CHAPTER 1

INTRODUCTION

1.1 Introduction

Remittances from foreign employment are the largest income source of the Sri Lanka and
it was amounted to USD 2502 million in 2007(CBSL Annual Report-2007, chap 4 page
90). The Balance of Payments (BOP) recorded a surplus for the third consecutive year
largely due to the favorable contribution of foreign remittances from abroad. (CBSL
Annual Report-2007, chap 4 page 90)
Higher inflows of private remittances from countrymen residing overseas helped swell
Sri Lanka's BOP to record a US$501 million surplus in 2005. (Lanka Business Online,
Apr 12, 2005)
Remittance business is a service provided by a business service provider (BSP) in most of
the cases Banks.
A business (also called a firm or an enterprise) is a legally recognized organization
designed to provide goods and/or services to consumers. Businesses are predominant in
capitalist economies, most being privately owned and formed to earn profit that will
increase the wealth of its owners and grow the business itself. The owners and operators
of a business have as one of their main objectives the receipt or generation of a financial
return in exchange for work and acceptance of risk.
(http://en.wikipedia.org/wiki/Business)

Apart from accepting deposits and lending money, banks also carry out, on behalf of their
customers the business of transfer of money - both domestic and foreign.- from one place
to another. This activity is known as "remittance business". Banks issue demand drafts,
banker's cheques, money orders etc. For transferring the money. Banks also have the
facility of quick transfer of money also know as telegraphic transfers. (www
allbusiness.com) .
A remittance can be defied as the act of transmitting money, bills, or the like, esp. to
distance place, as in satisfaction of a demand or in discharge of an obligation. (Webster,
1913).
Another definition of a remittance is the process of sending money to remove an
obligation. This is most often done through an electronic network, wire transfer or mail.
The term also refers to the amount of money being sent to remove the obligation
(banknetindia.com)

In remittance business, bank 'a' at a place 'a' accepts money from customer 'c' and makes
arrangement for payment of the same amount of money to either the customer 'c' or his
"order" i.e. a person or entity, designated by 'c' as the remitter, through either a branch of
bank 'a' or any other entity at place 'b'. In return for having rendered this service, the
banks charge a pre-decided sum known as exchange or commission or service charge.
This sum can differ from bank to bank. This also differs depending upon the mode of
transfer and the time available for affecting the transfer of money. Faster the mode of
transfer, higher the charges.

Remittances mainly divided into two parts namely inward & the outward .In Sri
Lanka outward remittances are few in numbers with compared to inward
remittances. Inward remittances were considered as the core area of this research
study.

Types of Inward Remittances consist of Foreign currency, Demand drafts,

International money orders, Cashier’s cheques, Postal ordres, Private cheques,
Travellers cheque,Telex, Telegraphic transfers (swift MT 103),
Web based payment systems (e- remittances) ,Internet payment systems ,Internet
banking. These inward remittances were mostly credited to normal savings
accounts and foreign currency accounts .

And the main types of outward remittances are, Foreign currency, Foreign drafts,
Travelers cheques, Swift/TT transfers, etc. The main purposes for such outward
remittances were importation of goods , education and other .

Remittance business is handled by all the licensed commercial banks in Sri Lank,
National Savings Bank, Development Banks & other non financial institutions &
even money changers .There is a heavy competition among the banks to enhance
their market share in the business. Lots of promotional activities and innovations
going on this regard.

There are number of factors affecting the Remittance Business and for the
purpose of my study I am considering main three factors. They are

- Speediness of the sending & receiving banks

- Commission charged by the banks

- Promotional Activities - Establishment of new remittance channels.

- Number of foreign representatives in abroad

- Efficiency and the quality of the service

- Promotion of new products.

1.2 Background to the Research

There are number of Banks and other financial institutions engage in remittance business
and there is immense competition among them. Due to time and resource constraints I
have narrowed down the industrial situation to the People’s Bank.

Name of the bank-People's bank

Legal status A licensed commercial bank under the banking act no. 30 of 1988
incorporated as a commercial bank by people's bank act no. 29 of
1961.

Head office -75, Sir Chittampalam a. Gardiner mawatha

(registered Colombo 2
office) Sri Lanka.

Cable Janabank
Tel 2327841 (6 lines)
2446316 (15 lines)
E-mail info@peoplesbank.lk
Swift Psbklklx
Vat registration no. 409000037-7000
Overseas 59, d.r. wijewardena mawatha
customer service colombo 10

Tel 2332746
Telex 21486 pbkfx ce
E-mail ocu@peoplesbank.lk,
nrfc@peoplesbank.lk
Swift psbklklx

People’s bank is one of the largest stat owned Banks in Sri Lanka. Its remittances
business is handled by the overseas customer services.
Key strengths of the organization

-47 years of pioneering banking services

-11,664,445 loyal deposit account holders
-8968 dedicated employees
-An unmatched outreach of 325 branches, 317 service centers and 238 ATMs in
 addition to the corporate branch and OCU.
-Automated inter branch funds transfer facility between 559 branches and
savings centers in key cities and towns across Sri Lanka.
-State-of-the-art core banking package to improve customer service quality and
facilities has been implemented across 418 centers across branch network and at
head office

Types of remittances in People’s bank includes, Foreign currency, Drafts, Travelers

cheques, Telex, Fax, Swift-MT 103, Peoples e-remittances, Cash on line / B 2 B system,
Western union money transfer.
People’s Bank being one of the market leaders in remittance business in Sri Lanka was
able to achieve 20.95% in 2007 of the total market share.

