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

Enrique Alberola and Rodrigo Salvado ()
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Rodrigo Salvado: Banco Centroamericano de Integración Económica

No 621, Working Papers from Banco de España

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.

Keywords: banks; financial development; migrations; remittances (search for similar items in EconPapers)
JEL-codes: G20 J61 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2006-08
New Economics Papers: this item is included in nep-ban and nep-com
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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