Do remittances promote financial development in Africa?

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.