Remittances and financial institutions development in Africa: A dynamic panel data approach

Abstract

Remittances constitute an essential and stable source of foreign capital inflows for many developing economies. This study employs the dynamic Generalized Method of Moments (GMM) approach to investigate the impact of remittances on the development of financial institutions across 30 African countries from 2010 to 2022. Financial institutions development is assessed through two key proxies: domestic credit to the private sector as a percentage of GDP and the financial institutions index. The analysis is conducted for the full sample (Sample A) and a sub-sample comprising low- and lower-middle-income countries (Sample B). The findings reveal that remittances significantly promote both measures of financial institutions' development across both samples. Notably, the effect of remittances is more pronounced on the financial institutions index than on domestic credit to the private sector. These findings underscore the importance of policies initiatives aimed at promoting the use of formal remittances channels and reducing barriers to remittance flows.