Impact of remittances on financial inclusion, human capital and economic development

Remittances have been an important source of external fund for many developing nations. This thesis intended to study the impacts of remittances inflows to the development of financial inclusion, expansion of human capital and hence the economic development of the remittances recipient countries. The first objective examined the effect of the inflow of remittances on financial inclusion in high remittance-receiving developing countries for 2011-2018. The study found that remittances, which were measured by the opening of bank accounts, initially contributed negatively, but at a later stage, contributed positively to financial inclusion. Early in the period, the use of remittances appeared to be unproductive due to less volume. However, with the passage of time, it could be seen that the increasing remittances were associated with better institutional quality and, proxied by trust and bureaucracy which creates demand to opening bank account as safe place keep excess fund by increasing volume of remittances In contrast to the existing literature, which states that remittances foster financial inclusion, the evidence in this study showed that the effect of remittances on the financial inclusion was conditional upon people’s perception about institutions. The results suggested that the impact of remittances on financial inclusion was inconstant. The policy implication of this finding is that the countries have to improve their governance as well as instill positive perception about financial institutions to enable those involved to enjoy the benefits of receiving remittances and growth of the financial sector. Enhance the institutional quality of financial institutions, such as reducing bureaucratic processes, improving credit allocation, strengthening credit regulation, ensure higher transparency, reinforcing information disclosure in the financial sector can instill public’s positive perception on financial institutions. The trust on financial institutions encourages the public to open bank account and sustaining the trust of clients during banking transactions is important for them to use other financial services provided by banks, hence help to promote financial inclusion. The second objective examined the effect of the remittance inflow on human capital investment in high remittance-receiving developing countries for the period of 1995- 2018. Motivated by the availability of basic infrastructures such as telecommunication, transportation and utilities and access to such facilities may affect the expansion of human capital, the orthogonalized interaction term between remittances and social infrastructure is employed to examine the impact of remittances on human capital and how the impact varies across different levels of social infrastructure. The results of our study showed that remittances alone are unable to generate human capital formation. However, remittance associated with better social infrastructure increases human capital formation. Thus, better social infrastructure in the recipient countries escalates investment on education. However, the impact of social infrastructure on tertiary education in the recipient countries is not significant. From a policy perspective, our findings suggest that it is vital to improve the social infrastructure as a means of improving the mechanism of human capital accumulation. The third objective examined the combined indirect effect of remittance inflows on economic growth with the interaction effects of financial inclusion and human capital in high remittance-receiving developing countries over the 2011-2018. The study found that a well-developed financial institution sector can absorb remittance inflows and efficiently channel it into proper and productive economic use, while a developed human capital may directly encourage robust economic activities and hence economic development. This implies that the policies to attract extra inward remittances ought to improve financial inclusion and human capital development are crucial.

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