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Remittances and Financial Institutions

The extant literature indicates that remittance inflows from developed to developing countries provide liquidity for domestic financial institutions, which aids in the development process.

However, the reverse effect has been neglected. In this paper Alberto Posso tests whether more financial services and opportunities in the home country attract remittances to developing countries. He addresses this hypothesis using a dataset of 72 developing countries over the period 1997 to 2011. The paper finds evidence that remittance inflows are driven by increased availability of domestic financial services. In particular, the presence of microfinance institutions is found to be a key driver in stimulating migrant remittances. These findings, perhaps, suggest that remittance-sending migrants may not be altruistic and send remittances to maximize their own future income. Alternatively, the results suggest that microfinance organizations have been successful in attracting remittances by lowering transaction costs and proving linked services.