Gregory Vincent explores the changing landscape for charities remitting money abroad.
The globalisation of the world’s economy is resulting in two important developments that threaten to turn traditional financial behaviour on its head. The first such development is that, increasingly, funds are now spent in the developing world in the local currency of the country in question, instead of in US dollars (USD).
For a myriad of reasons, governments are insisting that their sovereignty be respected and local expenses be settled in local currency, making the argument for holding USD onshore significantly less relevant.
At the same time, it is becoming easier and easier to now source local currency efficiently and (most importantly) transparently from international hubs, reducing the need to run multiple local treasury and finance operations in programme countries.
Nearly all major INGOs (including supranational organisations and even some government departments and development agencies ) now run international hubs, with one central specialised finance team responsible for sourcing local currency needs. This helps keep expenses to a minimum whilst simultaneously increasing head office oversight and is becoming an increasingly cost-efficient strategy even for mid-size and smaller charities.
Why is this story relevant to charities working abroad? Well historically there has been an argument for sending and holding USD (and other hard currencies) for the developing world. These arguments have centred around maintaining the value of the sent amount (as regards protecting against devaluation), the requirement to pay locally in USD and the complexities involved in exchanging into local currency in international markets.
The reason that recent developments are welcome is due to the risks associated with simply remitting USD, which include:
Delays in funds arriving
USD continues to be the world’s funding currency, meaning that relatively smaller aid and development payments sit a long way down the priority list of the large correspondent banks – where there are problems it can be very difficult to get sufficient attention from the correspondent network to fix quickly.
The involvement of multiple banks in the chain
Any of these banks may choose to charge a fee or may add to the potential delay; lack of clarity as to what is the genuinely available exchange rate (when funds sit already in the hands of the local bank before they are exchanged into local currency, one’s negotiating position is weakened)
The ultimate use of the funds
USD can easily be sent back offshore and are far more attractive to those who seek to divert the proceeds of local development organisations than local currency which, by its nature, must stay in the local economy.
This is not an exhaustive list, but it certainly represents a series of worries for any CFO or Finance Director when contemplating how to fund offices and projects in the developing world. Fortunately, with the benefits highlighted above, at least many of these can now be avoided!
Gregory Vincent is head of FX payments (EMEA) at INTL FCStone.
Civil Society Media would like to thank INTL FCStone for their support with this article.
