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International Remittances and Financial Inclusion in Sub-Saharan Africa

29.09.2014Maria Soledad Martinez Peria

Remittances to Sub-Saharan Africa (SSA) have increased steadily in recent decades and are estimated to have reached about $32 billion in 2013. Though studies have shown that remittances can affect aggregate financial development in SSA - as measured by the share of deposits or M2 to GDP (Gupta et al. 2009), to my knowledge there is no evidence for this region on the impact of remittances on household financial inclusion defined as the use of financial services. This question is important because there is growing evidence that financial inclusion can have significant beneficial effects for households and individuals. In particular, the literature has found that providing individuals access to savings instruments increases savings, female empowerment, productive investment, and consumption. Furthermore, the topic of financial inclusion has gained importance among international bodies. In May 2013, the UN High-Level Panel presented the recommendations for post-2015 UN Development Goals, which included universal access to financial services as a critical enabler for job creation and equitable growth. In September 2013, the G20 reaffirmed its commitment to financial inclusion as part of its development agenda.

In a recent paper, my co-author, Gemechu Ayana Aga and I explore the link between international remittances and one aspect of financial inclusion in SSA: households' use of bank accounts [1]. This issue is particularly important for SSA, given that on average only 24 percent of the population has an account with a formal financial institution. In contrast, 55 percent of adults in East Asia, 35 percent in Eastern Europe, 39 percent in Latin America, and 33 percent in South Asia have accounts.

Remittances may affect households' use of bank accounts in at least two ways. First, remittances might increase the demand for savings instruments. The fixed costs of sending remittances make the flows lumpy, potentially providing households with excess cash for some period of time. This might increase their demands for deposit accounts, since financial institutions offer households a safe place to store this temporary excess cash. Second, remittances recipients' exposure to banks, for example, when banks act as remittances paying agents, may familiarize them with the services offered by banks and increase their demand for bank accounts. Therefore, so long as lack of awareness is the main reason for households' financial exclusion, remittances may increase households' use of bank accounts.

Using World Bank survey data including about 10,000 households in five countries -- Burkina Faso, Kenya, Nigeria, Senegal and Uganda - we find that receiving international remittances increases the probability that the household opens a bank account in all the countries in our study. This result is robust to controlling for the potential endogeneity of remittances, using as instruments indicators of the migrants' economic conditions in the destination countries.

The size of the impact varies across countries (see Figure 1). In Kenya and Nigeria, receiving international remittances increases the probability of a household having a bank account by about 10 percentage points. The size of the coefficient is larger for Uganda, where receiving international remittances increases the probability of having a bank account by about 15 percentage points. The size of the coefficient is smaller for Senegal and Burkina Faso, where receiving international remittances increases the likelihood of having a bank account by about 5 and 6 percentage points, respectively.

Figure 1: The impact of remittances on the likelihood that households own a bank account



Want to know more about the remittances of migrants from the perspective of a local user? Read this very interesting article about a taxi driver from the Togolese diaspora. 

Maria Soledad Martinez Peria is the Research Manager of the Finance and Private Sector Development team of the Development Economics Research Group at The World Bank. Prior to joining The World Bank, Sole worked at the Brooking Institution, the Central Bank of Argentina, the Federal Reserve Board and the International Monetary Fund.


[1] Ayana Aga, Gemechu and Maria Soledad Martinez Peria, 2014. "International Remittances and Financial Inclusion in Sub-Saharan Africa." World Bank Policy Research Working Paper 6991.

Revolutionizing access to finance for African SMEs

12.09.2014Jean-Michel Severino

Over the past decade Africa has experienced a 5% growth across the continent. This surprising and spectacular growth attracts investors from around the world. They are both forced to change their perception about what contains profound upheaval, and seduced by what is now considered as the emerging new frontier. Among the ten countries in the world where economic growth was the fastest between 2000 and 2010, five were located in sub-Saharan Africa: Equatorial Guinea (12.3% per year), Angola (9.3% per year), Chad (8.8% per year), Nigeria (7.4% per year) and Ethiopia (6.9% per year).

But this growth remains fragile, uneven and carries huge challenges: how to ensure that it benefits to the greatest number of people and allow millions to get out of the poverty trap?

In 2050, Africa will not only account for 4% of the global economy, it will also make up 23% of the world's population. This new world pole will be facing major issues such as the employment of a young and dynamic population that will be increasingly numerous in the labour markets. In this context, African small and medium sized enterprises (SMEs) are best positioned to create jobs and local added value, as well as develop the local economic fabric. They stand for essential drivers for social and political stability by spreading the wealth created and structuring local economies.

Nevertheless, SMEs appear as missing links in most African economies. They desperately need to find ways to meet their needs for growth despite a latent lack of access to finance. Too small and too costly to manage for large banking institutions, they are also too large to meet the investment criteria of microfinance institutions. They often are in a deadlock and do not fully benefit from the growth of the continent.

In this context, what solution one could bring to these key actors for responsible and sustainable growth in Africa in order to enable them start their business or scale up?

The solution lies in the emergence of new financing capacities that will offer entrepreneurs the opportunity to strengthen their capital stock under conditions compatible with certain constraints in terms of management fees, transaction costs, etc. It consists of developing a new industry of capital investment, 100% African, which can rely on a network of local investment funds, promoted by African investors and managed by locally recruited teams. This new device will revolutionize the access to finance for small African entrepreneurs through new sustainable funding solution.

But this capital will not be sufficient for African entrepreneurs to reach their growth potential and maximize their economic, social and environmental impacts. It should be complemented by strategic guidance for establishing solid fundamentals and ensuring sustainable development in due respect of all stakeholders. Finally, technical assistance missions will be essential to build and strengthen the financing capacities, through the transfer of know-hows, methodologies and the development of local skills.

The creation of this network of African investment funds will draw lessons from successes and failures of microfinance and will bring to private equity the same kind of revolution as the one microfinance has brought to the debt. It will require a real education for not only existing African finance players: banks, development agencies, private institutions, so that everyone contributes to the success of this new funding; but also with entrepreneurs as private equity is sometimes looked at with distrust and its benefits are not fully appreciated today!

Jean-Michel Severino is Chairman of the private finance company Investisseur & Partenaire pour le Développement (I&P). He is the former Director of France's international development agency, AFD. Jean-Michel Severino is General Inspector of Finances at the French Finance Ministry and served as Director in charge of international development at the French Ministry of Cooperation. He has also worked at the World Bank, first as Director for Central Europe and then as Vice President for Asia.


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