The development role of remittances is considerable. The high proportion of remittances indicate that remittances improve the standard of living for households, which triggers a positive effect for the local economy due to increased consumption and investments. However there is no consensus as to what degree remittances contribute to economic growth and employment creation. Most studies reveal that up to 80% of remittances are used for basic household consumption and 5-10% are used to invest in human capital. Remittances are also used to invest in land, housing and livestock, often seen as future assets of the emigrants themselves. For poorer households, remittances can be a source to build up savings. Collective remittances are more often used for investment in the village or town. Risks and possible negative effects of remittances include: higher income of households through remittances can remove pressure from governments to implement economic and social reforms; inequitable growth at the community level; extensive land purchases by remittance recipients can lead to higher prices for land; there is a risk for recipients of remittances to develop a culture of dependence, which does not favour self-initiative.
The market for remittance transfers functions in many ways. The formal channels of money transfer include commercial banks, money transfer operators and to some extent postal banks. Examples of informal channels include Hundi or Hawala transfer systems, which build on trust relationship. Micro finance institutions have a potential to engage in the remittances market for domestic and regional transfers.