Can Financial Inclusion Make a Difference in Central America?

IMF News, November 17, 2016

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Published: November 17, 2016

Introduction

Speech delivered by IMF Deputy Managing Director Mitsuhiro Furusawa at the Central America Regional Conference, Antigua, Guatemala, November 17, 2016.
Emphasis: financial inclusion as a key element to build strong and inclusive growth amid efforts to fight corruption, improve governance and transparency, and pursue an ambitious social and structural agenda in the region.
IMF commitment: stand ready to assist with capacity development, policy advice and research.

The Role of Financial Inclusion

Definition and functions:
- "Financial inclusion basically means providing broad access to affordable financial services."
- Mobilizes savings and makes credit available to households and businesses.
- Brings labor and companies into the mainstream economy from the informal sector.
- Can increase government revenues.
Potential benefits:
- Provides a safety net and reduces poverty and inequality.
- A savings account can protect against a medical emergency or unemployment and open doors to education.
- Access to loans can help households and the self-employed manage large expenses and permit access to health and education.
Regional context and statistics:
- "37 % of the population lives in poverty;"
- "Inequality is high, while savings and investment are low;"
- "60 % of the work force, 60% is in the informal economy;"
- "And growth over the past decade has been just around 2½ %, a year."
- "About 40 % of adults have bank accounts" in Central America.
- Comparative: "other Latin American countries, where 50 % or half have accounts."
- Trends: "Central America leads Latin America in increasing the number of individual bank accounts."
- Country examples: "In El Salvador, the share of adults with an account has nearly tripled." "In Guatemala ownership of bank accounts almost doubled."
- Payment and usage gaps: "the use of ATMs, and credit and debit cards remains low, and improvements in electronic payment systems are slow."
SMEs and access to finance:
- Importance: access to banking enables borrowing, other financial services, investment and job creation; can reduce informality and boost productivity and growth.
- Country comparisons:
- "Dominican Republic, El Salvador and Costa Rica, where 96% of companies have bank accounts and 53%, more than half, have taken out loans."
- "Guatemala or Nicaragua and Honduras only an average of 70% of SMEs have bank accounts and 40% have taken loans."
- Constraints: high documentation and collateral requirements and high cost of credit.

Key Lessons from Other Regions

Four lessons summarized:

1. Role of public sector frameworks and infrastructure:

"Central banks, supervisors and other government agencies play a crucial role."
Governments modify regulations for opening bank accounts or introducing mobile banking.
Governments can provide infrastructure such as roads, payment and personal identification systems.
Example: "India’s introduction of a biometric identity card has reduced barriers to opening bank accounts."

2. Channeling social transfers through financial systems:

Example: "In Brazil, the program Bolsa Familia encourages families to receive payments through simple bank accounts. So 20 percent of Brazil’s adults got their transfers this way in 2014."

3. Private sector participation:

Importance of tapping demand, examining business models, and developing technology to reduce transaction costs.
Example: "Here in Guatemala, the network called Banrural is a useful model. It offers services geared toward the poor, including ATMs that speak Mayan languages to help illiterate customers."
Banrural specifics: offers women special accounts and training; provides microfinancing under a Grameen project.

4. Risks to financial stability from rapid expansion:

"Extending credit too rapidly can expose both lenders and inexperienced borrowers to higher risk."
Need for well-designed financial regulations and strong prudential oversight as inclusion expands.

Policies for Central America

Strengthen regulation and supervision:
- Recent IMF research shows strengthening regulation plays an important role.
- Countries have improved regulatory and supervisory capacity; government support could be deepened, starting with national strategies.
- "El Salvador, Guatemala, and Honduras are already taking steps in this direction."
Credit reporting and market conduct:
- Create credit reporting systems to broaden access and reduce costs.
- Enforce market conduct rules and strengthen frameworks to resolve disputes.
Complementary development policies:
- Improve educational systems, including financial literacy.
- Strengthen the rule of law.
- Reduce the size of the shadow economy and foster convergence to higher income levels to enable more inclusion without weakening stability.
Distributional caution:
- Policies that promote inclusion can sometimes increase inequality; example: reducing collateral requirements may benefit the rich more.
- "It is no guarantee that policies to increase inclusion will automatically produce the growth benefits."
- Recommendation: employ a range of policy tools to both promote growth and reduce inequality.

Conclusion

Financial inclusion is essential to lift economic growth and reduce inequality in Central America.
Financial sector development and inclusion should be integrated into IMF work through capacity development, policy advice and research.
Closing call: "Together, we can help more and more people to improve their lives. This effort is just beginning."

IMF Deputy Managing Director Mitsuhiro Furusawa, Central America Regional Conference, Antigua, Guatemala, November 17, 2016.