Remittance volatility and financial sector development in sub-Saharan African countries

Abstract

In this study we examine the relationship between remittances, remittance volatility and financial sector development in sub-Saharan Africa using a two-step system GMM estimator over the period 2002–2014. Separately focussing on banking sector- and stock market development, our study distinguishes between the effect of remittances and remittance volatility on financial sector depth and financial sector efficiency. The results indicate remittances act as a substitute for the formal banking system in sub-Saharan African countries. We further provide evidence that remittance volatility is detrimental to both banking sector depth and efficiency. No evidence is found that remittance volatility is related to stock market development. A policy implication from our study is that sub-Saharan African countries should have measures in place to monitor the predictability of remittances while the cost of remittance transfer needs to be investigated.