XM -Blog

What Is Remittance And How Does It Work?

November 13th, 2019

What is remittance and how does it work?

A 2019 study conducted by the Population Division of the UN Department of Economics and Social Affairs revealed that the global expat population has reached an astounding 272 million. It is also expected to grow more in the coming years. Evidently, the world is becoming smaller by the minute.

These days, many people move to other countries in search of better pay, improved standard of living, career growth, or other personal reasons. Increased migration also leads to an increased transfer of money between countries, which further affects how global economies function.

What is remittance?

While remittance may sound like a 21st century phenomenon, you will be surprised to know that it dates back to the industrial revolution. Many experts believe that it was during the industrial revolution that farmers and workers started moving to bigger cities in search of employment. They would often send money to their families back home, so they could meet their day-to-day needs. Just as it did back then, remittance continues to help families around the world to meet routine expenses.

So what does remittance mean in today’s scenario? When a person working in a foreign country, transfers money to a loved one in his/her home country, it is called remittance.

How does remittance work?

Now that we know what remittance means, it is time to understand how it functions. Remittance is a major source of cash inflow for any country. The transfer of funds mainly benefits developing countries. The process is simple, wherein expats save a portion of their salaries and send it to their families living in their home country.

Remittance happens via a legal channel: mail, bank transfer, money order, or an authorised money transfer operator. The remitter or expatriate transfers the funds from the current country of residence to their family back home. The funds are automatically calculated and converted as per the prevailing exchange rates and credited to the receiver’s account in the home country’s currency.

What are the types of remittance?

Remittance can be one of the following two types:

  • Outward Remittance: When expatriates send money to their home country, the process is referred to as outward remittance
  • Inward Remittance: The process of receiving this money by the expat’s family is called inward remittance

How does remittance help the economy?

Now that we have covered some ground on ‘what is remittance’ it is important to understand the impact of remittances on a nation. Inward remittance is a big part of a country’s economy and GDP. The money sent home by expats helps their families to meet their routine expenses, thereby improving their standard of living. This further increases their purchasing power.

When people have more money, their demands also increase correspondingly. This causes a ripple effect. Demand increases the supply, which in turn stimulates the market, the economy – and ultimately, the country’s GDP.

What does remittance mean for India?

If we consider India as an example, we can see that foreign remittance has played a pivotal role in its growth and development over the years. In FY 1990-91, India’s foreign remittance stood at USD 2.1 billion. The country’s remittance has grown by leaps and bounds since then and it was recorded at USD 79 billion in FY 2017-18. In fact, India has positioned itself as the world’s leading receiver of remittances.

Experts believe that the reason for India’s increasing remittance has been the rise in demand for unskilled expat workers in countries like Saudi Arabia, Oman, Qatar, and the UAE. These countries have recruited many Indian labourers who chose to work abroad, considering the difference in the value of INR when compared to foreign currencies.

What are the benefits of remittance?

Remittances cushion countries against financial setbacks. Here’s how:

1. Remittance tends to increase the purchasing power and consumption of a family. This results in access to better food, education, healthcare, housing and lifestyle among other things.

2. It directly benefits the recipients. There are no middlemen involved in the process, which reduces the scope of corruption. In fact, governments all over the world have introduced various tax-free accounts and other incentives to encourage foreign remittance through legal channels.

3. It improves a country’s per capita income and GDP.

4. Inward remittance is known to provide relief in times of natural calamities such as floods, earthquake, tsunami, etc.

5. The most significant benefit is that the remitter has complete knowledge of how and where their money is spent.

In most cases we can attribute the increase and decrease in money transfers to the economic crisis in the country. Trends show that a struggling economy encourages its country’s workforce to seek better avenues overseas. Another factor that can be credited to increased remittance is the relaxation on stringent migration laws. Today it has become easier and more affordable for people to migrate from one part of the world to another.


Each year the global volume of international remittances and its worth has continued to rise. As dynamics within the industry shift at a rapid pace, only time will tell what the future of remittances hold for expatriates around the world.

Also Read: Regulations In Remittances – Challenge Or Opportunity?