The absorptive capacity of the institution in the link between remittances and financial development in Africa: an advance panel regression

Abstract

Purpose The purpose of this study is to examine institutional quality’s absorptive capacity in African countries’ remittances-finance nexus. Design/methodology/approach A balanced panel data set of thirty African countries between 2000 and 2022 is used for the study. The study adopts an augmented mean group (AMG), method of moment quantile regression (MMQR) and two-step system generalized method of moment (2SGMM) as the estimation techniques due to the nature of the data set. Findings The findings of the direct effect reveal that remittances do not constitute the growth of financial development, while institutional quality promotes the growth of financial development in the long. The moderating effect of institutional quality in the linkages shows that the interactive term of institutional quality and remittances has a significant positive effect on financial development in the region. Hence, institutional quality moderates the impact of remittances. These results are robust to different proxies of financial development and estimates obtained from MMQR and 2SGMM. Practical implications This study, therefore, suggests that institutional quality is essential in the linkages between remittances and financial development. Hence, remittances should be seen as one of the instruments that can be used to develop the financial sector rather than survival mechanisms for households. Originality/value This study contributes to the literature by unearthing the absorptive capacity of institutional quality in the nexus between remittances and financial development in African countries, which extant studies have neglected.