The Malaysia-Indonesia Remittance Corridor

Making Formal Transfers the Best Option for
Women and Undocumented Migrants
Raúl Hernández-Coss
Gillian Brown
Chitrawati Buchori
Isaku Endo
Emiko Todoroki
Tita Naovalitha
Wameek Noor
Cynthia Mar

Contents
Foreword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vii
Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix
Acronyms and Abbreviations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xi
Executive Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xiii
Key Statistics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xx
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Female Migrant Worker Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Bilateral Remittance Corridor Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Methodology and Outline of Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1. Global and Regional Trends: The Context. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Global Migration and Remittance Patterns. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
East and South Asian Migration and Remittance Trends. . . . . . . . . . . . . . . . . . . . . . . 6
Indonesian Migration and Remittance Trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Malaysia as a Remittance-sending Country . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Main Points . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
2. Migrants and Remittances: The Corridor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
History of Migration from Indonesia to Malaysia . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Indonesian Migrants in Malaysia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Cost of Migration for Migrant Workers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Recruitment Procedures in Malaysia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Migrants Wages and Expenses in Malaysia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Estimates of Remittance Flows in the Malaysia-Indonesia Corridor . . . . . . . . . . . . 25
Main Points . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
3. Transaction Flows. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Formal Transaction Flows in the Corridor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Informal Transaction Flows in the Corridor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Deciding Between Formal and Informal Transfer Options . . . . . . . . . . . . . . . . . . . . 37
Remittance Distribution in Indonesia through Formal Transfer Mechanisms . . . . 42
Remittance Distribution in Indonesia through Informal Transfer Mechanisms . . . 45
Main Points . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
4. Conclusions and Policy Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Consequences for Using Formal or Informal Systems: Three Perspectives . . . . . . . 50
Operational Policy Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Concluding Remarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
APPENDIXES
A The Regulatory Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
B Measurement of Remittance Flows and Impact on Economies . . . . . . . . . . . . . . . . 73
C Field Work in Malaysia and Indonesia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
D Focus Group Questionnaires and Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
Endpiece Map: Indonesia Overseas Migrants (Outflows) and Remittances (Inflows)
Based on Migrants’ Place of Origin for the First Quarter 2007
LIST OF TABLES
1. World Bank’s Bilateral Remittance Corridor Analysis (BRCA), 2007 . . . . . . . . . . . . 3
2. East Asia & Pacific Region: Economic Aggregates and Workers’ Remittances . . . . . . 8
3. Estimates of Total Remittances sent from Malaysia, and Total Remittances
Received in Indonesia in 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
4. Indonesia: Worker Remittances Relative to Other Economic Indicators . . . . . . . . . 12
5. Workers’ Remittances and Compensation of Employees, Received . . . . . . . . . . . . . 12
6. Workers’ Remittances and Compensation of Employees, Received . . . . . . . . . . . . . 13
7. Malaysia: Worker Remittances Relative to Other Economic Aggregates . . . . . . . . . 16
8. Cost Born by the Domestic Worker Migrating from Indonesia to Malaysia . . . . . . 23
9. Cost Born by the Malaysian Employer of an Indonesian Migrant
Domestic Worker . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
10. Wages of Indonesian Migrant Workers in Malaysia, December, 2006 . . . . . . . . . . . 25
11. Formal Remittance Outflows from Malaysia by Top 5 Countries . . . . . . . . . . . . . . 26
12. Estimates of Remittances in the Malaysia-Indonesia Corridor in 2006 . . . . . . . . . . 27
13. The Cost of Migrating and Remitting Funds for an Indonesian Worker in
Malaysia in One Year (in US$) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
