Migrant workers' remittances to developing countries have become the second largest type of flows after foreign direct investment. This paper uses data on workers' remittance flows to 99 developing countries during 1975-2003 to study the impact of remittances on financial sector development. In particular, it examines whether remittances contribute to increasing the aggregate level of deposits and credit intermediated by the local banking sector. The findings provide strong support for the notion that remittances promote financial development in developing countries.
Key points from the paper are:
remittances, funds received from migrants working abroad, to developing countries have grown dramatically in recent years from U.S. $2.98 billion in 1975 to close to U.S. $90 billion in 2003
while the development potential of remittance flows is increasingly being recognised by researchers and policymakers, the effect of remittances on financial development remains largely unexplored
the author find that remittances have a significant and positive impact on bank deposits and credit to GDP
this result is robust to using different estimation techniques and accounting for endogeneity biases arising from omitted factors, reverse causation, and measurement error.