Remittances are a vital source of financial inflow for many developing countries, including Tanzania, where they help boost household incomes and play a pivotal role in poverty alleviation and local development. Despite their importance, Tanzania records notably lower remittance inflows compared to its East African neighbors, capturing only 0.9 percent of its gross domestic product (GDP) from these transfers. This policy diagnostic seeks to analyze the barriers and opportunities within Tanzania’s remittance landscape, aiming to enhance the effectiveness and inclusivity of remittance flows into the country.

OVERVIEW OF FINDINGS

• Remittance inflows: In 2023, Tanzania received approximately US$747 million in formal remittances, with the United States, United Kingdom, and Canada being the largest sources. These remittance flows are heavily influenced by the geographic spread of the Tanzanian diaspora and their earnings abroad.

• Market dynamics: The remittance market in Tanzania is served by various providers, including banks, microfinance institutions (MFIs), mobile money operators, and money transfer operators. However, despite the range of service providers, a small number of large banks dominant the market, driving up transaction costs due to limited competition. Many remittances are still sent via informal channels, which are often cheaper but come with higher security risks and lack of regulatory protections.

• Financial infrastructure: Tanzania has robust payment systems, such as the Tanzania Instant Payment System (TIPS) and mobile money platforms, which play a key role in facilitating remittance transactions. However, these systems are underutilized, and their limited interoperability prevents them from reaching their full potential.

• Regulatory environment: While the regulatory framework in Tanzania supports a variety of financial services, it also presents challenges. Stringent licensing and data localization requirements make it difficult for fintech companies and other non-bank financial providers to enter the market. These regulations tend to favor established financial institutions, limiting competition and innovation, particularly from smaller fintech companies that could otherwise reduce costs and enhance services.

• Political Economy and Diaspora Engagement: The Tanzanian government has made strides in engaging diaspora, with policies aimed at making it easier for diaspora members to invest and participate in the local economy. Zanzibar, in particular, has been proactive in formalizing the status of its diaspora through specific legislation that aims to strengthen ties and increase investment.

CHALLENGES

• Infrastructure and technological gaps: While Tanzania has implemented advanced systems like the Tanzania Instant Payment System (TIPS) and has a wide-reaching mobile money network, these technologies remain underutilized. Issues such as limited integration between financial service providers and the high cost of mobile transactions create barriers for users. These challenges not only hinder the smooth flow of remittances but also lead to prohibitively high transaction fees for lower-income populations. Moreover, the high costs of formal remittance transactions make it difficult for many members of the Tanzanian diaspora to send money home, ultimately reducing the overall volume of remittances.

• Regulatory barriers: Strict regulatory frameworks present significant challenges for new market entrants, particularly fintech companies and non-traditional financial institutions. These barriers limit competition and stifle innovation in the remittance market.

• Data localization requirements: Laws mandating local data storage place financial strain on new and smaller market players, making it harder for them to compete.

RECOMMENDATIONS

1. Regulatory Reform: Simplify the regulatory landscape to lower entry barriers for new entrants, particularly fintechs. This can be achieved by streamlining licensing processes and revising restrictive policies, such as those related to e-money issuance and data localization requirements. Such reforms would foster greater competition and potentially reduce high remittance costs.

2. Infrastructure Optimization: Maximize the use of existing financial infrastructure like TIPS to expand reach and increase efficiency in processing cross-border transactions. Enhancing interoperability among mobile money platforms can also lower transaction costs and improve service delivery.

3. Transaction Cost Reduction: Work with financial institutions to lower remittance fees and explore incentives for using formal remittance channels. Encouraging the shift from informal to formal channels will help increase transparency and reduce risks for users.

4. Diaspora Policy Strengthening: Implement measures that encourage diaspora contributions, such as easing investment and banking restrictions and ensuring consistent application of policies. For instance, standardizing fees across diaspora banking services and improving transparency in banking operations can build trust and increase engagement from the Tanzanian diaspora.

5. Regional and International Cooperation: Engage East African Community members and international bodies to harmonize remittance policies and fees. This would create cheaper and more efficient remittance corridors, benefiting both senders and recipients.

This diagnostic serves as a foundation for redefining Tanzania’s remittance framework. By addressing these challenges and implementing the recommended reforms, Tanzania can better harness the economic potential of its diaspora, positioning remittances as a key driver of national development.