Abstract
This paper investigates the impact of remittances on financial inclusion. This is an important issue given recent studies showing that financial inclusion can have significant beneficial effects on households. Using household-level survey data for El Salvador, the authors examine the impact of remittances on households' use of savings and credit instruments from formal financial institutions. They find that although remittances have a positive impact on financial inclusion by promoting the use of deposit accounts, they do not have a significant and robust effect on the demand for and use of credit from formal institutions. If anything, by relaxing credit constraints, remittances might reduce the need for external financing from financial institutions, while at the same time increasing the demand for savings instruments.
Highlights
Remittances have become a significant source of external financing for developing countries
Financial inclusion refers to three different alternative dependent dummy variables indicating: (i) whether the household has a deposit account at a formal financial institution; (ii) whether any member of the household has applied for a loan from a financial institution; and (iii) whether the household has received a loan from a financial institution
This issue is important given the evidence that financial development matters for growth and poverty alleviation and financial inclusion has many beneficial effects for households
Summary
Remittances have become a significant source of external financing for developing countries. Aggarwal, Demirgüç-Kunt, and Martínez Pería (2011) study the impact of remittances on the financial sector using balance of payments data on remittances and aggregate data on bank credit and deposit amounts for 109 developing countries over the period 1975-2007. While previous studies have looked at the link between remittances and aggregate deposits and credit amounts, this is the first study to examine whether remittances foster the use of deposit accounts and credit by households This is important given the literature that has identified beneficial effects from financial inclusion. We focus on formal financial institutions in order to analyze the impact of remittances on access to financial services such as loans, savings, and checking
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