Effect of Remittances from Diaspora on Financial Sector Deepening in the East African Community

Abstract

Purpose – This paper investigated the effect of diaspora remittances on financial sector deepening in the East African Community. Personal diaspora remittances were used as a measure of remittances from diaspora. The three proxies for financial deepening that were employed in the study were domestic credit as a ratio of GDP, total credit provided by the financial sector as a percentage of GDP and degree of monetization, M₂ as a percentage of GDP.

Methodology – The study adopted an explanatory research design. It employed panel data analysis - fixed effects method, to model the linear regression equation. The population of the study was the five East African Community member countries and covered a 20-year period (1997 to 2016).      The data for this study was obtained from the World Bank statistics website.

Findings – This study established that there exists a positive relationship between remittances from diaspora and financial sector deepening in the EAC but this relationship is not significant. The three models analyzed in this study, show that a 0.31, 0.08 and 0.28 change respectively, in remittances in the respective models, leads to a unit change in the level of financial sector deepening in the EAC.

Implications – The results of this study show that an increase in the level of remittances leads to increased financial deepening in the EAC economies. There is therefore need for the government in liaison with the private sector, to provide a conducive environment for development of financially innovative products that ease and reduce the cost of sending remittances as this will foster further financial deepening, which has the positive effect of financial inclusion, access to credit and economic growth.

Value – This study recommended the fostering of activities that are geared towards the ease of sending remittances and cost reduction of sending the remittances through employment of new financial technologies. Further studies have also been recommended to increase the frontiers of the study especially on developed countries in order to gain more conclusive understanding and generalizability of the remittances-financial sector deepening nexus.