Remittances flow and financial development

Remittances flow is one of the major sources of foreign exchange earnings and has an ever important role for Bangladesh economy. It accounts for over 11 per cent of Gross Domestic Product (GDP) of the country in 2008-09. This paper attempts to investigate whether the increased remittances flow has been contributing positively on the development of financial system of the country using annual data over 1971-2008. The results of our study indicate that the influx of workers' remittances significantly promote the financial sector's development by raising the aggregate level of deposits, money and credit as the share of GDP of the country in the long run. While the country size, institutional development, openness in goods and in capital market have long run positive effect on the expansion of financial sector, interest rates and inflation rates are negatively impacting on the widening of the financial sector of the country as expected by the theory. Our findings also suggest that while remittances are positively supporting the financial development of the country, on the contrary, financial sector's development is neutral in influencing the inflow of remittances into the country.