Remittances and Financial Access: Is There Really a Link and for Whom? Evidence from Mexican Household Data

• Author: Christian Ambrosius
• Published date: 01 July 2016
• Date: 01 July 2016
• DOI: http://doi.org/10.1111/twec.12287

Remittances and Financial Access: Is

There Really a Link and for Whom?

Evidence from Mexican Household Data

Christian Ambrosius

Institute for Latin American Studies, Freie Universit€

at Berlin, Berlin, Germany

1. INTRODUCTION

THE strong increase in remittances –the money sent by migrants to their families remain-

ing in their home country –has given rise to a major debate on the impact of these finan-

cial flows on receiving countries. This paper turns around a question that –although popular

in policy discussions –has only recently received attention in the academic literature: remit-

tances and access to financial services among the receivers of remittances. Lookin g at the

direct effects of remittances on households and the use of these funds alone ignores important

aspects of how remittances influence receiving countries. This paper draws attention to some

of the indirect effects of remittances on the economies of receiving countries via its linkages

to the financial sector. Moreover, it aims to improve the understanding of financial markets in

developing countries and how they relate to financial management of migrant households.

A large part of the population in developing countries lack access to financial services.

In most Latin American countries, for example, only one-quarter of the population owns

savings accounts, compared to more than 90 per cent for most Western European countries

(Honohan, 2008). This lack of access to financial services among poor households limits

their strategies for risk management and asset accumulation as poor households often hold

onto cash or invest it in the form of fixed assets like land and cattle. Furthermore, they

have limited opportunities to attain credit from formal financial institutions in order to cope

with unforeseen shocks, finance larger purchases or invest in small businesses (for a gen-

eral discussion, see Armend

ariz de Aghion and Murdoch, 2005; for a literature review

focusing on rural markets, see Conning and Udry, 2005). In this context, linking remit-

tances with additional financial services can have positive effects not only on remittance-

receiving households but also on remittance-receiving countries more generally and has

therefore become an important issue on the policy agenda (Orozco, 2004; Terry and

Wilson, 2005; Orozco and Fedewa, 2006). First, receivers themselves may benefit from

more efficient asset-building strategies through monetary savings options and eventually by

gaining access to other financial services like credit and insurance products. Beyond these

direct benefits to receivers, linking remittances with financial services has potentially wider

economic effects. Savings from remittances can be channelled to their most productive use

and be matched with the demand for credit elsewhere, therefore also benefiting those who

do not directly receive remittances themselves. Because microfinance institutions are usually

both socially and geographically closer to the typical receivers of remittances compared to

traditional banks, they play a potentially important role in linking remittances with addi-

tional financial services. While several studies have recently addressed the topic of remit-

tances and financial development, the question whether and how remittances affect the

financial sector of receiving countries is not settled. In particular, there is a lack of studies

at the household level.

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964

The World Economy (2016)

doi: 10.1111/twec.12287

The World Economy

Mexico provides an interesting case for studying the impact of remittances on financial

access because more than 10 per cent of Mexico’s population of circa 110 million people live

outside their country of birth, forming the largest group of immigrants in the USA (Pew His-

panic Center 2013). With an estimated 23.4 billion US$ of remittances transferred by Mexi-

can migrants to their home country in 2012, Mexico is one of the main receivers of

remittances worldwide, after India and China. Despite a 16 per cent decrease in the sending

of remittances following the 2008 US financial crisis, remittances still play an important role

in the Mexican economy, as remittances were even larger in size than foreign direct invest-

ment to Mexico, contributing more than two per cent to Mexico’s GDP in 2012 (World Bank

2014). In Mexico, as in many other countries, remittances are usually sent and received in

cash, and many remittance receivers belong to lower-income groups, which are excluded from

the (mainstream) financial system.

This paper is organised as follows: Section 2 summarises the state of current research on

remittances and financial intermediation, while Section 3 introduces the Mexican Family Life

Survey (MxFLS), a nationally representative panel data set at the individual and household

levels that allows researchers to combine information on remittances with access to and the

usage of financial services. Section 4 specifies the estimation strategy of a conditional fixed

effects logit model, and Section 5 discusses the results. Remittances are strongly correlated

with the ownership of savings accounts and, to some degree, with the availability of borrow-

ing options. These effects are more important for rural households compared with urban

households and more important for microfinance institutions than for commercial banks. The

final section summarises these findings and presents conclusions.

2. REMITTANCES AND FINANCIAL ACCESS: STATE OF CURRENT RESEARCH

In recent years, much research has been carried out on the manifold impacts of remittances

on receiving countries, such as their impact on poverty (e.g. Adams and Page, 2005), inequal-

ity (e.g. Jones, 1998; Acosta et al., 2008), spending behaviour (e.g. Cox Edwards and Ureta,

2003; Adams and Cuecuecha, 2010) as well as macroeconomic policy aspects (e.g. Amueda-

Dorantes and Pozo, 2004a; Mandelman, 2013). This paper focuses on the effects that remit-

tances have on access to financial services in remittance-receiving countries, a debate strongly

dominated by policy papers and practitioners’ perspectives presenting case studies on financial

institutions that have included remittances in their product portfolio and offer additional finan-

cial services to remittance receivers. Most of these case studies refer to institutions from the

microfinance sector that focus on lower-income clients (Orozco and Hamilton, 2005; Hastings,

2006; Orozco, 2008). Their conclusion is that receivers of remittances often match the profile

of the typical clients of microfinance institutions better than that of commercial banks, and

linking remittances with microfinance institutions therefore has important positive effects.

While providing insights into the possibilities and the potential of linking remittances with

additional financial services, these studies allow for few generalisations of findings, do not

systematically assess the remittance receivers’ demand for financial services or the success

of such initiatives and do not quantify the linkages between remittances and financial

intermediation.

In spite of figuring so prominently in development policy, academia has remained rela-

tively silent on the issue, with few studies having systematically approached the impact of

remittances on the financial sector. Using cross-country panel data, Aggarwal et al. (2010)

provide global-level evidence that remittances are correlated with deeper financial sectors in

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