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Banks, remittances and financial deepening in receiving countries. A model

Author

Listed:
  • Enrique Alberola

    (Banco de España)

  • Rodrigo César Salvado

    (Banco Centroamericano de Integración Económica)

Abstract

A remarkable fact of the mushrooming remittances market is the absence of commercial banks as relevant players. Furthermore, remittances have been identified as a potential catalyst for the financial deepening of receiving countries through higher access to banking services by migrants' families. Building upon these features, this paper sets up a two-period financial model of remittances without uncertainty. The formulation acknowledges, on the one hand, the altruism component of remittances sent by migrants to their families and, on the other hand, the dominant position of Money Transfer Operators (MTO's) due to migrants' mistrust to banks, which hinders the access of banks to the market. Altruism compounded with a non-competitive market allows MTO's to set excessively high remittance fees and to attain monopolistic rents. The model shows that banks can challenge this position thanks to their role as providers of remunerated saving and credit, which enables them to overcome the competitive disadvantage derived by migrants' mistrust. Notwithstanding this, the main positive impact of banks' entry is attained through higher competition, not through the provision of financial services. All in all, the entry of banks reduces the fees and increases the level of remittances, allows an optimal consumption smoothing and improves the welfare of migrants and their families, although it also increases the volatility of remittances.

Suggested Citation

  • Enrique Alberola & Rodrigo César Salvado, 2006. "Banks, remittances and financial deepening in receiving countries. A model," Working Papers 0621, Banco de España.
  • Handle: RePEc:bde:wpaper:0621
    as

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    References listed on IDEAS

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    Cited by:

    1. Philip Vermeulen & Daniel A. Dias & Maarten Dossche & Erwan Gautier & Ignacio Hernando & Roberto Sabbatini & Harald Stahl, 2012. "Price Setting in the Euro Area: Some Stylized Facts from Individual Producer Price Data," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(8), pages 1631-1650, December.
    2. Rios Avila, Fernando & Schlarb, Eva, 2008. "Bank accounts and savings - the impact of remittances and migration: a case study of Moldova," Kiel Advanced Studies Working Papers 448, Kiel Institute for the World Economy (IfW Kiel).
    3. Kujal Praveen & Ruiz Juan M., 2007. "Cost Effectiveness of R&D and Strategic Trade Policy," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 7(1), pages 1-35, April.
    4. Ritha Sukadi Mata, 2009. "Microfinance Institutions (MFIs) on the Remittances Market: Money Transfer Activity and Savings Mobilisation," Working Papers CEB 09-022.RS, ULB -- Universite Libre de Bruxelles.
    5. Bjuggren, Per-Olof & Dzansi, James & Shukur, Ghazi, 2010. "Remittances and Investment," Working Paper Series in Economics and Institutions of Innovation 216, Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies.
    6. Cooray, Arusha, 2012. "Migrant remittances, financial sector development and the government ownership of banks: Evidence from a group of non-OECD economies," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(4), pages 936-957.
    7. Luis J. Álvarez & Ignacio Hernando, 2006. "Competition and price adjustment in the euro area," Working Papers 0629, Banco de España.
    8. Ricardo Gimeno & Juan M. Nave, 2006. "Genetic algorithm estimation of interest rate term structure," Working Papers 0634, Banco de España.

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    More about this item

    Keywords

    banks; financial development; migrations; remittances;
    All these keywords.

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • J61 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Geographic Labor Mobility; Immigrant Workers

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