ABSTRACT

Remittance inflow into Nigeria has exceeded FDI since 2007. The growing volume of remittances has generated much interest in what they mean for the economy, and this study therefore examines the impact of international remittances on financial sector development in Nigeria. It concentrates on two questions: the impact of international remittances on financial development, and the causal relationship between the two. The statistical and econometric analysis yields three findings. First, international remittances have a significant positive impact on financial sector development in Nigeria. Second, remittances (REM) cause financial sector development when it is proxied by the ratio of credit to the private sector to GDP (CPS/GDP), without feedback, whereas no direction of causality is found when M2/GDP is used as the proxy. Third, the current account balance, used as a proxy for capital account openness, has a negative impact on financial sector development. Because remittances supply foreign exchange that is vital to both the internal and external sectors of the economy, they should be encouraged through appropriate policy formulation and implementation. Financial intermediaries operating in Nigeria should also step up the mobilisation of remittances so that they become an important source of loanable funds. Based on these findings, the study recommends policies that improve access to remittances by reducing the cost of remittance services in the financial sector.

CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Remittances to developing countries are attracting increasing attention because of their growing volume and their effects on recipient economies. Because they are stable and rising, many studies have examined their developmental impact in areas such as poverty, inequality, growth, education, infant mortality and entrepreneurship. Much less attention has been paid to whether remittances promote the economic and financial development of the recipient country. This is nonetheless an important question from a development perspective, because the financial system performs several key economic functions, and its development has been shown to foster growth and reduce poverty.

Remittances are the earnings that migrant workers send from the country where they work to their country of origin. They can also be described as financial resource flows that arise from the cross-border movement of a country’s nationals. Migrants’ remittances have grown extraordinarily over the last two decades. According to World Bank estimates (the Migration and Remittances Factbook 2011), inward remittance flows worldwide rose from US$101.3 billion in 1995 to US$274.9 billion in 2005 and to an estimated US$440.1 billion in 2010. Inward flows to developing countries rose from US$55.2 billion in 1995 to US$192.1 billion in 2005 and to an estimated US$325.5 billion in 2010.

The steady rise in remittances is also evident for Nigeria. Unlike other foreign capital inflows to developing countries, remittances have consistently exceeded FDI in Nigeria since 2007. In that year Nigeria received US$6,033 million in FDI, while Nigerians in the diaspora remitted about US$9,221 million. FDI inflows then declined, and the 2008 and 2009 figures (US$4,876 million and US$5,787 million) were well below the 2007 level, while remittances kept rising, to US$9,980 million in 2008 and US$9,585 million in 2009. Recent work confirms that the gap has persisted, reporting that diaspora remittances to Nigeria now dwarf both FDI and official development assistance (Ngene et al., 2024).

There are other reasons to be interested in remittances in Nigeria, one of which is the state of the financial sector, which has been maturing quickly in depth and scope. Financial institutions can play an important role in transferring remittances efficiently and cheaply and in channelling them to potentially productive sectors, especially small and medium-sized enterprises (SMEs) with good projects for development, innovation and production. They also have the potential to mobilise remittances and ease credit market constraints, particularly for households and SMEs, so as to raise investment and growth.

The relationship between remittances and financial development is, however, ambiguous. On one view, well-functioning financial markets with lower transaction costs help to direct remittances to their highest-return uses and so enhance financial development. On the other view, remittances can compensate for a poor financial system: by loosening liquidity constraints, they allow would-be entrepreneurs to start productive activities when the financial system fails them through lack of collateral or high lending costs. Recent Nigerian evidence reflects this ambiguity. Nadabo (2023) found that remittances have a positive and significant long-run impact on financial sector development, with a two-way causal relationship between the two, whereas Igbinedion (2023) found that remittances improve private sector performance in the short run but affect it negatively in the long run, and recommended strengthening remittance channels. Evidence from Sub-Saharan Africa suggests that digital technology can strengthen the link between remittances and financial development (Jemiluyi & Jeke, 2023).

Nigeria’s financial sector has been reformed repeatedly since 1986, and these reforms should have affected financial sector development. The first phase of banking reform, from 1986 to 1993, deregulated the industry, and a further reform programme in 2004 made bank consolidation its centrepiece, with the aim of correcting structural and operational weaknesses that prevented banks from performing financial intermediation efficiently (Anyanwu, 2010). The number of banks increased after the 1986 reforms, but over time these institutions could not sustain a high level of intermediation. Weak and terminally distressed banks, especially in the 1990s up to 2003, accounted for the low level of financial deepening in that period, and this necessitated the consolidation of 2004/2005 (Imahe, 2015). The financial structure raised the level of financial savings and so affected the financial sector positively, but the system has not been efficient in allocating resources, as the fluctuations observed in the sector show.

