The Malaysia-Indonesia Remittance Corridor

1. The Malaysia-Indonesia Remittance Corridor Making formal transfers the best option for women and undocumented migrants East Asia Social Development Unit Financial Market Integrity Unit (FPDFI) The World Bank

2. Content • Global Remittance Trends • Indonesian Migrants: Vulnerability and Use of Remittances • The Malaysia-Indonesia Migration and Remittance Corridor • Transfer of Remittances • Implications for Policy

3. Global Migration Trends:The number of migrants continues to increase • More than 190 million people – or about 3% of the world’s population are living in countries in which they were not born • IOM (2005) notes that: • There is a shift in destination countries • A rise in undocumented labor flows • An increasing feminization of migrant workers • In 2005, East Asia and Pacific Region accounted for $45 billion, or 17% of global recorded remittance inflows • Indonesia has 4.3 million citizens working overseas mostly in Middle East and Asia Pacific. Migration is increasingly feminized and increasingly undocumented.

4. Global Remittance Trends:Recorded remittance flows continues to increase $ billion Private debt and portfolio equity 275 225 FDI 175 Recorded remittances 125 75 ODA 25 -25 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004e 2005e

5. Global Remittance Trends: Poverty Reduction • Evidence from a few household surveys shows that remittances reduce poverty • Cross-country evidence shows that a 10% increase in per capita remittances leads to a 3.5% decline in the share of poor people • Remittances also finance education and health expenditures, and ease credit constraints on small businesses However, qualitative evidence suggests this may not be the case in Indonesia

6. Indonesian Migration • In 2005, remittances were estimated at US$5.3 billion, making remittances the second highest forex earner after oil and around 1.5% of GDP • This is lower than China ($22 billion) or Philippines ($14 billion) • 680,000 workers left on contracts in 2006, almost 80% were women, 88% of whom work in informal sector and come from poor rural areas

7. Map:Migration and Remittances in Indonesia

8. Vulnerability of Tenaga Kerja Indonesia (TKI) TKIs migrate primarily for financial reasons, but migration is risky for several reasons: • Indonesian laws and regulations exacerbate migrant vulnerability (concentrate power in recruitment companies) • Malaysian laws and regulations weaken position of migrants (e.g. employers retain passports) • The cost of migration is high and migrants must borrow to finance migration • Lack of institutional framework and capacity for effective monitoring • Little or no accountability mechanisms • Weak support mechanisms for migrants in sending villages and destination places of work

9. Indonesian Migrants: Use of Remittances • Estimated 45% of wages earned are sent back as remittances to families • Remittances used to pay debts, and for day-to-day living and consumption expenses of family left behind, for house building and improvement, and luxury consumer goods • Fewer migrants invest in health and education, or in productive activities • There is rarely a plan for investment of remittances and migrants have little control over the use of remittances while they are away (although they regain control when they return) • Families become dependent on remittances, and with few sustainable livelihood improvements, migrants get trapped in a cycle of migration Main Challenge: How can the impact on poverty reduction be improved and sustained?

10. The Corridor: Major Destinations for Indonesian Migrants

11. The Corridor:Indonesian migrants in Malaysia • Malaysia is second highest recipient of Indonesian migrant workers after Saudi Arabia and the number is increasing • 17% of Malaysia’s workforce are from overseas: more than 60% of these are from Indonesia • Approximately 1.3 million documented and 700,000 undocumented Indonesian migrants worked in Malaysia in 2006 • 60% of documented Indonesian migrants in Malaysia are women • Undocumented workers travel without visas, overstay visa/work permit, change jobs without necessary procedures • They have no legal protection and are often exploited by Malaysian employers due to their illegal immigration status

12. The Corridor:Remittance Characteristics • Fees to secure jobs can be several hundred dollars • Other formal costs borne by domestic workers migrating from Indonesia to Malaysia total about $340 • Monthly salary between $145 and 200 for domestic workers • Average remittance amount is estimated at $115-$150 per transaction • In 2005, Indonesia received about $5.3 billion (IMF) in remittances of which about $2.7 billion was from Malaysia • Only about 20% total remittances arrive in Indonesia through formal channels, and even less - about 10% of remittances arrive in formal channels from Malaysia

