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 anumber of years. Financial inclusion policies have aimed at channeling microcredit to poor,spreading formal banking system usage, fostering electronic payment acceptance, andmaking financial services more affordable. Using simulations from a general equilibriummodel it is possible to identify the most binding financial sector frictions that precludefinancial inclusion of enterprises, and study the effects on growth and inequality of efforts toremove these frictions. The study finds that lowering contraints on collateral promises highergrowth while inequality is better tackled through measures that lower the financialparticipation cost.