Remittances as a means towards financial inclusion

Much has been said about remittances and how they in some countries constitute the second largest component of external finance after foreign direct investments.

In economic and financial literature much attention has been paid to two important points namely (1) how remittances help meet shortfalls in finances in countries and (2) how financial inclusion is a means to an end – helping channel these remittances from abroad to intended recipients; most of whom are often poor and beyond the reach of normal banking channels.

Though true the emphasis on these two points tend to miss another very important point. How remittances are a means to achieving financial inclusion for all.

Not only do these remittances flowing in from abroad provide an incentive to bring greater segments of the population under the ambit of formal financial institutions and channels as there is sufficient revenue to be gained for banking and financial institutions from channeling remittances to these recipients but they also make it possible for the recipients to gain access to formal banking channels and networks that were until recently structurally at least out of their reach. the result of this is an improvement in the lending capacity of banks and credit institutions in these countries who with greater numbers of people using their service; primarily for savings; suddenly have greater volumes of credit in their possession ; significantly enhancing their lending capability. An added impetus is provided by national and international  security considerations that look down upon informal channeling of money from abroad into domestic economies. Thus remittances by their very existence exert and demand pull to  improve formal institutional coverage to unbanked and under-banked sections of society. 

Under such scenarios remittances provide ample scope for “development” ; provided adequate policy is designed by governments and central banks to channelize the extra lending capability of formal financial  institutions; through infrastructural and policy initiatives; to help bridge the gap currently existing between demand for credit and supply of credit for particular segments of society and regions that are lagging behind. Structural change in economies to put them on to an accelerated path of development is hence a very possible consequence if remittances and their externalities are successfully harnessed.