs, and may increase your firm’s perceived size and stature, thereby
affecting its competitive position compared with other similar-sized organisations.
What is more, research and development (R&D) and other costs can also be offset
against a larger sales base, or the move into exports may contribute to the
company’s general expansion. For others, exports may be a way of testing the
opportunities for overseas licensing, franchising or production.

2. Increasing Profits
Clearly, you are not likely to enter the export market in order to make a loss.
Companies generally strive to make profits and the bigger the profits the better. In
many instances, exports can contribute to increased profits because the average
orders from international customers are often larger than they are from domestic
buyers, as importers generally order by the container instead of by the pallet
(thereby affecting both total sales and total profits). Some products – especially
those that are unique or very innovative in nature may also command greater profit
margins abroad than in the local market. Having said this, it is also not uncommon
– indeed, it is highly likely – that you may receive smaller profit margins from
your export sales compared with the local market. The reason for this is the highly
competitive nature of global markets that forces exporters to lower prices, squeeze
profits and reduce costs. You may also find that in some markets you generate
higher profit margins, while in other markets your profit margins are considerably
lower.

3. Reducing risk and balancing growth

It is risky being bound to the domestic market alone. Export sales to a variety of
diverse foreign markets can help reduce the risk that the company may be exposed
to because of fluctuations in local (and foreign) business cycles. At any one time,
the UK, Australia and Germany will be enjoying different growth rates. By selling
in all of these countries, the risk of low growth in one or more of these countries
will be offset by increased growth in the others, thus resulting in a balanced
portfolio of growth overall. In addition, with the challenging labour conditions that
many firms in South Africa face today, exports may help to create and/or maintain
jobs thus reducing the risk of a labour dispute that could otherwise cripple the
company.

4. Lower unit costs

Exports help to put idle production capacity to work. This is generally achieved the
more efficient utilization of the existing factory, machines and staff. What is more,
because you are now selling more products without increasing total costs to the
same extent, this has the effect of lowering your unit costs which represents a more
productive overall operation. Lower unit costs make a product more competitive in
the local marketplace as well as in foreign markets, and/or can contribute to the
firm’s overall profitability.

5. Economies of Scale
Exporting is an excellent way to enjoy pure economies of scale with products that
are more “global” in scope and have a wider range of acceptance around the world
(in other words, they can be used in other parts of the world without much
adaptation). This is in contrast to products that must be adapted for each market,
which is expensive and time consuming and requires more of an investment. The
newer the product, the wider range of acceptance in the world, especially to
younger “customers,” often referred to as the “global consumer”.

With increased export production and sales, you can achieve economies of scale
and spread costs over a larger volume of revenue. You reduce average unit costs
and increase overall profitability and competitiveness. Long-term exports may
enable a company to expand its production facilities in order to achieve an
economic level of production.

6. Minimizing the effect of seasonal fluctuations in sales

Being in the Southern Hemisphere, South Africa has seasons that are opposite to
those in the Northern Hemisphere. For companies that sell seasonal goods such as
fruit growers, and swimwear or suntan lotion manufacturers, being able to sell
these goods in the Northern Hemisphere when our season ends, helps achieve a
longer and more stable sales pattern. This increases the sales potential for these
goods and also helps reduce risk.

7. Small and/or Saturated Domestic Markets

One good reason to begin exporting is when the local market is too small to
support a firm’s output or when the market becomes saturated. For companies that
produce heavy industrial machinery or that have invested in large factories, they
need to be able to sell enough of their manufactured goods to justify the investment
and to insure that the unit price of goods are kept acceptably low. With relatively
small markets such as South Africa, it is usually not long before the local market
becomes saturated and offers limited additional opportunities for sales. Many of
South Africa’s larger manufacturers have had to turn to foreign markets to justify
their existence. Examples include most of the motor vehicle manufacturers such as
Opel, VW and BMW; the paper producers such as Mondi and Sappi; and mining
houses such as Anglo-American and De Beers. The same is true of international
firms such as Volvo, Philips and Roche. They only way firms such as these can
justify their investment is to sell abroad because their respective local markets are
just too small.

Excise
clearance Benefits/Rebate

As soon as goods are ready for dispatch to the port of shipment, exporter has to
apply to the central excise authority for excise clearance of the cargo. The exporter
has, now an option to remove the goods with inspection by the central excise or
remove the goods without inspection. For this, exporter has to apply to the
jurisdiction Range Superintendent of central excise in the prescribed form ARE-1,
in sixtuplicate.

For inspection, exporter has to give advance notice of 24 hours to the range
superintendent. The inspection may be made by the range superintendent or excise
inspector, nominated by the superintendent of excise. After inspection, they seal
the goods and give excise clearance. In case, goods are inspected by the excise
authorities and seals are not broken, the customs authorities may not inspect the
goods at the port. If goods are removed by the exporter, without the inspection by
excise authorities, customs conduct inspection of goods at the port.

