The shadow economy, and the rule of law).

The paper concluded that the performance on financial
inclusion of firms had been particularly commendable. The region was broadly in
line with other emerging markets and, on average, was better than what would be
suggested by economic fundamentals (income per capita, prevalence of foreign
owned firms, reliance on fuel exports) on financial inclusion of firms.
Nevertheless, country experiences varied, and a few countries have negative
firm inclusion gaps. More generally, collateral requirements remained high and
access to/cost of finance is seen as a major constraint by a large share of
SMEs in some countries.


In contrast to firm financial inclusion, LAC lagged
behind other EMs on financial inclusion of households, in particular, with
regards to account holdings and savings at a financial institution. This, to a
large extent, reflects region’s weak domestic fundamentals (income per capita,
education, the size of the shadow economy, and the rule of law).

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The economic impact of inclusion policies depended on
the source of financial frictions and other country characteristics. Higher
financial inclusion can help spur economic growth and reduce inequality though
tradeoffs are likely. In particular, while policies aimed at lowering
collateral requirements (e.g. strengthening the legal framework for managing
and seizing collateral, reducing the size of collateral requirements, and
creating modern collateral registry) were most beneficial for growth, they may
also lead to higher inequality as marginal benefits accrue to the top of the
wealth and income distribution. In contrast, policies aimed at reducing
participation costs (e.g. lowering documentation requirements, reducing red
tape and the need for informal guarantors to access finance) could help reduce
inequality but may not yield substantial growth benefits. Hence, developing
tailored policies requires an understanding of the country-specific constraints
and priorities. Moreover, given potential trade-offs between growth and
inequality, a multi-pronged approach to foster financial inclusion was
warranted. In addition, financial inclusion strategies may lead to unintended
“side effects” (e.g. increased financial instability) that need to be monitored
and addressed.