Do remittances create credit?

Remittances from foreign workers to their families at home are an important source of income in some countries. Whether this is a good solution for the long term is debatable, though, as it may create a dependency. Thus it is important to understand whether these remittances end up not just fueling consumption but build the basis for investment in various forms of capital and future domestic income.

Christian Ambrosius looks at Mexico and finds that receiving remittances is strongly associated with the ownership of a savings account, especially in rural areas. So at least all of the remittances are going into consumption. More interesting is that there is also evidence that it also builds up some borrowing capacity, especially in microfinance banks. Once more, it is not the big financial institutions that seem to be the key to the development of the poorest, but the small institutions that rely on the local social network. And remittances are perfect to finance that.