Lending across borders

In many ways, families in El Salvador who have family members in the US working and sending back remittances should be considered as a single economic unit, despite the borders which separate them. A recent article in Financial Times describes how banks are starting to awake to this reality and the possibility of extending consumer banking services to these cross-border families:
Now 47, José Antonio Reyes has worked for years as a builder in his native El Salvador and has never once thought about opening a bank account.

On the face of it, he and his wife Edith Portales seem like some of the most unlikely people to have their lives transformed by innovations in trans-national finance. The couple live in a cramped and airless house in Soyapango, near the country's capital, San Salvador, which they share with their son Fernando and their nephew Gerardo Alfaro's three children. They are dependent on the $600 (£299, €440) or so that Mr Alfaro sends them each month from the US.

Mr Reyes says he has long wished to add a floor to his home, but getting a mortgage to finance the work was never an option. In El Salvador, as throughout Latin America, commercial banking services have traditionally been available only to the better off.

This year, though, Mr Alfaro was offered an innovative $20,000 mortgage loan in the US that will allow his relatives at home to build the extra floor, providing his kids with a room of their own and somewhere to study. The deal was organised by a US money transfer company called Alante and Integral, a Salvadorian micro-finance bank.

Until recently, handling a mortgage for such a small amount, especially a cross-border mortgage, would have been too expensive for banks to make a decent return. But helped by greater economic stability in the region and lower interest rates, micro-finance banks and some other innovative financial institutions have begun to see potential in this market.

The deal highlights the way migrant workers and their families are slowly being brought into the world's banking and credit markets, which experts say is crucial to giving remittances a wider impact on economic development. Money transfer companies such as Western Union have traditionally handled the vast bulk of transactions. They transmit cash electronically, convert it into local currency and arrange payment in cash for local family members in exchange for a percentage commission.

Such a cash-to-cash system means that only a small proportion of remittances - which make up more than 15 per cent of El Salvador's gross domestic product - stays in the banking system, where it could be used to finance local investment.

Yet, given the right opportunities, families that regularly receive remittances could use them to open bank accounts and would then find it easier to buy insurance and other financial products, borrow money to buy a house or start a small business. All that could dramatically increase the economic impact of the money. In the words of Don Terry, the head of the Multilateral Investment Fund at the Inter-American Development Bank: "Creditworthiness simply produces greater multiplier effects." (more).