It costs three times more to transfer money within East Africa than to send a similar amount from Europe into the region, new data shows.

But this trend is likely to change with last month’s launch of an East African Payment System (EAPS) that is expected to lower the cost of money transfer by eliminating the need to convert money into multiple currencies.

Remittances will now be converted directly into the recipient’s currency instead of being first changed into dollars.

A report by the Overseas Development Institute (ODI) shows that remitting $200 from one country to another within the EAC costs up to $50; sending the same amount from the UK into East Africa costs $15 and the global average cost is $8. Most of the cost of sending money is attributed to conversion of currencies.

The report found that almost two-thirds of the African market is controlled by just two money transfer organisations — Western Union and MoneyGram.

Relatively low financial penetration in the region is also partly responsible for the high cost of sending money, ODI said in the report released on Wednesday, adding that Africa is losing $1.8 billion annually in transaction costs.

“Weak competition, concentration of market power and flawed financial regulation all contribute to high remittance charges. We conservatively estimate that the two companies account for $586 million of the loss associated with the remittance ‘super tax,’ part of it through opaque foreign currency charges. ‘Exclusivity agreements’ between operators, their agents and banks restrict competition and drive up prices, as do African financial regulations favouring banks over other remittance payment options,” said the report.

The new system will circumvent the currency change. Njuguna Ndung’u, Governor of Kenya’s Central Bank said, “Previously you needed to change Kenya shillings into dollars and then send the money. The recipient on the other side received in dollars and changes into the local currency. These are the costs EAPS will bypass. This will mean local currencies will be in use.”

New platform in place

Kenya, Uganda and Tanzania have already implemented the new platform — which started operations in November last year but became officially operational last month — with Burundi and Rwanda said to be working on connecting their central banks to the platform with funding from the African Development Bank (AfDB).

READ: East Africa rolls out cross-border payment plan

Collectively, $5.5 billion is transferred within the EAC every year.

In 2012, the Common Market for Eastern and Southern Africa (Comesa) launched a similar system, the Regional Payment and Settlement System (REPSS). The ODI says the efforts by the EAC and Comesa are steps in the right direction and are likely to have a positive effect.

“My concern is that the arrangements do not address the underlying problem of high intermediation charges,” said Alfonso Daniels, spokesperson for the ODI.

The new report singles out low financial penetration, opaque charges by money transfer organisations (MTOs) and regulatory challenges as key contributors to the high cost of transferring monies into and within the region.

For example, even though microfinance organisations in the region have wider branch networks than banks, regulators have barred them from acting as agents for MTOs.

“While microfinance institutions have greater reach, financial regulation precludes all but a few from providing remittance payments. The same is true of post offices, which have far larger branch networks in most countries than banks,” states the report.

Data from the World Bank shows that African migrants pay more to send money home than any other migrant group in the world. While South Asians pay an average of $6 for every $100 they send home, Africans often pay more than twice that.

ODI estimates it costs an average of 7.12 per cent to send money to different regions in the world — excluding sub-Saharan Africa — whereas a sender spends an average of 24 per cent to transfer money within East Africa using banks; it would cost 11.2 per cent to send money from the UK to any country in the region.

READ: Africa loses $1.8bn in high money transfer costs a year

The G8 recommends that the transfer cost should be about five per cent of the amount sent.

According to the UK agency, Money Gram and Western Union are overcharging senders of money into the region.

“As market leaders, Western Union and MoneyGram account for $586 million of the revenue loss associated with the gap between African and world average charges,” the report states.

The ODI further says that the different fees that the MTOs charge on remittances are not a true reflection of the actual cost of doing business in these markets. But the MTOs have rubbished the report, arguing that a look at their aggregate transfer numbers paints a different picture.

“The average global revenue earned by Western Union from transferring money (including fee and FX) is 5-6 per cent of the amount being sent. Our pricing varies between countries depending on a number of factors such as consumer protection costs, local remittance taxes, market distribution, regulatory structure, volume and currency volatility. These factors can impact the fees and foreign exchange rates offered by corridor and service type,”  said Kristin Kelly, the corporate communications director at Western Union in an e-mail response to The EastAfrican.

The report argues that the commercial terms on which MTOs interact with African banks are not widely available and that the real costs associated with regulatory compliance, foreign currency trade, agent fees and other dealings are largely unknown.

“Given the differences in country conditions, the reasons for the uniform fee are difficult to establish: Operating conditions in Kenya are clearly very different to those in Sierra Leone, yet Western Union applies a uniform charge. In addition, the fee structure appears to be independent of the volume of trade. MoneyGram appears to operate a tiered band approach,” reads the report.