Remittances and financial development in Africa

Abstract

Despite the magnitude of remittances as an alternative source of investment financing in Africa, the financial sector in Africa has significantly remained underdeveloped and unstable. Finding a solution to Africa's financial deregulation problems has proved tenacious partly because of inadequate literature that explain the nature of Africa capital and financial markets which has shown to be unorganised, spatially fragmented, highly segmented and invariably externally dependent. We examine the structural linkages between remittances and financial sector development in Africa. Panel data on indices of remittances was regressed on indices of financial sector development in fifty-three (53) African countries from 1986 through 2017 using the Pooled Mean Group (PMG) estimation procedure. We accounted for cross-sectional dependence inherent in ordinary panel estimation and found a basis for the strict orthogonal relationship among the variables. Findings revealed a positive long-run relationship between remittances and financial development with a significant (positive) short-run relationship. It is suggested that, while attracting migrants' transfers which can have significant short-run poverty-alleviating advantages, in the long run, it might be more beneficial for African governments to foster financial sector development using alternative financial development strategies.

The Nexus Between Remittance Inflows and Financial Development in India: Substitutes or Complements?

“…Donou-Adonsou et al (2020), from the results of panel cointegration and Autoregressive Distributed Lag (ARDL) PMG regression, reported a long-run positive and significant impact of remittances on the financial development of top remittance-receiving countries in Sub-Saharan Africa. Using the same method, Adekunle et al (2020) reported similar findings for a panel of 53 African countries. Basnet et al (2020), based on the results of panel cointegration and PMG estimation, documented a positive impact of remittances on the financial development of South Asian countries.…”

Remittances and the future of African economies

“…Remittances were measured using net remittance inflows to recipient countries as used in the work of Adekunle et al (2020); labour was measured using labour participation rate as in Erten and Metzger (2019); the capital stock was proxied using gross fixed capital formation as in Topcu, Altinoz and Aslan (2020); the exchange rate was measured using the nominal exchange rate as used in Oseni, Adekunle and Alabi, (2019); inflation was measured using the GDP price deflator as in Galí and Gertler (1999); technology was measured using account ownership with a financial institution or mobile money service provider as used in Asongu (2013); the population was measured using total population as in Kibirige (1997). In Table 2, the description of the variables, their sources and motivating studies are presented for ease of understanding and flow.…”

“…To gauge the future of African economies within a remittance inflow–financial development relations, this paper follows the dual gap theoretical model as in Aggarwal et al (2011) and Adekunle et al (2020). The dual gap theory argues that developing countries smoothen the intertemporal constraints in their saving–investment gap using external financing options.…”

“…More importantly, a substantial part of remittances should be invested to generate employment and income in the homeland rather than exacerbating the risk of currency substitution. Recent studies have shown that remittances, in the short and long run, promote the development of the financial sector of recipient economies, including that of African countries (Chowdhury, 2011; Coulibaly, 2015; Mundaca, 2009; Adekunle et al, 2020).…”

“…The potential contribution of highly skilled African professionals to the home economy may not be realized unless they remigrate. Long‐term studies on remittances and development in Africa show that skilled labour participation rate (human capital), capital stock and remittances have a positive relationship with financial development in Africa (Aggarwal et al, 2011; Anzoategui et al, 2014; Adekunle et al 2020). We, therefore, move to the conundrum in the next section.…”