The effect of diaspora remittance on financial development in Kenya.

Abstract

In spite of the importance of remittance inflows gaining prominence in their contribution to the foreign capital inflows, the effects of remittances on capital formation specifically the financial sector developments has not been sufficiently studied. This paper studies the effects of Diaspora remittances on the financial development in Kenya for the period 1970 to 2017. In this study, financial development was measured by bank credit to private sector as a proportion of GDP. Remittances on the other hand were measured by the private remittances as a proportion of GDP. Other macroeconomic variables included in the model were fiscal balance, investments all expressed as a portion of GDP, the real interest rates and the inflation. The data was analyzed using Auto-Regressive Distributed Lag (ARDL) model, given that some of the model variables were integrated of order zero and other integrated of order one. The results of the ARDL model show that remittances have a positive and a statistically significant impact on the financial development at the one percent level of significance. This implies that, an increase in remittances results to a significant increase in financial development. Other control variables found to have a positive and significant effects on the financial development include, investments and the interest rates. On the other hand, fiscal balance and inflation significantly and negatively determines the financial development. Additionally, the lagged financial development was found to significantly determine the financial development at one percent level of significance. Based on the study findings, the study recommends for policies geared towards boosting remittance inflows into the country in order to enhance financial sector development.