Remittance as a determinant of financial sector development

Abstract

This paper studies the impact of remittances on financial sector development. Remittances sent across countries have increased enormously in the last three decades. For instance in 1980 remittances sent globally amounted to 47billion,47billion,102 in 1990, 321billionin2010,321billionin2010,529 billion in 2012 and $550 billion in 2013. A significant portion of remittances are received in lump sum and channelled through financial institutions which increases bank deposits, revenue for banks through transaction costs and enabling households access other financial services. Data on remittances, financial sector development and the control variables for the 31 countries for the period between 1980 and 2012 was used. General Moment Method (GMM) was used to analyse the data. The results show that remittances have an adverse effect on domestic credit to private sector and foreign direct. However the study further found that impact of remittances on bank deposit was positive though statistically insignificant. The study concludes that remittances can support financial sector development if financial institutions are effective in converting deposits to credit