DO REMITTANCES CONTRIBUTE TO THE DEVELOPMENT OF FINANCIAL INSTITUTIONS? NEW EVIDENCE FROM THE DEVELOPING WORLD

This study empirically examines the impact of remittances on the development of financial institutions in 50 countries selected from low (LI), lower-middle (LMI) and middle-income (MI) groups. The income group effect is inspected using the system Generalised Method of Moment Regression (SGMM), while for individual economies we employ the dynamic panel bootstrap Granger causality approach. The results reveal that remittances increase financial depth in three groups, stabilise the institutions in low-income and increase profitability in middle-income group. The remittances used for consumption play a negative role in financial expansion. Suitable government policies uplift the position of financial institutions whereas, corruption exerts an adverse effect on it. The causality evidence shows that remittances have a more robust effect on financial institutional development especially in lower-middle and middle-income countries. Moreover, remittances and institutions cause each other in three-fifths of lower-middle and three-fourths of middle-income countries. The developed financial institutions have the additive capability to attract more remittances and employ them in a productive way. We notice the fact that, the economic relationship between remittances and financial institutions is more country-specific. Sound economic policies, tax exemptions and a competitive environment in the financial sector can have dual effects on both the remitters and the intermediary financial institutions.