Foreign Remittance Inflows and Financial Sector Development in Nigeria

Abstract

This study investigated the impact of foreign remittance inflows on financial development in Nigeria. The  research  is motivated by the assumption that remittance inflows are deemed  to create  avenues for most unbanked households to avail themselves of some of the products offered by financial service providers and by extension influence the level of financial development in Nigeria.The study made use of Secondary data covering the period 1981 to 2015.  A least square regression analysis was carried out on a time series data, and to avert the emergence of spurious results, unit root tests were conducted. Other econometric advances of co- integration, Vector Auto Regression technique as well as granger causality tests were deployed to ascertain the order of co integration and the level of relationships existing between the dependent and independent variables. The paper established that foreign remittance inflows are significant contributors to broad money supply, credit to the private sector and financial savings at both the short and long runs. Foreign remittance inflows also have a significant positive relationship with exchange rate in the short run but this fizzled out in the long run .On the other hand , it had  a negative relationship with interest rates at both the short and long runs. These results are in tandem with our apriori expectations. To make remittance inflows more effective in Nigeria, the study recommends that savings should be made more attractive. This will unarguably raise the proportion of banked remittances .One way of doing this is to arrange a particular interest rate for remittance receivers, by promising them relatively higher returns if they will convert their hard currency to domestic currency and deposit a large proportion of it in banks. Remittance receivers who have not opened accounts can be convinced to open and operate one. Another way of improving financial development through remittance inflows is to allow for more financial transfer agents as is done in the western world. The existing number of  agents appear oligopolistic  as they help  to make  the cost of transfer relatively costly for the remitter while they reap the benefits associated with such transfers. There is also the need to reduce the gap between the official and unofficial exchange rates, to allow banks retain more of the  remittance inflows. Lastly, some deposit incentives and promotions can be embarked upon by deposit money banks. Such incentives can be enforced by the Central Bank of Nigeria

Keywords: Foreign Remittance inflow, Broad money, Credit to the private sector, Exchange rate, Interest rate