Remittance effects on banking sector development in Bangladesh: An Empirical investigation

Abstract

Introduction: The paper investigates the interaction between foreign remittance and banking sector development in Bangladesh. Foreign remittance has become a major contributor to the Bangladesh’ economy. As the emigrant workers from Bangladesh gradually increased over the years, the amount of annual remittance to the country significantly rose. According to World Bank, Bangladesh is now one of the largest recipients of remittance with almost $18.32 billion in 2019. It was 3rd highest recipient of remittance in South Asia in 2019. Worker’s remittance to Bangladesh now constitutes the single largest source of foreign exchange earnings and plays a critical role in the socio-economic development of Bangladesh. Remittance has resulted in improved living standards of worker’s families and helped in improving the income distribution in favor of poorer and less skilled workers. It is important to recognize that worker’s remittances are likely to have an effect on the development of banking sector in Bangladesh in terms of increasing deposits and injecting loanable funds to the banking sector. Remittances reduce the total unbanked population, and thus that banks are likely to open branches even in rural areas. Such branch enlargement increases the customer base, so banks can increase their income through commission and creating more loanable credit, as well as ledger fees. Methodology: This study is conducted using nine variables; out of which BSD is considered as the dependent variable and DEBT, EXC, FDI, GDPG, INF, IQE, TO and R be independent. The unit root test (ADF, PP, and KPSS) is formulated for the purpose of finding stationarity in the time series variables. . To determine the positive and negative effect of the independent variables on the dependent variable, the ARDL model is conducted. Findings: A long-run relationship between the dependent variable and the other independent variables were found through the Linear ARDL Bound Test. According to the result of the ARDL model, in the long run, remittance (R) positively affects to banking sector development with a coefficient of 0.053. Furthermore, Exchange rate (EXC), Income inequality (IQE), Inflation (INF) and Trade openness (TO) have positive effects to banking sector development with a coefficient, coefficient are respectively given 0.712, 1.596, 0.105, and 0.096. On the other hand, foreign direct investment (FDI) and gross domestic product growth (GDPG) have negative effects to banking sector development with a coefficient, coefficient are respectively given -0.048 and -0.174. Outcome summary: what you understood The result of this study may assist the government, financial institutions and investors. The strong relationship between income inequality (IQE) and banking sector development reveals that where income inequality high bank can develop more easily and quickly for that reasons income inequality will be reduce. Also remittance trends to banking sector development and banking sector open its branch even in the rural area for that reasons it can reduce unbanked population as well as small entrepreneur can get inspiration and manage funds even in the rural area. Moreover, Trade openness, exchange rate, and inflation trends to banking sector development. But foreign direct investment and gross domestic product growth negatively impact to banking sector development.