Acta Universitatis Danubius. Œconomica, Vol 15, No 4 (2019)

Abstract

Remittances play an important role in poverty reduction especially in developing countries. The goal of this research was to determine the association of remittances inflow with financial development and economic growth in Southern African Development Community (SADC). A sample period between 2006 and 2016 on 14 countries in the region was considered with the utilization of GMM dynamic panel techniques. The findings present evidence of a positive impact of remittances on economic growth, while a negative association between remittances and financial development is also found. The results are unique since many previous studies established a positive relationship between remittances and financial development. The negative relationship between remittances and financial development in SADC implies investment is mainly financed through remittances inflow since access to bank financing is very difficult. These results support the substitution hypothesis and they are in line with findings by Paola and Ruiz-Arranz (2009) and Calderon et al (2007) who found similar results. We recommend that inflows of remittances should be encouraged in SADC since they can be channeled to the most productive sectors of the SADC economies. Besides, the development of the financial sector would eventually shift the reliance of private financing on remittances in favour of banking services which ensure sustainable development in the long-run.