Remittance

Definition

Remittance refers to the transfer of funds from one party to another, often from a foreign worker to their home country. These transfers can be made via wire, mail, online transfer, or through a payment system such as PayPal or Western Union. They play a key role in the economies of many nations, functioning as an important source of income for families and businesses.

Phonetic

The phonetic spelling of the word “Remittance” is: /rɪˈmɪtəns/

Key Takeaways

1. Remittances are important economic resources: These are funds that migrants and foreign workers send back to their home countries, often to support families or contribute to local economies. This financial inflow often constitutes a significant proportion of the Gross Domestic Product (GDP) in these countries, thus playing a critical role in their economic stability.
2. They reduce poverty: The regular income from remittances can help reduce the level of poverty in many developing nations. It provides an essential lifeline for many families, allowing them to afford essential goods, education, and healthcare services that they might not otherwise be able to access.
3. Transaction costs can be high: The process of sending remittances can often be costly, with transaction fees sometimes taking a significant chunk out of the amount sent. Various institutions – from banks to mobile money operators to informal channels – offer remittance services, each with their own fee structure, which can affect how much money actually reaches the intended recipients. Efforts are underway to reduce these costs and make remittance transfers more efficient and affordable.

Importance

Remittance plays a pivotal role in the business/finance world as it pertains to the transfer of money by a foreign worker to their home country. This is an important economic source for many developing countries where the recipients often depend on these transferred funds for their survival. Not only does it serve as a key driver of the country’s socio-economic growth, enhancing living standards and reducing poverty rates, but remittance also helps businesses by providing working capital. In the corporate context, remittance allows businesses to smoothly carry out international transactions, ensuring financial obligations are met in a time-effective manner. Therefore, remittance significantly contributes to both individual economic stability and global economic engagement.

Explanation

Remittances serve a critical function in economies worldwide by acting as a modality for transferring funds internationally. Most typically, remittances are sums of money sent by overseas workers to their home families or countries. They play a crucial role in supporting economies, especially those in developing nations, by providing an influx of foreign income. This inflow of capital can buoy economic stability, help reduce poverty, and increase household income, thereby enhancing health, education, and housing conditions among the populations that receive them.In an economic context, remittances are also influential contributors to GDP, acting as a direct indicator of consumer spending ability. They often form a substantial part of the equilibrium in the balance of payments of a nation. Furthermore, these flows have a counter-cyclical impact, meaning that during economic downturns, remittances can help maintain a level of economic stability in the receiving country or region by ensuring a continuous flow of income. Therefore, they are considered a reliable, stable and resilient source of external finance.

Examples

1. International Money Transfers: This is the most common example of remittance. Immigrants working in foreign countries often send money back to their families in their home countries. For instance, a surgeon from Mexico working in the United States may send money back home to support his family. 2. Invoice Payment for Businesses: In the business world, remittance often refers to customers submitting payment to businesses for goods or services rendered. A restaurant that orders ingredients from a supplier, for example, will receive an invoice for these goods. When the restaurant pays this bill, the money sent is referred to as remittance. 3. Freelance Work Payment: If a company in the UK hired a freelance graphic designer from India to design their company logo, the payment sent from the UK to India upon completion of the work would be considered a remittance. The company sends remittance to the freelancer as a payment for the services provided.

Frequently Asked Questions(FAQ)

Related Finance Terms

• Wire Transfer
• Electronic Funds Transfer (EFT)
• Payment Gateway
• Foreign Exchange (Forex)
• Money Order

Sources for More Information

• Investopedia
• World Bank
• Britannica
• Federal Reserve