The Effects of Diaspora Remittances on the Kenyan Economy

A Project Report Submitted to the Chandaria School of Business in Partial Fulfilment of the Requirement for the Degree of Masters of Business Administration (MBA)The purpose of this study was to analyse the effect of remittances received from Kenyans residing abroad on macroeconomic factors in Kenya. This study was guided by the following research objectives: (i) To determine the effect of remittance flows on Kenya’s GDP; (ii) To determine the effect of remittance flows on investments in the Kenyan securities market; (iii) To determine the effect of remittance flows on bank interest rates in Kenya and (iv) To determine the effect of remittance flows on foreign exchange rates in Kenya. The research design was explanatory in nature focusing on remittances received from Kenyans residing in other countries and how they affect various macro-economic indicators such as gross domestic product (GDP), securities market data, interest rates and foreign exchange rates. The study primarily involved the examination of published data that was available from Central Bank of Kenya (CBK) and Kenya National Bureau of Statistics (KNBS), government ministries such as Ministry of Finance (MoF) and Ministry of East African Affairs, Commerce and Tourism (MEACT), as well as organisations such as the United Nations Conference on Trade and Development (UNCTAD), the World Bank and the International Monetary Fund (IMF). Descriptive and inferential statistics were used to analyse the data. In particular, means and standard deviations were calculated for all the variables in the study. Further statistical analysis was carried out by use of correlation and regression analysis where remittance flows were regressed against GDP, exchange rates for selected currencies, investments in the securities market and bank interest rates. Data was analysed using Statistical Package for Social Sciences (SPSS) and results presented in graphs and tables. The study findings indicated that that the amounts of diaspora remittances had increased consistently over the period of study. Further the findings indicated that the real exchange rate has consistently inclined over the period under study. Correlation results revealed that there was positive and significant relationship between remittance flows and GDP, bank interest rates, US Dollar exchange rate and Euro exchange rate. The study findings concluded that diaspora remittances had a positive and significant relationship with GDP, bank interest rates, the US Dollar exchange rate and Euro exchange rate. The study recommends that the country needs to consider adopting institutions that help in amplifying the growth effects of remittances into sustainable economic growth. The government in conjunction with financial institutions should come up with policies that make it cheap, easy and safe to receive remittances as well as establish efficient and effective formal channels for sending and receiving remittances. The study recommends that the various commercial banks should develop banking products that will encourage migrants to maintain bank accounts in the labour-exporting country. Such accounts should be denominated in applicable foreign currency of choice to the migrant and must be made operational in the migrant‘s country of residence through the use of modern information and communication technology. The study also recommends that effective measures are needed to be taken by the central bank to control inflation by reducing money supply in the economy. The formulation of monetary policy by the central bank is an important factor for controlling inflation. It is recommended that the monetary authority should use policies aimed at strengthening the Kenya shilling as doing so would reduce the charges for sending remittances. Kenya should device a way of influencing remittance recipient households to save their income so that the proceeds can be distributed to critical sectors of the economy. For instance, policies advocating for the increased use of remittances in funding entrepreneurial activities in the economy can be formulated. This will also need an effective and efficient distribution system, that is, a vibrant financial system that can mobilise remittance funds and distribute them as investment capital to unfunded entrepreneurs