As a matter of policy to encourage exports, exporters are exempted from payment

of central excise duty on thy, final product. Where exemption is not possible,
refund of excise duty is made. Exporter has option to export under rebate or export
under bond. In respect of excise duty paid on inputs, refund is made through
Cenvat Credit or Duty Drawback.
In case of export under rebate, excise duty has to be paid first by the exporter and
once the export transaction is completed, refund of excise duty paid can be
claimed. In case of export under bond, excise duty need not be paid, but bond has
to be executed by the exporter in the prescribed format, as approved by Controller
of Central Excise, by producing security or surety, at least to the amount equivalent
to the amount of excise duty chargeable on the goods.

Customs & Excise Clearance

A major area in any Export/Import operations is the customs clearance procedure.

Sometimes it can be taxing with a series of procedures and documentations to be
adhered to and followed. Our customs clearance services make it simple for you.
We as a Customs Clearing Agents offer wide variety of services in order to help
the clients for import and export customs clearances.

Qualified professionals try to provide the best possible benefit to the clients with
reference to the custom notifications and exemptions. This helps in avoiding the
delay in clearance and other detention charges such as heavy demurrage etc.

 Guidance and consultancy on pre and post shipment services

 Liasoning and follow up with various Govt. Organizations
 Documentation procedures i.e. preparation and handling of
documents
 All post shipment formalities and endorsements
 Drawback/DEPB and several other export benefits

Income Tax Benefit

Tax concession for export profits

Finance (No. 2) Act, 1962

By way of Rebate of tax

 11. Section 2(5) of the Finance (No. 2) Act, 1962 provides for a
tax concession in the case of profits derived from the export of
goods or merchandise out of India. This tax concession will be
admissible in the case of all assessees except companies which
have not made the prescribed arrangements for the declaration and
payment of dividends within India. The tax concession has been
given in the form of a rebate of tax which will be equal to the
income-tax and super tax calculated respectively at one-tenth of
the average rate of income-tax and the average rate of super tax on
the amount of export profits included in the total income. If the
export profits are set off against any losses in the process of
computing the total income, no tax concession will be available.
Rules will be issued shortly laying down the method as to how the
amount of such export profits should be computed in a case where
the assessee derives income by sales in India in addition to income
from exports.
Finance (No. 2) Act, 1962

12. It should be noticed that this tax concession will be available

only to the person who exports the goods or merchandise out of
India. If a manufacturer himself exports the goods or merchandise
out of India, he will get the benefit of this concession. But if he
sells such goods or merchandise to another merchant or
manufacturer in India who in turn exports them out of India, it is
the latter and not the former who will get the benefit of the tax
concession.

Shipment &
Transport-Sea, Air, Rail, Road,
Pipeline
The mode of transportation is an important consideration when planning the
shipment process. Besides the costs, the urgency of the shipment, the value of the
goods being shipped as well as the size and weight of the goods need to be
evaluated when determining the form of transportation.

SEA

Seaborne trade accounts for about 90% of the global trade, and as per UNCTAD,
1687 million tons (2015 estimate) were carried in around 177.6 million containers
(2015 estimate) covering 998 billion ton-miles (2016 estimate).

Because of size or volume, there are several types of cargoes that cannot be or is
economically unviable to move by other modes of transport than the sea.

Ocean freight is a less expensive method of shipping goods, but the drawback is a
longer transit time. Another benefit for ocean freight is while size and weight may
be an issue for air; it is not for ocean freight.

Ocean freight is used quite extensively for the movement of bulk commodities
such as agri-products (wheat, maize, soya, etc.), coal, iron ore or for wet bulk
products such as crude oil and petroleum. Also, larger, odd-shaped items including
engines and propellers may move via this mode as well, depending on how
sensitive the delivery time is.

Ocean freight is also a preferred mode of transport for the movement of high
volume and heavy cargo such as minerals, metals, ores, steel coils, etc. which
would be impossible to move by air freight.

Additionally, businesses are placing more of an emphasis on the environmental

impact on shipping. An air freight service emits a higher amount of polluting gases
with less space capacity compared to sea freight services which are considered a
much greener transportation mode with a higher carrying capacity.

Key benefits of ocean freight include

 Suitable for wide range of products with long lead times

 Large volumes. A single, ultra-large container ship can carry +/-
20,000 twenty-foot equivalent units (TEU)
 Most environmental friendly among all modes of transport
 Liner shipping is the most efficient mode of transport for goods
 Extensive coverage around the world
 Multiple carrier options for the shippers
AIR

Over the next 15 years, as the world GDP grows, there will be a demand for higher
value goods. As per Boeing’s 2016 – 2017 world air cargo forecast, there will be a
proportionate growth in the value per ton of total traded goods around the world.

