Remittances, funds received from migrants working abroad, to developing countries have grown dramatically in recent years from U.S.$18 billion in 1980 to over U.S.$126 billion in 2004. They have become the second largest source of external finance for developing countries after foreign direct investment (FDI), both in absolute terms and as a proportion of GDP. Furthermore, unlike, other capital flows, remittances tend to be stable even during periods of economic downturns and crises.
The development potential of these flows is increasingly being recognized and therefore interest in remittances and their impact is growing among governments, international organizations, and the private sector. Yet, research on remittances is sparse and limited mainly to country-specific surveys that examine the effects of remittances on poverty, education, and health among other things. On the other hand, the effect of remittances on financial development remains largely unexplored, despite the increasing interest on the part of financial institutions both in the remittance source and destination countries to enter this business as a way to expand their customer base.
Furthermore, this topic is empirically interesting because, a priori, the links between remittances and financial sector development are unclear. Remittances might have a positive impact on credit market development if, as individuals receive sizeable transfers from abroad that are shown to be stable, banks become more willing to extend loans to remittance recipients. On the other hand, because remittances might help relax individuals’ financing constraints, these flows might also lead to a lower demand for credit and have a dampening effect on credit market development. At the same time, whether we observe a positive relationship between remittances and financial development measured in terms of deposits will depend on the extent to which households are able to save part of the remittances they receive and do so by depositing these funds with banks.
We analyze the impact of remittances on financial development using both balance of payment statistics for close to 100 countries over the period 1970-2002 and household survey based data for Mexico (2000) and El Salvador (1995, 1997, 1999, 2001).
Researchers
- Sole Martinez Peria
- Asli Demirguc-Kunt
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