Abstract

This article represents a modest attempt to empirically establish the effect of remittances on financial development in Lesotho. Remittances tend to have a long run effect on financial development; however, they do not cause financial development. In the short run this effect evaporates. Trade openness and inflation have significant effects on financial development both in the short and long run. The former has a negative long run effect and a positive short run effect, while the latter has a negative effect in the short and long run. Financial liberalisation and the size of the economy have only long run effects on financial development. The Granger causality test reveals that financial development Granger-causes remittances. Hence, looking at the role of remittances in Lesotho, the development of the financial sector can help increase the propensity to remit. This is an important lesson for the authorities, because a number of impediments to financial development relate to the creation of a conducive or enabling environment in which activities of financial intermediaries, particularly credit extension can flourish.

Key words: Remittance in financial development, Lesotho.