To meet the demand for growth, world air cargo traffic is forecasted to grow an
average 4.2 percent per year.

Air freight is a critical mode of transport. It serves markets and supply chains that
demand speed. One of greatest examples goes back to 1997 when Apple began
innovating on the nitty-gritty details of supply-chain management. Almost
immediately upon Steve Jobs’ return. At the time, most computer manufacturers
transported products by sea, a far cheaper option than air freight.

Steve Jobs took advantage of the benefit of air freight and used an innovative
strategy. He paid $50 million to buy up all the available holiday air freight space to
ensure that the company’s new, translucent blue iMacs would be widely available
during Christmas season giving them a massive competitive advantage over their
rivals. – “It was an ‘Oh s—’ moment,” recalls former HP supply chain chief Mike
Fawkes.”

Other industries such as the automotive and retail industry also utilize air freight to
achieve ‘just-in-time’ (JIT) inventory replenishment. JIT option allows stores,
production lines to place order fulfillment based on demand as, and when required.
It provides greater flexibility and reduces inventory and storage costs.

Also, perishable goods such as foods, flowers, and some pharmaceuticals also take
advantage of shorter transit time. Another positive for air freight is that there’s less
handling of cargo overall, so the likelihood of damage or theft is less likely when
utilizing air.

But air freight also has its own disadvantages such as being one of the most
expensive due to the requirement of speed and the fuel that is used.

It also has its size and weight limitations. Regulatory bodies limit what can and
cannot be transported by air, and as such, oddly shaped or very large items may be
more suitable for other modes of transport.

Key benefits of air freight include

 Quick transit
 Less handling of cargo
  Less documentation
 Reliable arrival and departures
 Enhanced level of security for your cargo
RAIL

Another mode of transport which is also considered a ‘green’ option is rail. Trains
burn less fuel per ton-mile than road vehicles and a train, which can have as many
than 100 wagons, only needs one driver. There are, however, some additional costs
which are incurred in a rail journey: at each end of the rail transit, a road delivery
will be needed, and there will be a lift cost to transfer the container between the
train and the road vehicle.

On average, longer journeys tend to be less expensive by rail, and shorter journeys
are less costly by road. Where the point of cost neutrality comes is governed by
many factors which are route and commodity specific, but in general, the point of
cost neutrality can be expected to lie in the range of 130 to 150 miles.

In 2015, the first freight train carrying ISO freight containers from China arrived in
the Port of Rotterdam in 18 days as against the normal 44 odd days by the sea.

This movement of containerized cargo by rail from China to logistics hubs in

Europe such as in the Netherlands, UK is seen as a significant step in the
development of trade between the two continents. It has encouraged multinationals
such as Hewlett-Packard and Ricoh to use the route from Europe to China for their
cargoes.

The Manager of European Transport at Ricoh notes that if one can set up an
effective planning, rail is a relatively quick mode of transport taking only 20 days
to China. In addition, the move by rail also has some advantages such as all
containers being transported to the location in one go, while being environmentally
friendly as a train releases far less CO2 than a plane.

Key benefits of rail freight include

 Reliable transit times and schedules

 Railroads are the most efficient form of land transportation. One
train can haul the equivalent of over 400 trucks
 Fast and cost-effective deliveries over long distances. Typically
over 500 miles
 Traditionally, rail has a strong safety record.
 Helps in alleviating road congestion, thus lowering emissions
ROAD
Road freight is one of the most common of all modes of transportation. It is widely
used in continents such as Europe, Africa, and North America. The single customs
document process provides a seamless movement of goods even across various
states and countries.

Road freight provides several advantages over other modes of transportation such
as

 Cost-effectiveness
 Quick and scheduled delivery
 Local, over border, long or short haul deliveries even in rural areas
 Flexible service
 Saving in Packing Cost compared to other modes
 Track and trace of cargo and truck
 Complete door-to-door service and it is one of the more
economical means of transport.
However, truck transport is limited somewhat as to what it can carry by the size of
the vehicles used and by size and weight restrictions. Another limitation is that it is
affected by weather, road conditions and traffic.

PIPELINE

Pipeline transport is the long-distance transportation of a liquid or gas through a

system of pipes—a pipeline—typically to a market area for consumption. The
latest data from 2014 gives a total of slightly less than 2,175,000 miles (3,500,000
km) of pipeline in 120 countries of the world. The United States had 65%, Russia
had 8%, and Canada had 3%, thus 75% of all pipeline were in these three
countries.

