Abstract

Sephooko I. Motelle

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.