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On Remittances, Foreign Currency Exposure and Credit Constraints: Evidence from Nepal

Nephil Maskay (), Sven Steinkamp () and Frank Westermann

No 101, IEER Working Papers from Institute of Empirical Economic Research, Osnabrueck University

Abstract: In this paper, we investigate whether foreign currency accounts help overcome credit constraints in developing countries. We analyze a novel bank-level data set from Nepal, where a steady inflow of remittances has contributed to foreign currency deposits on commercial bank balance sheets. In this data set we find that: (i) Banks hedge their FX exposure by investing in FX assets. (ii) Banks also hedge indirectly via their sectoral lending composition: Banks with a large share of FX deposits primarily lend to firms in traded-goods sectors. They lend only little to the non-traded sectors, as well as deprived sectors of the economy that have been targeted by various support programs. While the direct impact of FX accounts on relaxing credit constraints thus appears small, and biased towards specific sectors, there is also a substantial indirect effect via the additional creation of domestic deposits – that benefits all sectors of the economy.

Keywords: Foreign Currency Deposits; Sectoral Lending; Financial Development (search for similar items in EconPapers)
JEL-codes: F31 F24 E58 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac
Date: 2014-10-22, Revised 2017-07-25
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Related works:
Working Paper: On Remittances, Foreign Currency Exposure and Credit Constraints: Evidence from Nepal (2015) Downloads
Working Paper: On Remittances, Foreign Currency Exposure and Credit Constraints: Evidence from Nepal (2014) Downloads
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