Remittance and financial development in Africa: A multidimensional analysis

Abstract

Previous studies on the nexus between remittances and financial system development are less informative due to their failure to investigate how remittance inflows affect different aspects of the financial sector in Africa. In the study, we re-investigate the impact of the remittances on the African financial system in twenty-seven (27) countries for 1980- 2017 using the Augmented Mean Group (AGM) estimating technique. The results show that remittance does not have any significant impact on different dimensions of financial development in Africa. This finding is robust to alternative estimating techniques. This implies that remittance inflow is not a major driver of financial development in African countries. The outcomes of this study show that it is important to go beyond the use of conventional measures of financial development and focus more on multidimensional aspects of the sector such as access and efficiency of both the financial institutions and financial markets. It is also worth noting that remittance inflows in African regions are under-documented due to the high level of the shadow economy. The study suggests that the African government should formulate policies encouraging African migrants to pass through formal channels when remitting for the benefits of the financial sector and the economy in general. The policy should also encourage remittance savings and their utilisation in the African productive sector.