On Remittances, Foreign Currency Exposure and Credit Constraints: Evidence from Nepal

29 Pages Posted: 24 Nov 2014

See all articles by Nephil Matangi Maskay

Nephil Matangi Maskay

Nepal Rastra Bank

Sven Steinkamp

Universität Osnabrück - Institute of Empirical Economic Research

Frank Westermann

University of Osnabrueck - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute); CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute

Date Written: November 24, 2014

Abstract

In this paper, we investigate whether foreign currency accounts help overcome credit constraints in developing countries. We analyze a novel bank-level data set from Nepal, where a steady inflow of remittances has contributed to foreign currency deposits on commercial bank balance sheets. In this data set we find that: (i) Banks hedge their FX exposure by investing in FX assets. (ii) Banks also hedge indirectly via their sectoral lending composition: Banks with a large share of FX deposits primarily lend to firms in traded-goods sectors. They lend only little to the non-traded sectors, as well as deprived sectors of the economy that have been targeted by various support programs. While the direct impact of FX accounts on relaxing credit constraints thus appears small, and biased towards specific sectors, there is also a substantial indirect effect via the additional creation of domestic deposits – that benefits all sectors of the economy.

Keywords: foreign currency deposits, sectoral lending, financial development

JEL Classification: F310, F240, E580

Suggested Citation

Maskay, Nephil Matangi and Steinkamp, Sven and Westermann, Frank, On Remittances, Foreign Currency Exposure and Credit Constraints: Evidence from Nepal (November 24, 2014). CESifo Working Paper Series No. 5053. Available at SSRN: https://ssrn.com/abstract=2529862

Nephil Matangi Maskay

Nepal Rastra Bank ( email )

Nepal

Sven Steinkamp (Contact Author)

Universität Osnabrück - Institute of Empirical Economic Research ( email )

Barbarastr. 12
Osnabrueck, 49076
Germany

Frank Westermann

University of Osnabrueck - Department of Economics ( email )

Rolandstr. 8
Osnabrueck, D-49069
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute ( email )

Poschinger Str. 5
Munich, 01069
Germany

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