Migrants’ Remittances and Financial Development: Macro‐ and Micro‐Level Evidence of a Perverse Relationship

Abstract

Financial development is commonly identified as an important condition for fostering investment and economic growth. It is also believed that migrants’ remittances stimulate financial development in the receiving economy, contributing indirectly to economic growth. We explore the relationship between remittances and financial development using macro‐ and micro‐level data. From cross‐country panel data, we find evidence of a negative relationship between remittances and financial deepening in developing countries. Using household survey data from a study of migrants’ remittances in two CIS countries, Azerbaijan and Kyrgyzstan, we also investigate the relationship between remittances, financial intermediation and ‘financial literacy’ among remittance‐receiving households. While we find some evidence of a positive, albeit weak, relationship for Kyrgyzstan, in Azerbaijan, the relatively more financially developed economy, we uncover a strong perverse relationship. Remittances appear to deter bank intermediation and use of formal banking services. Possible reasons are explored and areas for further investigation identified.

Remittances, financial development and economic growth: Empirical evidence from Lesotho

“…On the supply side, it is argued that the deposit of remittance receipts in banks increases the availability of loanable funds and thus bank's ability to extend credit to both remittance and nonremittance receiving households and more so to the former, given their stable source of foreign earnings (Brown, Carmignani and Fayad, 2013). They go on to aver that remittances contribute to financial development by: (i) fostering 'financial literacy' among the remittance-receiving communities, thereby increasing households' demand for and use of banking services: and (ii) increasing the supply of loanable funds to the financial sector, thereby promoting greater financial depth.…”

The Role of International Mobile Remittances in Promoting Financial Inclusion and Development

“…Of the studies that have been conducted in order to investigate the association between remittances and access to financial services, the apparent majority of these studies have found evidence of a positive relationship (Ambrosius and Cuecuecha, 2016;Ambrosius, 2015;Anzoategui et al, 2011;Aggarwal et al, 2011;Demirguc-Kunt et al, 2011;Gupta et al, 2009). However, an outlying study by Brown et al (2013) did not find any evidence to support the claims of a positive relationship between remittances and the receiving households' use of formal banking services. Ambrosius and Cuecuecha (2016) conducted a research in Mexico in order to investigate the effect of cross-border remittances on the use of formal and informal financial services.…”

“…The household survey data was collected by the Asian Development Bank in 2007. At the macro level, Brown et al (2013) found no evidence that remittances increased domestic credit to the private sector. The effect actually appeared to be negative from their results.…”

“…They argued that formalising remittance flows could enable unbanked individuals and households to access formal financial services and that the development potential of remittances was dependent upon how recipients used funds that remained after they had catered for their basic consumption needs. In a study that yielded different results Brown et al (2013) discussed what they termed the "induced financial literacy hypothesis". They described the hypothesis as the notion that receiving remittances introduced recipients to the formal financial sector and helped them understand the sector better, thus inducing them to make more use of the formal services.…”

Remittance and Economic Growth in Nigeria

“…Calderon, Fajnzylber, and Lopez (2008), indicate that remittances can reduce credit demands and "have a dampening effect on the credit markets." Brown (2013) estimates the relationship between remittances and financial development using cross-section panel data. They find that after controlling for per capita GDP, other macroeconomic factors, and the country where the funds originate, remittances do not increase domestic credit to the private sector.…”