Migrants' Remittances and financial Development: Macro- and Micro-level Evidence of a Perverse Relationship

Financial development and financial literacy in developing countries are commonly identified as important conditions for attaining higher rates of investment and economic growth. It has also been argued that migrants’ remittances stimulate financial development in the receiving economy, contributing indirectly to economic growth. Past research has been based almost exclusively on the macro-level relationship between remittances and financial depth. To explore this relationship further, we combine macroeconomic analysis using a cross-country panel dataset with micro-level analysis of households’ uses of financial sector services. From the macroeconomic analysis we find evidence of a negative relationship between remittances and financial deepening in developing countries, once we control for the countries’ legal origin. At the microeconomic level we use household survey data from a recent study of migrants’ remittances in two transition economies, resource rich and relatively more financially developed Azerbaijan, and Kyrgyzstan, to test the relationship between remittances and financial literacy among remittance-receiving households. While we find some supportive evidence, albeit weak, for Kyrgyzstan, in Azerbaijan, the relatively more financially-developed economy, we uncover a strong perverse relationship. Remittances appear to deter the use of formal banking services. Possible reasons are explored and areas for further investigation identified.