14. Customer Due Diligence Requirements for Remittance Transfers in Malaysia . . . . 34
15. Comparing incentives facing undocumented migrant workers . . . . . . . . . . . . . . . . 40
A1. Registration and Licensing Requirements for Remittance Agents in Indonesia . . .68
A2. AML/CFT Requirements in Malaysia and Indonesia for Non-Bank
Remittance Service Providers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .71
LIST OF FIGURES
1. Global Remittance Trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2. Indonesian Migrants, Major Destination Countries (1997–2006) . . . . . . . . . . . . . . . 9
3. Total Remittances Inflows to Indonesia by Region, January–April 2007 . . . . . . . . . 14
4. Foreign Workers in Malaysia by Nationality, December 2006 . . . . . . . . . . . . . . . . . 16
5. The History of Indonesian Migration to Malaysia . . . . . . . . . . . . . . . . . . . . . . . . . . 18
6. Flows of Indonesian Migrant Workers to Malaysia and Saudi Arabia
(1997–2006) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
7. Gender Trends in Migrant Flows to Malaysia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
8. Trends in Total Formal and Informal Sector Migrant Flows . . . . . . . . . . . . . . . . . . . 21
9. Migrant Worker Recruitment Procedure from the Perspective of a
Malaysian Employer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
10. Remittance Outflows from Malaysia (1997–2006) . . . . . . . . . . . . . . . . . . . . . . . . . . 28
11. Flow Map of Formal Sector Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
12. Fees for Remitting Funds from Malaysia to Indonesia . . . . . . . . . . . . . . . . . . . . . . . 32
13. Costs per $100 of Remitting Different Sums of Money, April 2007 . . . . . . . . . . . . . 33
14. Role of Recruitment Agencies on Collecting and Transferring Placement Fees . . . 36
15. The Remittance Market between the Two Countries . . . . . . . . . . . . . . . . . . . . . . . . 38
16. The Options Remittance Senders Face when Transferring Funds from
Malaysia to Indonesia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
17. Market Share among Indonesian Banks for Remittance Transfers (2006) . . . . . . . 42
18. Cost of Sending US$200 from the U.S. to Mexico, El Salvador, Jamaica and
Gautemala, Relative to Number of Companies Operating (2001–2005) . . . . . . . . . 58
19. Correlation Between a Decline in Average Remittance Transfer Costs and an
Expansion in Remittance Flows in the U.S.–Mexico Remittance Corridor . . . . . . . 59
B1. Indonesia Worker Remittance Inflows and Net Inflows of Foreign Direct
Investment (1983–2005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .75
B2. Indonesia: Exports of Goods and Inflows of Workers Remittances as a
Percentage of GDP (2000–2005) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .76
C1. Lombok . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .80
LIST OF BOXES
1. Official Policies and Programs to Regulate Indonesian Worker Migration . . . . . . . 10
2. Use of Remittances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
3. Overview of the Malaysian and Indonesian Regulatory Framework . . . . . . . . . . . . 31
4. Regional ATM Link-up between Malaysia and Indonesia . . . . . . . . . . . . . . . . . . . . . 35
5. Risk of Informal Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
6. Focus Groups in Purworejo and East Lombok . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
7. Bank Indonesia Promotes Rural Bank Financing for Overseas Workers . . . . . . . . . 44
8. Account Mediator in Lombok . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
9. Access to Formal Fund Transfer Mechanisms for Undocumented Workers . . . . . . 52
10. Targeting Undocumented Workers to Use Formal Transfer Channels in
South Korea . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
11. Customizing Banking Services to Migrants and their Families: The Case of
BPI in the Philippines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
12. Recording Remittance Transfer Costs: The Case of Mexico . . . . . . . . . . . . . . . . . . . 54
13. HimalRemit Mechanism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
14. Home Town Association “3×1” . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
15. The New Alliance Task Force of the FDIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
16. Western Union Strategies to Attract Migrant Workers . . . . . . . . . . . . . . . . . . . . . . . 56
17. The Promise of Mobile Phones in Fostering Financial Sector Development . . . . . 57
18. Informal Fund Transfer Systems in Mexico: The Case of “Professor Pacheco” . . . . 60
A1. The Malaysian Anti-Money Laundering and Anti-Terrorism Financing
Act 2001
B1. Bank Indonesia Five Steps to Estimate Workers Remittances Inflows . . . . . . . . . . .74
C1. Bank Perkreditan Rakyat (People’s Credit Bank) . . . . . . . . . . . . . . . . . . . . . . . . . . . .79
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