Countries in Latin America and the Caribbean (LAC) have made important strides in promoting financial inclusion of firms and households. However, while the region is broadly at par with its peers on financial inclusion of firms, household inclusion lags behind. Nonetheless, there is substantial heterogeneity across LAC countries. Reducing borrowing costs and strengthening further the regulatory environment, while taking steps to protect efficiency and stability of the financial system, could help close financial inclusion gaps. Reducing financial participation and monitoring costs and relaxing collateral constraints will help spur growth and reduce inequality though trade-offs are likely, as illustrated in the case of Guatemala, El Salvador, and Peru.

Financial inclusion holds the promise of boosting growth and reducing poverty and inequality, not ably by mobilizing savings and providing households and firms with greater access to resources needed to finance consumption and investment and to insure against shocks. In addition, financial inclusion can foster labor and firm formalization, helping, in turn, boost government revenues and strengthen social safety nets. The benefits of financial inclusion could be particularly pronounced in Latin America and the Caribbean (LAC) where growth is modest and volatile, poverty and inequality remain high, savings and investment are low, and informality is rampant. Not surprisingly, financial inclusion has become an increasingly important goal of policymakers in the region. Indeed, following a period of instability and crises, financial systems in LAC have been strengthened(International Monetary Fund, forthcoming) and progress has been made in fostering financial inclusion through the expansion of bank networks, improvements in payments systems, and the diversification of savings and credit services available for households and small and medium size enterprises(SMEs). This progress partly reflects governments’ efforts to create an enabling environment for finance in general, including by liberalizing financial flows, addressing vulnerabilities in the financial sector, enhancing effectiveness of regulation and supervision, and improving the underlying physical and market infrastructure. It also reflects specific policies to promote inclusion, such as introduction of low-fee bank accounts, the use of the banking sector to channel government transfers, correspondent bank arrangements, as well as support for mobile and e-banking. Notwithstanding this progress, considerable scope for enhancing household and firm financial inclusion remains.