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

Financial inclusion has been one of the key pillars of Colombia's development strategy for a number of years. Financial inclusion policies have aimed at channeling microcredit to poor, spreading formal banking system usage, fostering electronic payment acceptance, and making fi nancial services more affordable. Using simulations from a general equilibrium model it is possible to identify the most binding fi nancial sector frictions that preclude fi nancial inclusion of enterprises, and study the effects on growth and inequality of efforts to remove these frictions. The study fi nds that lowering contraints on collateral promises higher growth while inequality is better tackled through measures that lower the fi nancial participation cost.