Financial Inclusion, Growth and Inequality: A Model Application to Colombia

This paper studies the effects on growth and inequality of efforts to remove financial sector challanges. It uses simulations from a general equilibrium model to identify the most binding financial sector challenges that preclude financial inclusion of enterprises. It also attempts to fill the literature gap by analyzing the link between reforms implemented on the micro-side and their longer-term macroeconomic consequences. The paper covers the following topics in detail:

• Background of financial inclusion in Colombia;
• Determinants of financial inclusion with a focus on obstacles of precluding greater financial inclusion, which can be further divided into three categories: access, depth, and efficiency;
• Model application with a discussion on the alteration of various model parameters and discussing its outcomes;
• Policy recommendations with the focus on relaxation on borrowing constraints, improving access to information, and enhancing consumer protection.

The paper suggests that relaxing collateral requirements precluding greater financial sector inclusion promises higher growth. Inequality is better tackled through measures that lower financial participation cost.