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Financial Sector Development and the Preference for Informal Remittance Channels: Evidence from Bangladesh

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  • Md. Azad Uddin
  • Masaru Ichihashi
  • Shubhasish Barua

Abstract

The potential socioeconomic benefits of remittances remain untapped as a large portion of remittances is transferred through informal channels worldwide. In this paper, we explored the effect of the financial sector development in the home country on the preference for informal remittance channels using a nationally representative household dataset from Bangladesh along with subdistrict level data on bank branches. However, the identification of the effect of the banking network on the choice of remittance channel is challenging due to the unobserved heterogeneity problem. We circumvent this problem by using an instrumental variable (IV) approach. We found that greater accessibility to the banking network at the subdistrict level significantly reduces the use of the informal remittance transfer channels: a 10% increase in the availability of the total number of bank branches reduces the probability of using the informal channels, at least once, by 1.79% and hundi by 2.3% on average. The results are consistent and robust across different specifications and estimation methods. The main policy implication of this result is that the expansion of bank branches can enhance the inflows of remittances through formal channels and thereby can magnify the macroeconomic benefits of remittances globally.

Suggested Citation

  • Md. Azad Uddin & Masaru Ichihashi & Shubhasish Barua, 2022. "Financial Sector Development and the Preference for Informal Remittance Channels: Evidence from Bangladesh," Journal of Development Studies, Taylor & Francis Journals, vol. 58(6), pages 1231-1258, June.
  • Handle: RePEc:taf:jdevst:v:58:y:2022:i:6:p:1231-1258
    DOI: 10.1080/00220388.2022.2029420
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    Cited by:

    1. Robert C. M. Beyer & Konstantin M. Wacker, 2024. "Good enough for outstanding growth: The experience of Bangladesh in comparative perspective," Development Policy Review, Overseas Development Institute, vol. 42(2), March.
    2. Dinarte Diaz,Lelys Ileana & Jaume,David Jose & Medina-Cortina,Eduardo & Winkler,Hernan, 2022. "Neither by Land nor by Sea : The Rise of Electronic Remittances during COVID-19," Policy Research Working Paper Series 10057, The World Bank.

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