Pipeline and Gas Journal’s worldwide survey figures indicate that 118,623 miles
(190,905 km) of pipelines are planned and under construction. Of these, 88,976
miles (143,193 km) represent projects in the planning and design phase; 29,647
miles (47,712 km) reflect pipelines in various stages of construction. Liquids and
gases are transported in pipelines and any chemically stable substance can be sent
through a pipeline. Pipelines exist for the transport of crude and refined petroleum,
fuels – such as oil, natural gas and biofuels – and other fluids including sewage,
slurry, water, beer, hot water or steam for shorter distances. Pipelines are useful for
transporting water for drinking or irrigation over long distances when it needs to
move over hills, or where canals or channels are poor choices due to considerations
of evaporation, pollution, or environmental impact.
 Role of Overseas
Agent & Remittance of
Commission

A sales agent acts on your behalf in the overseas market by introducing you to
customers who you supply and invoice direct. They are paid a commission for any
sales they make ranging between 2.5 per cent and 15 per cent. The key benefit of
using an overseas sales agent is that you get the advantage of their extensive
knowledge of the target market.

Advantages of using an overseas agent

 You avoid the recruitment, training and payroll costs of using your
own employees to enter an overseas market.
 An agent should be well placed to identify and exploit
opportunities.
 Your agent should already have solid relationships with potential
buyers – it might take you some time to build up your own
contacts.
 Using an agent allows you to maintain more control over matters
such as final price and brand image – compared with the other
intermediary option of using a distributor.
Disadvantages of using an overseas agent

 You remain responsible for shipping and other trade-related

logistics – although your agent should be able to help.
 You need to specify in an agent’s contract if you need them to
credit check your customers for you.
 Arrangements must be made to allow access to your sales ledger
as part of the commission payments process.
 After-sales service can be difficult when selling through an
intermediary.
  You may lose some control over marketing and brand image,
compared with entering the market yourself.
Remittance of Commission

Remittance

A remittance is funding that is sent or transferred to another party, usually one in

another country. Remittances can be sent via a wire transfer, mail, draft, or check.

Remittances can be used for any type of payment, including invoices. But the term
is typically used to in reference to money sent to family members back in a
person’s home country.

Remittances have played an increasingly large role in the economies of small and
developing countries. They are often used as a way to help raise the standard of
living for people abroad and help combat global poverty. In fact, since the late
1990s, remittances have exceeded development aid, and in some cases make up a
significant portion of a country’s gross domestic product (GDP).

According to the World Bank’s 2019 Migration and Development Brief, $529
billion in remittances were sent to low-income and middle-income countries in
2018, an increase of 9.6% over the previous record high of $483 billion in 2017.
This figure is significantly larger than the $344 billion of foreign direct investment
in these countries (excluding China) in 2018.

If we include high-income countries as well, the total amount of remittances jumps

to $689 billion, up from $633 billion in 2017.

Remittances are seen as an important part of disaster relief and often exceed
official development assistance (ODA).

On the plus side, remittances are also used to help those living in less developed
nations open bank accounts, which helps promote economic development.

 A remittance is money that is sent to another party, usually one in

another country; typically the sender is an immigrant, and the
recipient a relative “back home.”
 Remittances reached a record high in 2018, according to the
World Bank.
 Remittances represent one of the largest sources of income for the
population of low-income and developing nations, often exceeding
 the amount of direct investment and official development
assistance.
Examples of Remittances

For low-income countries or countries with struggling economies, remittances

represent one of the largest sources of income for the native population. In 2015,
for example, Mexicans abroad sent over $24 billion back home, which was more
money than the country generated from selling oil.

Plunging oil prices and production have also caused much of the Venezuelan
population to migrate to other countries over the years. With so many refugees and
immigrants living abroad, the result has been a surge in remittances. In 2017, over
$1.5 billion in remittances were sent to family members remaining in the
beleaguered country.

Special Considerations for Remittances

The methodology that countries use to record the amount of money people are
receiving via remittances is rarely made public. While the majority of value
transfers occur via web or wire transfers where they can be more easily accounted
for, a fair amount of money is transferred in ways that are more opaque.

As a result, concerns have been raised among financial intelligence units that
remittances are one of the ways in which money can be laundered or violent
activities like terrorism can be sponsored.

7% – The global average cost of sending a $200 remittance, according to the

World Bank.

Many authorities are also concerned about the high cost of remittances. Sending
small sums is often expensive. To promote transparency, some countries limit
remittances to bank wires, but banks are the most expensive transfer channel,
according to the World Bank: in the first quarter of 2019, they charged an average
of 11% in transfer fees. Post offices charge on average over 7%. The fees can
exceed 10% when the destination is in Africa or a Pacific Ocean island.