Financial Development (FD) is understood as the improvement in the functions of the financial system, which enables a more efficient allocation of resources toward the real sector of the economy. Recently, Latin America and the Caribbean have made significant efforts to strengthen their financial systems by promoting inclusion in the banking system. Nevertheless, the region still lags behind other emerging markets, particularly in terms of the growth and consolidation of its financial markets.
The International Monetary Fund (IMF) measures FD through an index based on two main dimensions: financial institutions and financial markets. These dimensions are further evaluated across three pillars: depth, access, and efficiency. The index ranges from 0 to 100, with higher values indicating greater financial development. For instance, in 2023, Asia achieved an average of 60.76 points, reflecting major progress in modernizing its financial systems, led by China and India. Africa also showed notable growth, reaching 38.16 points, although significant challenges remain.
In contrast, Latin America recorded the lowest growth, increasing from 15 points in 1992 to only 26.45 in 2021. This low average stems from poor institutional quality, limited financial inclusion, underdeveloped financial markets, a heavy reliance on the banking system, and minimal or nonexistent financial education.
The region faces major challenges in terms of financial inclusion, which negatively affects its economic development. Still, there has been better performance in the development of financial institutions, thanks to policies that have expanded services to previously excluded population segments. However, access to and usage of these services remain limited—especially among women, youth, and people in rural areas. Additionally, financial markets—an essential component of the system—remain underdeveloped.
According to a report from Americas Market Intelligence (AMI), between 2020 and 2023, most Latin Americans gained access to basic financial products, although 21% remain excluded. While nearly eight in ten people now have access to financial services, there are still hurdles to achieving more advanced inclusion. Only 58% hold a credit card, and just three in ten access products like loans, insurance, or investments. In fact, only 59% of low-income individuals have a bank account.
Governments have played a key role in this progress, as 15% of citizens opened their first account thanks to the digitization of state assistance programs. The use of advanced financial products is also rapidly growing, reflecting greater financial integration in the region.
The relationship between financial development and economic growth
Greater financial development—especially through access to the banking system—drives financial inclusion. According to the World Bank, in 2017 over 1.2 billion adults worldwide gained access to a bank account, enabling their participation in the formal economy. This access is key to economic growth, as it allows households and businesses to actively engage with the financial system. Companies can finance productive projects and generate jobs, while households can meet consumption and investment needs. In turn, inclusion strengthens the stability of the financial system by integrating previously excluded sectors, promoting more equitable and sustainable growth.
Beyond access, the depth and efficiency of the financial system also foster economic growth. Greater depth, reflected in the size and liquidity of the system, expands the resources available to finance productive activities, facilitates credit, and supports the funding of high-impact projects. Increased efficiency reduces intermediation costs, optimizes resource allocation, and strengthens strategic sectors. Together, these factors stimulate consumption, investment, innovation, capital accumulation, and employment.
A study by the School of Economics at Universidad de Las Américas in Ecuador evaluated the relationship between FD and economic growth from 1992 to 2019 for a group of 18 upper-middle-income countries, mostly from Latin America, Africa, and Asia. The results showed that FD has a positive impact on economic growth. In Latin America’s case, a one-point increase in the FD index correlated with an average economic growth of 0.1%.
However, in Latin America, the impact of financial development is limited by structural and institutional problems. Low institutional quality hampers the implementation of effective policies, creates information asymmetries, and results in incomplete markets, restricting both access and system efficiency. Moreover, the region faces significant challenges in developing its financial markets compared to other emerging regions, particularly regarding depth and efficiency. This situation is worsened by the strong reliance on the banking system, which limits the diversification of funding sources and reduces the potential of financial development to foster sustainable long-term growth.
Conclusion
To boost financial development, policies must be implemented to strengthen inclusion and the banking system. Measures like the use of mobile electronic money—as successfully adopted in Peru—or tax incentives to expand banking coverage, as seen in Brazil, improve access in rural areas. Additionally, adopting international standards such as the Basel Accords reinforces system resilience. These actions not only expand coverage but also improve the efficiency and depth of the financial system.
From a capital markets perspective, financial development requires expanded access and a stronger structure. Regional integration, simpler regulations, and broader financial education enable more people to invest securely and knowledgeably. A robust legal infrastructure ensures transparency and trust, benefiting both businesses and investors.
Financial development (FD) is a fundamental pillar for driving a country’s economic activity. But to achieve this, governments in the region must strengthen financial systems through effective policies and regulations that promote greater access to financial services and expand financial markets. This would allow an increasing number of individuals and businesses to join the system, facilitating the financing of productive activities. A strong and developed financial system not only acts as an engine for economic growth but also helps reduce social inequalities.
*Machine translation proofread by Janaína da Silva.
Autor
Economist graduated from the University of the Americas in Ecuador.
Professor of Economics at the University of the Americas, Ecuador. Economist from the Pontifical Catholic University of Ecuador and the University of Grenoble Alpes, France.
