Home >News >India >Remittances’ effect on financial inclusion

Remittances are one of the biggest sources of funds for low- and middle-income countries. However, the pandemic has disrupted them, with the World Bank recently projecting a 20% drop in inflows. Such a large decline in remittances can also affect financial inclusion in poorer countries, suggests data from a working paper published by the International Monetary Fund (IMF).

In the study, Sami Ben Naceur and other researchers use World Bank data on average remittances from 2004 to 2015 for 187 countries to study their impact on financial inclusion. The study uses data on access and usage of financial services to define inclusion levels.

When remittances are above 13% of gross domestic product on average, they strengthen financial inclusion by improving access and use of banking systems, the study finds. However, at a level lower than this threshold, remittances are used directly for consumption rather than investment, becoming a substitute instead of a contributor to formal banking.

Below the threshold, neither are remittance inflows deposited nor do they expand the banking sector’s role. In low- and middle-income countries, where formal banking channels face high entry barriers, remittances become a cheap source of income. However, as the inflows rise, households save more and tend to use banking services, which in turn improves financial inclusion, the study finds.

The study measures access to banking through the number of commercial bank branches and ATMs per 100,000 adults for each country. For usage, the number of depositors and borrowers per 1,000 adults is considered. The study also accounts for factors such as inflation and trade to arrive at the conclusions.

Also read: Do remittances enhance financial inclusion in LMICs and in fragile states?

Subscribe to Mint Newsletters
* Enter a valid email
* Thank you for subscribing to our newsletter.

Never miss a story! Stay connected and informed with Mint. Download our App Now!!

Edit Profile
My ReadsRedeem a Gift CardLogout