IMPACT OF REMITTANCES ON FINANCIAL DEVELOPMENT IN SOUTH ASIA
IMPACT OF REMITTANCES ON FINANCIAL DEVELOPMENT IN SOUTH ASIA

Summary/Abstract: Remittance inflows have been recorded as the second major external source of finance after foreign direct investment (FDI) for emerging economies. This paper empirically examines the impact of remittance inflows on financial sector development in South Asia using data from 1989 to 2011. We have constructed a financial development index through Principle Component Analysis (PCA) using eight main indicators of financial development from banking, stock and insurance sectors. Pooled Ordinary Least Square (OLS) estimation indicates that remittances inflows have positive and significant impact on financial sector development. Further, Generalized Method of Moments (GMM) system estimation to cater endogeneity biases (resulting from reverse causality) is applied. Findings confirm a significant positive impact of remittances on the financial sector development. Factors that drive financial development have a differential impact in South Asia. Specifically, economic growth and Foreign Direct Investment (FDI) enhance financial development. Inflation and exports are to deteriorate financial development in the region. These results are robust under different model specifications. This study is of importance for the South Asian countries to properly formulate policies and channelize these increasing inflows so that it can foster financial development.

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