Transferring money within Africa is significantly more expensive than in any other region in the world. In 2024, the average cost of sending $200 to Sub-Saharan Africa was 8.37%, compared to the global average of 6.65%. In some cases, the cost can rise above 10%, meaning a large portion of remittances does not reach the intended recipients. This affects millions of people who rely on money transfers for basic necessities such as food, healthcare, and education. But why does sending money within Africa cost so much? Below are some key reasons.
1. Limited Competition Among Money Transfer Operators
One major factor contributing to high transfer costs in Africa is the dominance of a few money transfer operators (MTOs), such as Western Union and MoneyGram. These companies often engage in anti-competitive practices, such as signing exclusivity agreements with local banks, preventing other providers from offering cheaper alternatives. With little competition, fees remain high, leaving customers with few cost-effective options.
For instance, in some African corridors, sending money can cost up to 15% of the transfer amount, far exceeding the United Nations Sustainable Development Goal (SDG) target of 3%. The World Bank has repeatedly called for greater transparency and regulation to reduce these costs, but significant progress has yet to be made.
2. Lack of Interoperability Between Financial Systems
Many African countries have fragmented financial systems that are not integrated with one another. Unlike regions such as Europe or North America, where banking and mobile money systems can communicate seamlessly, African financial institutions often operate in silos. This lack of interoperability means that transferring money from one country to another involves multiple intermediaries, each charging their own fees. As a result, the total transaction cost increases, making cross-border transfers expensive.
3. Regulatory and Compliance Costs
Different African countries have varying financial regulations, making it difficult for money transfer services to operate efficiently. Many governments impose strict foreign exchange controls and licensing requirements, which increase compliance costs for money transfer operators. Additionally, some governments impose taxes on remittances, further raising the cost of transactions.
For example, Nigeria has policies that restrict international money transfers to official banking channels, limiting competition and keeping transfer fees high. Kenya and Ghana, on the other hand, have made progress with mobile money systems, but sending funds across borders still comes with steep charges due to differing regulatory frameworks.
4. High Cost of Financial Infrastructure
Setting up financial infrastructure in Africa is expensive due to inadequate banking networks, limited technological advancements, and high capital costs. Many banks and money transfer services must invest heavily in compliance, security, and payment processing systems, and these costs are ultimately passed on to consumers.
Unlike regions with established digital banking networks, many African countries still rely on cash-based transactions, requiring more physical infrastructure such as agents and cash collection points. This makes transactions more expensive compared to digital-first economies.
5. Foreign Exchange Fees and Currency Instability
Currency conversion fees add another layer of cost to intra-African money transfers. Many African countries have weak or unstable currencies, making it costly to exchange money between them. Fluctuations in exchange rates can also result in additional hidden fees for consumers, reducing the actual amount received by the recipient.
For example, transferring money from Ghana to Nigeria often involves converting the Ghanaian cedi to US dollars before converting it again to Nigerian naira. This double conversion process incurs extra costs, unlike in regions where local currencies can be directly exchanged at lower fees.
6. Reliance on Traditional Money Transfer Methods
While mobile money services such as M-Pesa and MTN Mobile Money have revolutionized local transactions, they still face challenges when it comes to cross-border transfers. Many Africans still rely on traditional methods such as bank wire transfers or cash-based services, which are more expensive than digital alternatives.
Additionally, informal transfer systems, known as “hawala” networks, are widely used in some African regions due to lower costs and speed. However, they are not regulated and often lack the security of formal financial services, making them a risky alternative.
Efforts to Reduce Transfer Costs
Despite these challenges, efforts are being made to lower the cost of transferring money within Africa. Some key initiatives include:
- The African Continental Free Trade Area (AfCFTA): Aims to improve financial integration by standardizing regulations and promoting interoperability between African financial systems.
- Pan-African Payment and Settlement System (PAPSS): Launched by the African Export-Import Bank (Afreximbank), PAPSS facilitates instant transactions between African countries without the need for intermediaries, reducing costs.
- Growth of Fintech Solutions: Companies like Flutterwave, Chipper Cash, and Nala are leveraging digital technology to offer cheaper and faster money transfer solutions. Nala, for example, has raised $40 million to expand its services across Africa.
Conclusion
The high cost of transferring money within Africa is a result of multiple factors, including limited competition, regulatory barriers, financial infrastructure challenges, and currency instability. However, with increasing fintech innovations, regulatory reforms, and initiatives like PAPSS, there is hope that intra-African money transfers will become more affordable in the future. Lowering remittance costs is crucial for economic growth and financial inclusion, ensuring that more funds reach those who need them most.
