Abstract
The paper seeks to establish whether or not remittances promoted financial developments and explore the traceable causality between remittances and financial developments in some countries in Africa. We examine the association between remittances received and how they affect the availability of credit to private sector, bank deposits intermediated by financial institutions and money supply. We also question whether the development in the financial sector causes higher levels or otherwise of remittances received. This paper uses data on remittance flows to 50 developing countries in Africa from 1990 to 2011 to explore the nexus. The study uses fixed effects and random effect estimations as well as Vector Error Correction Model method on the panel data. The study shows that remittances promote certain aspects of financial development to some extent and better financial system foster receipts of remittances. The effect of causality is seen in the short run and not in the long-run. The study alludes to literature that remittances could promote financial development in the short run and the development of the financial sector helps increase the propensity to remit via formal channels.
Highlights
Efficient financial systems influence the rate of savings, leading to improved investment decisions and eventually to higher long-run growth rates (Schumpeter 1912; McKinnon 1973)
This paper extends the literature on how these remittances on aggregate level, influence the financial sector development in terms of credit availability to the private sector, levels of deposits and the level of quasi money in some developing countries in Africa
All data that were used for this were attained from the World Development Indicators (WDI) and the International Monetary Fund (IMF) databases
Summary
Efficient financial systems influence the rate of savings, leading to improved investment decisions and eventually to higher long-run growth rates (Schumpeter 1912; McKinnon 1973). The positive effect of financial development on growth has been extensively documented (Rajan and Zingale 1998; Levine 1997, 2004; Levine et al 2000; Beck et al 2000). Through the availability of credit at a lower cost and improved saving propensities, investments are very likely to improve which foster economic growth. In Africa, the cost of funding can be deemed as very high. Individual, households and entrepreneurs are known to resort to other sources rather than funding via formal means from financial institutions. Monies remitted by relatives who reside overseas with better living conditions form a major part of these alternative sources of funding for the private sector
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