The Impact of Remittances on Financial Development in Developing Countries from 2005 to 2015

Abstract

Remittances inflows as a major financial source in most of the emerging countries effect many economic aspects of country. However, there is a gap in existing literature regarding impact of remittances on financial development, which remains one of the most fast-growing and profitable sectors of the economy. This paper focuses on how remittances can effect financial development, measured in bank deposits and bank credits to GDP in case of 32 Top remittance receiving countries in the period from 2005 to 2015. Theoretical background on this topic identifies statistically significant role of traditional macroeconomic indicators and remittance inflows in determining the level of bank deposits and credits. Thus, hypothesis suggests positive relationship between remittances inflows and financial development indicators, because in emerging economies share of remittances in real GDP is considerably high, which means that socioeconomic impact of remittances is significant in those countries. Current research is based on panel dataset from 32 developing countries with low, lower–middle and upper-middle income levels. Empirical part of the research estimates AR model, applying Fixed Effects and Arrelano-Bover generalized method of moments methodology. Preliminary findings include significant positive association of focus variable, remittances, with financial development indicators, along with trade openness, current account balance, country size, level of economic development, inflation and dollarization rate.