Remittances and Financial Inclusion: Evidence from El Salvador


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While we know a lot about the impact of remittances on growth, investment, poverty, inequality, health, and education, the potential effects of international remittances on the domestic financial system and financial inclusion have not received much attention. There are several ways in which remittances could affect financial inclusion (that is, facilitating households’ access to and use of financial services). First, remittances might increase the demand for savings instruments. The fixed costs of sending remittances make the flows lumpy, providing households with excess cash for some period of time. This might potentially increase their demands for deposit accounts, since financial institutions offer households a safe place to store this temporary excess cash. Second, remittances might increase household’s likelihood of obtaining a loan. Processing remittances flows provides financial institutions with information on the income of recipient households. This information might make financial institutions more willing and able to extend loans to otherwise opaque borrowers. On the other hand, since remittances might help relax households’ financing constraints, the demand for credit might fall as remittances increase.

Using household-level survey data for El Salvador for the period 1995-2001, Diego Anzoategui, Asli Demirguc-Kunt and I study the impact of remittances on financial inclusion. In particular, we focus on whether remittances promote the use of deposit accounts and credit by examining the impact of remittances on the likelihood that households have a deposit account, apply for loans, and receive loans from formal financial institutions.
We find that households that receive remittances are more likely to have a deposit account at a financial institution. Our most conservative estimates indicate that receiving remittances increases the likelihood of having an account by at least 11 percent and an additional colon (local currency unit) per capita in remittances raises this probability by 5 percent. These effects are sizeable given that on average only 19 percent of households have an account. However, remittance-recipient households are not more prone to request or receive a loan. In fact, some estimations show the opposite. This suggests that though remittances might have the potential to encourage the use of savings instruments, they do not necessarily foster the demand for and use of credit, perhaps because they help to relax credit constraints.

There are a number of potential avenues for future research. First, it would be interesting to analyze the extent to which remittance recipients that have accounts, actively use these accounts to save and manage their daily transactions. Second, it would be important to go deeper into the reasons why those that receive remittances do not seem to have a higher demand for credit. In particular, it would be useful to analyze whether indeed this is due to the fact that remittances relax credit constraints or because the credit products offered to remittance recipients are not considered adequate by this population.





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Elliot Roper
October 18, 2011

I am currently still working on my thesis surrounding circular migration in the former Soviet Union space and having some difficulty selecting a theoretical framework. I would argue that hate is the driving factor that makes individuals and families move from their surroundings to another environment and that one particular framework. Hate for the local situation that they are placed in, albeit economic, social, political, etc. If the desire to move exists within someone, that implies that the current situation is unacceptable to them and hate it with such a passion that they seek refuge in another location for a better life; otherwise they would just stay put and not leave and develop locally.

I have wrestled with an institutional theoretical framework or an economic one, such as the neoclassical, but having traveled much myself, one cannot escape the fact that the family unit is the main source for moving and trying to escape the boundaries of that unit for freedom and personal development. I would be interested to get some feedback on this thought.

October 19, 2011


A very interesting note. Working with rural cooperatives in El Salvador i observed a significant divide between poor rural remittance receivers who used nearly all their remittance on sustenance, and those who viewed the remittance as belonging to the sender and duly deposited it for him at a cooperative toward some future goal (usually building a house or buying land). These depositors were not necessarily empowered, but rather good stewards of their relative's money. It would be interesting to analyze the other macro- and microeconomic factors that prevent the first type of person from opening and using a savings account, and also the actual breakdown between savings accounts opened for month-to-month money management versus those for accumulating lump sums for assets.

It would also be interesting to repeat the analysis with more recent data. Does increased or decreased uptake of savings and flows of remittances correlate with the improving/worsening lot of Salvadorans in the U.S. and Canada?