DOES REMITTANCE INFLOW PROMOTE FINANCIAL DEVELOPMENT IN SOUTH ASIA?

Even though remittance income has become one of the major sources of external finance for South Asian countries, its influence on financial development of the region has not been sufficiently examined. This paper studies the relationship concerning three established indicators of financial development (Deposit/ GDP, Private credit/GDP and M2 money/GDP) with remittance inflow for five South Asian countries(Bangladesh, India, Nepal, Pakistan, Sri Lanka). Assuming panel heterogeneity for our model we have conducted panel unit root test, ECM based panel co-integration test and Dynamic OLS method to estimate the long run relationship. Using newly constructed data from 1990 to 2014, we find that remittance inflow has positively impacted the factors of financial development. The results indicate that remittance inflow plays an essential role in improving total deposit, private credit and M2 money of South Asian countries.