On the Role of Remittances in Microfinance - Creating Transnational Financial Services in El Salvador

Abstract: More and more poor people regularly receive money transfers, remittances, from family members abroad as international migration increases. But since many poor and low-income people in developing countries lack access to financial services their opportunities to achieve investment goals, and thereby improve their living conditions, are limited. This study explores the possibility of channelling remittances into microfinance as a way to increase the development effects of these money transfers. In the specific case of El Salvador, examined in this study, a new innovative housing microfinance product, linked to remittance funds, is investigated. The main contribution of this thesis is the exploration of how remittances can reduce market failures and solve problems on the credit market when channelled into microfinance products. In particular linking remittances with housing microfinance, and thereby adding to development, is examined. The study points out that a new client type, the transnational family, is emerging in countries with extensive migration. It is found that promoting the development of remittance services through microfinance institutions can contribute to increasing the banking of these transnational families, and hence facilitate their overall access to financial services. The so called Transnational Credit, investigated in this study, poses an answer to the lack of financial products that link the demand of the migrant with the demand of the family in the home country. Although the product needs to be improved, it forms an important contribution in the struggle to make financial services available for the poor.