Foreign Remittances, Private Sector Investment and Banking Sector Development

Abstract

In the last three decades, foreign remittances flowing to Sub-Saharan Africa have grown more rapidly than the average for developing countries forming a significant component of external capital flows. Simultaneously, there has been an increase in the number of studies investigating the impact of these transfers on consumption and the general welfare of the receiving household. However, very few studies have examined the impact of foreign remittances on private sector investment in Sub-Saharan Africa, which is considered as having an inefficient banking sector. From this background, this study aims to investigate the impact foreign remittances on private sector investment and the moderating role of banking sector development. The study uses a sample of 15 Sub-Saharan African countries with data for the years 1986-2017. The findings of this study indicate that foreign remittances and banking sector development has a positive and statistically significant impact on private investment Sub-Saharan Africa. Moreover, the banking sector development has a moderating effect. These results suggest that foreign remittances are important sources of capital for private investment and it can efficiently fill the financing gaps of inefficient financial markets.