13. The Corridor:Remittance Trend 2,500 2,000 Grand Total 1,500 millions of US$ Other 1,000 500 Indonesia United States Singapore 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 • While the number of documented TKI in Malaysia have been increasing, the remittances sent to Indonesia through the formal system decreased both in real terms and as a percentage of total remittances • Outflows to Indonesia as a percentage of the total decreased from 35 percent in 1997 to 13 percent in 2006 Source: Bank Negara Malaysia, based on bank and RSP reporting

14. The Corridor:Disparity in formal and total remittance flows 6 5 4 Billions of US$ 3 2 1 0 Total Remittances Remittances Total remittances from Malaysia to reaching remittances into leaving Malaysia Indonesia Indonesia from Indonesia Malaysia Calculated from migrant stock Recorded through formal channels

15. Transfer Mechanisms • Costs and risks of remitting funds are considerable in proportion to TKI salary • Bank channels make up 90 percent of formal channels, but represent a slim percentage of total remittance flows • An unregulated industry has arisen to facilitate remittances in situations where remitting funds through formal channels is difficult • This industry includes account mediators, migration agents or agencies, and informal channels that are part of formal enterprises (money changers)

16. Transfer Mechanisms – Cont’d • Migrant workers – especially undocumented ones have more incentives to use informal remittance channels • Returned TKIs have a generally clearer understanding of the costs and benefits of the different channels of remitting funds • Financial literacy among TKIs is low

17. Comparing Incentives of Remittance Channels Remittance Channels Incentives Source: World Bank

18. Migration Costs Annual Cost of Migrating and Remitting Funds for an Indonesian worker in Malaysia

19. In Summary • The number of migrants to Malaysia is increasing, increasingly feminized, and many undocumented migrants • Migrant workers are increasingly choosing non-formal means to transfer remittances because: • Identification: they can’t meet the requirements • Access: they ( or the recipients) can’t reach the banks easily • Cost: High cost of remitting through banks • Competition: other means of transfer are more responsive to their needs • However, qualitative evidence suggests that improvements are needed for remittances to have a greater impact on poverty reduction • Possible security implications of large flows of unrecorded remittances

20. Avenues for Policy Consideration I. Make the formal sector accessible and responsive to migrant workers, while recognizing the need to establish basic requirements for transparency and regulation, through: • Enhancing Security and Reliability of Identification • Strengthen the reliability of passports by ensuring the same number is not issued and by assessing the use of biometric information (ie. fingerprints etc) • Issue new ID cards for migrants, recognized by both countries and financial institutions • Promoting Customization of Products and Organizational Structures • Encouraging banks and postal systems to develop financial products tailored to TKIs • New rules allowing Malaysian money changers to act as RSPs should be tailored to their economic and institutional capacity

21. Avenues for Policy Consideration II. Facilitate migrant workers access into the formal sector, via: • Expanding Financial Education • Financial Literacy Programs could be implemented at the pre-departure stage in Indonesia, and when foreigner cards are issued in Malaysia • Awareness raising programs for female TKI, through employers of female TKI and leaders of TKI communities, to promote empowerment and financial literacy • Ensuring Better Assessment Techniques of Data and Regulatory Changes • Longer period of observation to comprehensively assess market responses to recent regulations adopting new registration system for RSPs in Indonesia • Improved data quality, gathering and reporting procedures, to expand existing knowledge of available data to create better informed policy choices for TKI

22. Avenues for Policy Consideration • Involving Relevant Development Actors to Facilitate Migration • MFIs and NGOs could be convinced to finance migration for formal and informal TKIs, under the condition that only formal transfers are used for future remittance transfers • Collateral for Migration could be guaranteed by local communities III. Formalize and regulate the informal providers, while maintaining their accessibility to migrant workers, through: • Enabling strategic partnerships between formal and informal remittance service providers • The enhanced private sector participation would reduce transfer costs and expand remittance flows • Account mediators should be part of the formal channel for distribution because these informal operators access rural communities in Indonesia where no banks have a presence • Recent regulatory legislation allowing individuals and informal corporate entities in Indonesia to legally provide remittance services should be properly monitored and implemented

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