Remittances and Credit Provided by the Banking Sector: Evidence from Sub-Saharan Africa

Abstract

Recorded international remittances to sub-Saharan African countries reached US $28 billion in 2009 and are projected to increase to reach US$ 41 billion in 2016. However, empirically it is unclear how these private transfers affect the financial sector. This paper investigates the effect of international remittances on the level of credit provided by the domestic banking sector in sub-Saharan Africa using a panel of thirty countries over five time periods, composed of non-overlapping averages from 1990 to 2012. Though sub-Saharan African region receives the least portion of the total recorded remittance flows to all developing regions, the study finds that international remittances have positive and significant effect on aggregate level of credit provided by the banking sector in the region after controlling for macroeconomic variables that are commonly used to explain financial development in developing countries. The results hold after accounting for potential endogeneity of remittances (other explanatory variables) in a system GMM estimation using both internal and external instruments for the remittance variable. The paper recommends that policy should be focused on increasing remittances through the formal financial system.

Keywords: Remittances, Bank Credit, system GMM, Sub-Saharan Africa (SSA)