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Migrants' Remittances and financial Development: Macro- and Micro-level Evidence of a Perverse Relationship

  • Richard P C Brown
  • Fabrizio Carmignani
  • Ghada Fayad

Financial development and financial literacy in developing countries are commonly identified as important conditions for attaining higher rates of investment and economic growth. It has also been argued that migrants’ remittances stimulate financial development in the receiving economy, contributing indirectly to economic growth. Past research has been based almost exclusively on the macro-level relationship between remittances and financial depth. To explore this relationship further, we combine macroeconomic analysis using a cross-country panel dataset with micro-level analysis of households’ uses of financial sector services. From the macroeconomic analysis we find evidence of a negative relationship between remittances and financial deepening in developing countries, once we control for the countries’ legal origin. At the microeconomic level we use household survey data from a recent study of migrants’ remittances in two transition economies, resource rich and relatively more financially developed Azerbaijan, and Kyrgyzstan, to test the relationship between remittances and financial literacy among remittance-receiving households. While we find some supportive evidence, albeit weak, for Kyrgyzstan, in Azerbaijan, the relatively more financially-developed economy, we uncover a strong perverse relationship. Remittances appear to deter the use of formal banking services. Possible reasons are explored and areas for further investigation identified.

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Paper provided by Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford in its series OxCarre Working Papers with number 059.

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Date of creation: 2011
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Handle: RePEc:oxf:oxcrwp:059
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  1. Catalina Amuedo-Dorantes & Cynthia Bansak, 2006. "Money Transfers among Banked and Unbanked Mexican Immigrants," Southern Economic Journal, Southern Economic Association, vol. 73(2), pages 374–401, October.
  2. Demirguc-Kunt, Asli & Lopez Cordova, Ernesto & Martinez Peria, Maria Soledad & Woodruff, Christopher, 2009. "Remittances and banking sector breadth and depth : evidence from Mexico," Policy Research Working Paper Series 4983, The World Bank.
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