The impact of remittances on financial development in selected Asian countries

Abstract

Although the impact of remittances on economic growth and poverty has always been a controversial problem for researchers and policy makers as remittance inflow have been becoming one of the largest external capital sources for many countries, its direct effect on financial development merely attract more attention after the financial crisis of 2007-2008. In an effort to contribute to empirical studies on this issue, this study utilizes fixed effect, random effect and system Generalized Method of Moments (GMM) to investigate the direct impact of remittances on two dimensions of financial development comprising the percentage of domestic credit to private sector by banks and broad money to GDP in thirty-seven Asian countries during the period 1990-2014. Furthermore, this study also examines whether there are different effects of remittance inflows in high, middle and low-income countries in this area. The results show that an increase in remittances seems to have no impact on financial development in general while there are mix results regarding the different income groups of countries in Asia. In particular, while no evidence on the impact of remittances on both easurements of financial development as the whole region are obtained in middle and low-income countries, there is a significant and positive effect of these flows on the ratio of domestic credit to private sector by banks to GDP despite an insignificant influence on broad money to GDP in high income countries.