Financial Services and Poverty Reduction in Latin America and the Caribbean
By César Bouillon, Pietro Masci, Luis Tejerina (12/06, En)
The Inter-American Development Bank (IDB) has been
increasing its focus on the critical links between poverty and sectors of the
economy that traditionally have not been associated with poverty reduction, such
as financial markets, regional integration, and trade policy. Recently the Bank
has launched a new initiative called "Building Opportunities for the
Majority", which includes financial democracy as one of the six priority areas
for Bank activities in Latin America and the Caribbean.
This strategic emphasis on equitable access to financial
services is expected to bring substantial benefits to promote productive
investment, mitigate economic shocks, and reduce poverty. As the empirical
evidence offered in the introductory chapter of this volume shows, there are
many positive correlations between financial development, economic growth,
and poverty reduction, suggesting a virtuous cycle of improved financial
sector activities, leading to greater savings, more investment in human capital,
improved skill endowments, greater poverty reduction, and further positive
impact on financial activities.
The need for financial democracy, and for financial
products and services that can help the poor, is pressing. Consider these facts.
Only 14.5 percent of poor households in Latin America and the Caribbean have a
savings account and only 3.3 percent have access to credit (defined as the
percentage of households that obtained a loan from a formal or semiformal financial
institution in a 12-month period). At the same time, a huge and growing volume
of remittances from migrant workers, representing a financial inflow of more
than $60 billion per year into the region and more than 3 percent of regional
GDP, only modestly involves the financial sector, weakening its potential impact
on productive investment. The Bank's current approach recognizes that reducing
poverty requires complementary actions in multiple sectors, and that in order to
expand the economic opportunities and the productive potential of the poor, both
their productive capital (human, physical, and financial) and their market
environment opportunities must be improved.
The financial sector offers multiple instruments to improve
the efficiency of capital allocation in the economy, and to help households
manage their exposure to economic risk, including transaction banking, credit,
savings, and insurance. Given the fact that economies in the region face
considerable economic volatility -both aggregated and idiosyncratic- financial
instruments, together with social insurance and protection systems, are
particularly helpful in managing economic risk. Such risk is a major perpetuator
of poverty, as several studies in this volume show. The work in this book
strengthens the policy prescription that the promotion of equitable access to financial
services "financial democracy" should be a major component of any strategy to
eradicate poverty in the region.
This new approach to financial services contrasts with the
more traditional and generally held perceptions that poverty alleviation mainly
requires direct interventions in the social sectorsand no independent actions
in other sectors. This new approach tries to enhance the ability of the poor to
achieve higher living standards and escape poverty through their own efforts. In
addition, by taking a more integral and multidimensional approach that goes
beyond social sector issues, the Bank avoids the risk of marginalizing
anti-poverty efforts by focusing exclusively on social policies.
This volume presents the papers submitted at the
international conference on "Financial Services and Poverty Reduction in Latin
America and the Caribbean", held at IDB Headquarters in September 2004. The
conference brought together key stakeholders and experts from ten Latin American
countries, who represented not only the financial sector but several social
sectors, as well. The main objective of the conference was to increase the
understanding of the links and transmission mechanisms between financial market
activities and poverty reduction. At the same time, the conference sought to
raise awareness in the region about the impact of financial sector markets,
activities, and instruments on poverty reduction. Thus some papers developed a
framework to analyze the mechanisms and linkages of how financial markets can
contribute to alleviate poverty.
The conference focused on three main subjects regarding financial
markets and poverty. The first subject addressed the links between access to financial
products and the welfare of the poor. The second subject sought to identify
policy priorities to improve the poor's access to financial services. The third
subject was related to the role of the Bank in supporting countries in
implementing policies and programs to increase the access of the poor to financial
services. The conference participants generated a rich discussion on each of the
studies presented, and most of their comments are included in this volume.
Highlights of the consensus that emerged from the discussion during the
conference include the following.
First, the positive indirect effects of financial deposit
insurance on poverty reduction should be taken into consideration more fully.
Financial deposit insurance can promote greater stability of the financial
sector and thereby induce economic growth. It can also help make savings and
banking more attractive to poor households that have been financial excluded and
that can benefit from access to formal financial instruments to manage economic
risk.
Second, adequate regulation of banking and microfinance
plays a key role in expanding the availability of services to low-income
populations. In particular, the specific nature of microfinance transactions
(high transaction costs, geographical dispersion, lack of collateralization of
loans) should be taken into account when regulating this segment.
Third, it is important to take better advantage of
information technology to enhance the provision and affordability of financial
services. Innovations such as the use of palm pilots and biometric instruments
can help overcome geographical and language barriers. The development of efficient
credit bureaus can lower transaction costs for institutions.
Fourth, the financial literacy of poor clients needs
to be addressed, to overcome language, educational, and geographical obstacles
that were repeatedly mentioned during the conference as one of the key factors
preventing successful experiences in microfinance.
Fifth, conference participants raised a cautionary note
regarding efforts to implement successful experiences from other regions without
taking into account the idiosyncratic characteristics and institutional context
of Latin American countries. Ignoring this advice might make the adoption of
these experiences less cost-effective or even unviable.
Finally, gaps in data and research need to be filled. The
availability, opportunity, coverage, and comparability of empirical evidence
about access to financial markets at the household level needs to be
improved. Many relevant questions about the potential benefits of financial
services to poverty reduction remain unanswered because of lack of data in the
region. Although the Bank has access to valuable information about access to financial
services for a limited number of countries and time periods, in the near future
the Bank should give priority to promoting the systematic collection of
statistical data about equitable access to financial services by IDB Regional
countries, using specialized modules for household surveys and taking advantage
of the regional network built by the MECOVI program with the region's National
Statistics Institutes during the last decade. With a sustained effort on data
collection, by 2010 the region should have a very complete picture of which
countries are better off in terms of financial democracy and which have overcome
financial exclusion. An area in which the Bank has started to work and that
deserves more attention is the role of insurance to reduce uncertainty and spur
productive economic activities.
We are confident that this volume contributes to the
research and policy agendas in the region by providing policymakers, microfinance
practitioners, academics, and other stakeholders with a rigorous analytical
framework, useful empirical findings, and valuable comparative experiences and
lessons. This publication reiterates the IDB's commitment to promote the
implementation of policies and programs aimed at furthering financial democracy
and reducing poverty.
Carlos Eduardo Vélez
Chief, Poverty and Inequality
Unit
Pietro Masci
Chief, Infrastructure and
Last updated: 04/26/07