A large literature suggests that remittances promote financial development and economic growth and also help to reduce poverty and inequality in developing countries. Comparable studies on Nigeria remain scarce. To fill this gap, the present study examines the impact of remittances on financial sector development in Nigeria.

1.2 Statement of the Problem

Remittances can affect growth directly or indirectly through the financial sector, given that financial development is regularly included among the conditions for growth in developing countries. Policy analysts have yet to reach a consensus on the relationship between financial development and remittances and on how it affects growth. There are also arguments about the factors that affect remittance flows into Nigeria. Many scholars have reasoned that the underdevelopment of the Nigerian financial sector has hindered the flow of remittances, while others argue that the improvement of the financial sector has been accelerated by increased remittances.

Trends in some financial development indicators illustrate the puzzle. The ratio of money supply to GDP (M2/GDP) rose from 28.1 percent in 2007 to 37.7 percent in 2008, an increase of about 34.2 percent, and then to 43.6 percent in 2009, a further increase of about 15.6 percent. Credit to the private sector as a share of GDP (CPS/GDP) rose from 24.5 percent in 2007 to 33.2 percent in 2008, an increase of about 35.5 percent, and then to 41.3 percent in 2009, a further increase of about 24.4 percent. Meanwhile, remittance inflows rose from US$9,221 million in 2007 to US$9,980 million in 2008, an increase of 8.2 percent, and then fell slightly to US$9,585 million in 2009. As remittance inflows rose, the financial indicators rose as well, and even when remittance inflows fell, the financial indicators continued to rise. This suggests that the growth of formal remittances and the growth of the financial development indicators tend not to move together, since their growth rates differed. The trends also showed no clear lead or lag between the two variables.

Despite the huge remittance inflows, their impact on the economy is yet to be felt, and several factors have been advanced to explain this. Some attribute it to the high transfer costs charged by financial institutions, and others blame the lack of appropriate policies to channel remittances into investment sectors that would enhance economic development. Could it be that growth in remittance inflows does not trigger an increase in financial development, or that the two grow independently but alongside each other? Was remittance partly responsible for the surge in M2/GDP and credit/GDP, or was the reverse true? What benefits accrue to overall economic growth from such flows, and did the surge in the financial sector attract more remittances? To answer these questions, the study investigates the direction of the relationship between remittances and financial development in Nigeria and addresses the following research questions.

• Do international remittances affect Nigeria’s financial sector development?
• What is the direction of causality between international remittances and financial sector development in Nigeria?

1.3 Objectives of the Study

The broad objective of the study is to investigate the impact of international remittances on the financial sector in Nigeria. Specifically, the study addresses the following objectives:

• To determine the impact of international remittances on financial sector development in Nigeria.
• To determine the causal relationship between international remittances and financial sector development in Nigeria.

1.4 Statement of Hypotheses

• H₀₁: International remittances have no impact on financial sector development in Nigeria.
• H₀₂: There is no causal relationship between international remittances and financial sector development in Nigeria.

1.5 Significance and Justification of the Study

A study of this kind will be useful to policymakers and other researchers. It will help in providing less costly and hassle-free means of transmitting remittances, which will encourage remittances and mainstream them into national development. It will also justify policy initiatives to develop the financial sector for remittance services and the need for a credible immigration policy.

1.6 Scope of the Study

The study covers the period 1977 to 2009. The scope was chosen on the basis of data availability and the need to capture the interaction between remittances and financial sector development in Nigeria.

REFERENCES

Anyanwu, C. M. (2010). An overview of the current banking sector reforms and the real sector of the Nigerian economy. Central Bank of Nigeria Economic and Financial Review, 48(4).

Igbinedion, S. O. (2023). Bank credit and private sector performance in Nigeria: Do remittances really matter? Acta Universitatis Danubius. Œconomica, 19(3), 268–288.

Imahe, G. (2015). Empirical analysis of bank recapitalisation in Nigeria (1986–2011). Journal of Corporate Governance, Insurance, and Risk Management, 2(3), 131–147.

Jemiluyi, O. O., & Jeke, L. (2023). How catalytic is digital technology in the nexus between migrants’ remittance and financial development in Sub-Saharan African countries? Economies, 11(3), 74. https://doi.org/10.3390/economies11030074

Nadabo, Y. S. (2023). Revisiting the nexus between remittances and financial sector development in Nigeria. Economic Journal of Emerging Markets, 15(2), 115–128.

Ngene, I. A., Nnaji, F. C., & Okorie, I. O. (2024). Diaspora remittances inflows and Nigeria’s socio-economic development in the 21st century. African Journal of Politics and Administrative Studies, 17(1), 173–190.