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A Tree without Water: The Failure of Financial Inclusion in Latin America

By Terence Hui


A fruit tree is one of the most volatile living things. As many gardeners know, under fertile soil, fruit trees are projected to grow high and to bear many fruits. However, without the right amount of water or the right amount of attention, the fruit tree is destined to wither and die. Similar to the Tree, the economy of Latin American countries is sitting on “fertile soil” with access to many resources, a growing population, and flourishing trade with the rest of the world. However, while their soil may be rich, they lack the water that’ll allow the to grow and reach their peak. Unfortunately for most of Latin America, the water they need to receive is muddied and soured by institutional instability, and there needs to be an effort to cleanse and hydrate the withering trees. In this case, the failure of financial inclusion within Latin America is dangerously stumping its growth and needs streams of stimulus to regain its flow.

Financial Inclusion is defined by the World Bank Group as the “individuals and businesses (ability to) have access to useful and affordable financial products and services.” Financial inclusion allows for individuals to secure their earnings, connect businesses to consumers while increasing economic flow in an economy. Most developed countries maintain a large financial inclusion rate, while most growing countries are making great strides. For example, in the United States, over 93% of Americans have access to a bank account. In Nigeria, from 2016-2018 the financial inclusion rate rose from 56.8% to 63.2%. Financial inclusion within these countries allows for its citizens to flourish, with research showing that there is a positive correlation between financial inclusion and economic growth, along with the decline of income inequality. If Latin America were not to improve its financial inclusion, it may be doomed to seeing a stump in its overall growth, and a continuation of the current wealth gap.

Latin America currently has a drought in financial services. Even among the major economies of Latin America, bank accounts are rare. In Mexico, the financial inclusion rate is about 36.9%, while in Argentina only 48.4% of municipalities have access to at least one financial service. Though some Latin American countries are currently making great strides, like in the Southern cone, overall, most still sit below the world standard. So why has Latin America failed to meet the standards of growth?

The dry spell in Latin America is both man-made and natural, with Latin America’s history causing a limitation of both supply and demand for financial services.

Geographically, there is a large segment of the population that is isolated from the main cities. In these isolated areas, it is unlikely the locals will transverse hundreds of miles to find a bank. On the supply side, banks and governments are unwilling to invest in areas isolated from urban centers. Infrastructure in Latin America is generally lacking, causing a lack of motivation in trying to reach out to the secluded populations. However, more important than geography is the social climate of Latin America

The lack of social momentum and income inequality is one of the driving factors to the absence of a “financial culture”. According to the Inter-American Development Bank, financial inclusion and income equality often run side by side together, serving as a loopback. There is a large issue in Latin America where the rule of law is often ignored, which puts strain on the trust of businesses and individuals to put their financial faith in the system. However, the issue of financial inclusion is not simply an issue on the demand side, but also on supply. Due to the oligopolistic nature of many Latin American countries, most economic elites are wary of growing competition. Causing governments to allow the gap between small and large firms to grow. Moreso, banks within a nation are generally hesitant to provide loans to “high-risk” clients, choosing to loan to the same customers. However, despite the misaligned motivations, some Latin American countries are setting new policies to improve their financial inclusion.

Some Latin American governments are finally seeing their errors, and have been forming new policies to combat this lack of financial institutions. Ironically, with the COVID-19 pandemic with a period of physical isolation, came most countries’ greatest leaps in financial inclusion. The governments began looking to the digital realm as the answer to the financial issue. By supporting the digital jump, the financial institutions have transverse the geographic gap that plagues Latin America, giving more people access. Digitalization has already had a great effect, for example, Brazil has reduced its unbanked population by 73%. This similarly has had a positive effect in Brazil, Argentina, and Colombia. However, despite these improvements, unless there is an effort to change the institutional trust, Latin America might be doomed to never flourish.

Despite positive results from the digital leap, it is paramount that Latin American countries solve their institutions before the lasting change could be made. Watering a tree every day would not matter if the water itself is contaminated or full of artificial matter. A good example of this was seen most recently, with the implementation of Bitcoin in El Salvador’s economic system. While it had the intended effect of assisting in the growth of financial’s access, the policy itself only benefited the elites of the nation. This led to hundreds of protests against the implementation of bitcoin. Ironically, this policy was considered elitist, due to the lack of financial inclusion within El Salvador, as over 70% of the population does not have a bank account.

Latin America has the ability to grow beyond anyone’s imagination, however, it is stunted by elites within most countries who seek to profit off their fellow countrymen. Solving these institutional changes would be on a case-by-case basis for each country, as each of these Latin American countries is unique in its own way. Foreign assistance could be helpful, due to the trust people have in say the American dollar, and there could be an effort for foreign banks to tap into this growing market. However, similar to the digital leap, this would not be enough and it would be dependent on each country to solve their social issues before they could see the light in their tunnel. Time will tell if the trees of Latin America will flourish and bear the expected fruit, but with a plan to cleanse and provide more water, the sky’s the limit.


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