Can financial market policies reduce income inequality?
Highly imperfect financial markets are an important source of income inequality in Latin America. This paper shows that, whilst banking institutions in most Latin American countries have shown reluctance to serve the lower end of the business market, over 70% of all poor earners in Latin America either own or are employed by micro and small enterprises (MSEs).
Westly argues that implementing policy changes from a broad agenda of "second generation" financial reforms emerging in the region could help reduce this inequality by altering the conditions under which financial markets function. Whilst most microfinance efforts to date have focused on building retail capacity the author suggests that second generation reforms should:
- Concentrate on improving legal and regulatory frameworks and legal reforms;
- Develop credit bureaus to enhance the performance of microfinance systems.
The paper concludes by suggesting a number of specific reforms aimed at helping smaller firms gain access to financial services:
- Improving regulation and supervision of credit unions and MFIs;
- Improving the legal and regulatory framework for secured transactions;
- Modernizing supporting institutions;
- Reducing informality;
- Establishing or strengthening credit bureaus;
- Improving the legal and regulatory framework for leasing and factoring;
- Strengthening credit unions and MFIs.
