CHAPTER ONE

INTRODUCTION

1.1        Background of the study

Remittances flowing into developing countries are attracting increasing attention because of their rising volume and their impact on recipient countries. On account of stable nature and increasing volume of remittances to developing countries, quite a number of studies analyzed their developmental impact across various dimensions including: Poverty, inequality, growth, education, infant mortality and entrepreneurship. But, very little attention has been given to the question of whether remittances promote economic as well as financial sector’s development of recipient country or not. However, this is a very important matter if judged from the perspective of development because financial system performs a number of key economic functions and their development has been shown to foster growth and reduce poverty [King and Levine,(1993); Beck, Levine and Loayza, (2000); and Beck, Demirguc-Kunt, and Levine, (2004)].

Remittances are migrant workers’ earnings sent back from the country of employment to the country of origin. They can also be referred to as financial resource flows arising from the cross border movement of nationals of a country (Kapur, 2003). Migrants’ remittances have grown extraordinarily over the last twenty years. According to the World Bank (2011) in the figure below, inward remittances flows increased worldwide from US$ 101.3 billion in 1995 to US$ 274.9 billion in 2005 and to an estimated US$ 440.1 billion in 2010. Correspondingly, inward remittances flows to developing countries grew from US$ 55.2 billion in 1995 to US$ 192.1 billion in 2005 and to an estimated US$ 325.5 billion in 2010).

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FIG 1:

$billions

1995

2000

2004

2005

2006

2007

2008

2009

2010e

Inward remittance flows

101.3

131.5