Inward Remittances - Market Share

In Rs .Million
Description 2006 2007
All Banks 241,900 269,715
People’s Bank 49,296 56’507
Market Share % 20.38 20.95

(Progress Report -2007, People’s Bank)

1.3 Research question

What is the prevailing position of the remittance business in Sri Lanka? Whether it is
favorable or unfavorable? And factors affected for such a favorable or unfavorable
situation with special reference to People’s bank of Sri Lanka.

1.4 Objectives of the study

The primary objective of this study was to find out the present situation of the remittance
business and to identify the key factors affecting the remittance business.
The secondary objectives were as follows.
 To determine the main factors affecting the remittance business out of factors affecting
the business.
To analyze the relationship between the key factors and the remittance business.
To identify the role of the People’s Bank in the business.
 To determine strategies implemented by People’s Banks to the development of the
business.
 To make suggestions and possible recommendations for the enhancement the business.

1.5 Significance of the study

The flow of funds from migrant workers back to their families in their home country is an
important source of income in many developing economies. The recipients often depend
on remittances to cover day-to-day living expenses, to provide a cushion against
emergencies or, in some cases, as funding for small investments. The total value of
remittances has been increasing steadily over the past decade and it is estimated that in
2005 the total value worldwide was over USD 230 billion equivalent, involving some 175
million migrants. (The world bank report on general principles for international
remittance services, Jan 2007 ).Remittances are now probably the largest source of
external financing in developing countries and for some countries they can account for as
much as a third of GDP; moreover, the flow of remittances seems to be significantly
more stable than that of other forms of external finance.

The importance of remittances, and the difficulties that can be associated with them,
have been increasingly recognized in recent years. In particular, at their summit at Sea
Island in June 2004, the G8 countries agreed to take action with developing countries to
help reduce the cost of making remittances. One such action was the creation of a task
force to develop principles for international remittance services. (The world bank report
on general principles for international remittance services, Jan 2007 )

More over the trade deficit of the BOP was largely offset by increased private remittances
in recent past. The current account deficit narrowed marginally to US dollars 1,369
million in 2007 from US dollars 1,499 million in 2006. In terms of GDP, it improved to
4.2 per cent of GDP in 2007 from 5.3 per cent of GDP in 2006. The increased worker
remittances helped to contain the widening current account deficit and cushion the
adverse impact of higher international commodity prices on the current account and
exchange rates. (CBSL Annual report, chapter 5, p108)

The new measures taken by commercial banks on the initiatives of the Central Bank to
mobilize more remittances through creation of more awareness among migrant workers
on the benefits of transferring money through banking channels and posting additional
bank officers in several major labour hiring countries to mobilize remittances also helped
to increase the remittances in 2007. The enhanced worker remittances are estimated to
have financed about 70 per cent of the trade deficit in 2007 (CBSL Annual Report,
chapter 5 p108)

And also in a crisis situation of a country such as national disaster foreign remittances
considered as an important mode to transfer aids, funds from foreign counter parties. And
foreign remittances are very much essential for the country’s development.

1.6 Conceptualization
Remittance Business was influenced by many factors and for this study speediness,
Commission charged and promotion activities were identified as the main
contributors for current volume of the business. The factors were also ranked as
highly important in the primary data collection from the remitters and beneficiaries.
And according to studies carried out on workers remittances it was proved that the
following factors has higher dignity.

Speediness

Commission charged Remittances Business

 Promotion Activities

Independent Variable Dependent

Variable

Even though not highly emphasized in this study other factors such as foreign exchange
rates, Infrastructure issues, micro and macro economic variables, political and legal
factors, social and cultural factors are also affecting remittance decisions made by the
customers.

1.7 Hypothesis

Alternative hypothesis
• There is a positive relationship between speed of transaction (independent
variables) and the remittance business (dependent variables)
• There is a negative relationship between Commission charged by the bank of
financial institution (independent variables) and the remittance business
(dependent variables)
• There is a positive relationship between promotion activities (independent
variables) and the remittance business (dependent variables)

1.8 Methodology

Data collection
 Primary data
Questionnaire was designed to get feedback from customers who transacting with the
People’s Bank (sample size 100).The factors considered by the customers when they
remitting money and the level of priority given for such factors and the relationship
between three main factors and the remittance business were the core content of the
questionnaire.

Secondary data
The study has been carried out using various secondary data sources such as previous
research studies, survey studies on this subject. And Central Bank Annual report, People’s
bank annual reports and publications, text books, journals, Articles, magazines, Internet
and other publications were also referred in the secondary data collection process.

Sampling.
The sample of this study consisted of 100 remitters and beneficiaries who remitting and
receiving funds through People’s Bank. And used stratified random sampling method to
select participants. To get the feedback from remitters in abroad telephone interviews
were also used.

Analytical techniques
Quantitative and qualitative methods such as correlation co-efficient, graphs, data tables,
chats, ratios were used to analyze both primary and secondary data. As analytical tools
SPSS data analytical tool and spread sheets were utilized.

1.9 Scope & limitations

This research was carried out with special reference to the People’s Bank of Sri Lanka as
it is one of the market giant in the remittance business. The main limitations faced were
listed below,
• High confidentiality of data on remittance business performance due to high
competition among the competitors.
• Even though there were number of market players in the business like all the
licensed commercial banks in Sri Lank, National Savings Bank, Development
Banks & other non financial institutions & even money changers, the research
limited to the People’s Bank.
• Only key three factors affecting the remittance business discussed in the research.
There are so many factors affecting the remittences.
• Time constraint
• Lack of books written on the subject of Remittance Business
• Lack of previous research studies conducted on the same subject in Sri Lankan
context.