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Remittance inflows and financial development in Sub-Saharan African countries: Does governance matter?
N M Odhiambo1, Mercy T Musakwa1
1Department of Economics, University of South Africa, P.O Box 392, UNISA, 0003, Pretoria, South Africa.
Background:
The surge in remittances in most sub-Saharan African countries motivated this study to establish whether remittance inflows enhance financial development and whether governance plays any significant mediating role in the nexus between financial development and remittance inflows.
Purpose:
The study examines the impact of remittance inflows on bank-based financial development in 26 sub-Saharan African (SSA) countries using three proxies of bank-based financial development. The study also examines whether government regulatory quality and effectiveness modulate the impact of remittance on bank-based financial development.
Method:
The generalised method of moments (GMM) estimation technique is used to examine this linkage.
Results:
The results show that when financial development is proxied by liquid liabilities and bank deposits, remittance inflow is found to have an unconditional positive impact on bank-based financial development, while governance is found to reinforce the positive relationship between remittance and financial development. However, when financial development is proxied by deposit money bank assets, remittance is found to have no profound effect on bank-based financial development, but it was found to interact with government effectiveness to yield a positive influence on financial development.
Conclusion:
Overall, remittance inflows were found to have an overwhelming positive impact on the banking sector development. It was also found that good governance generally tends to reinforce the positive impact of remittances on banking sector development.
Novelty:
This study adds value to the extant literature by providing answers to the role that governance plays in enhancing the impact of remittances on financial development in sub-Saharan African countries.
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