Remittance Inflow and Financial Development in Selected ECOWAS Countries

ABSTRACT

In this study, the impact of migrant remittances on the financial development in the ECOWAS sub-region is examined. In particular, the study considers the different levels of relationship between the receipts of remittances and both financial sector depth and width in the country. Financial development in the ECOWAS countries is measured using three variables in the study: bank deposits per 100,000 persons, proportion of private sector credit in GDP, and the ratio of broad money supply to GDP (financial sector liquidity). Thus, financial development is captured in form of both access and use of formal financial sector activities in the economy. A panel data for eleven (11) ECOWAS countries covering the period 1985 to 2020 is used while the Fully Modified Ordinary Least Squares (FMOLS) estimation technique is adopted to address the issues of endogeneity and bias in the study. The study finds that remittances improve access to financial services among ECOWAS countries as well as the capacity of banks and other financial institutions to provide credit services. It is however found that remittances receipts have no significant impact on use of financial services among ECOWAS countries in terms of bank deposits and ownership of bank accounts. The Granger causality test result demonstrates that there is unidirectional causality between remittances inflows and financial development (measured in terms of the ratio of broad money supply to GDP – M2GDP and proportion of private sector credit in GDP - CREDIT) in ECOWAS countries. Policies that encourage remittance recipients to adopt financial sector services and those that enhance more innovative financial services by the banking sector are therefore recommended in the study.