A well-functioning financial system has the potential to mobilise and channel private resources towards development objectives. A developed financial system provides access to essential financial services such as loans, saving products and insurance for individuals and businesses, allowing them to improve or smooth consumption and increase investment in physical and human capital. Furthermore, the financial system plays a pivotal role in promoting entrepreneurship and fostering job creation, thereby improving economic welfare, reducing inequality and fostering economic growth (Levine, 2018[1]; World Bank, 2008[2]; OECD, 2020[3]). A fundamental condition for achieving these objectives is to ensure well-regulated and supervised financial markets, as this should foster soundness and stability, and mitigate vulnerabilities to prevent systemic risks (Boikos, Panagiotidis and Voucharas, 2022[4]; Strobbe, Nie and Rab, 2023[5]).

Financial markets have experienced significant growth over the last three decades in Latin America and the Caribbean (LAC) in terms of volume, participants, instruments, and products. Households have greatly increased their participation in financial markets through access to savings accounts and borrowing, although a large proportion of informal households still do not have a credit account. The expansion of the financial sector has benefited the growth and development of large companies, including the largest companies. However, micro, small and medium-sized enterprises (MSMEs) in the LAC region still face challenges in accessing financial markets, where they face the second-largest financing gap of any region in the developing world (OECD et al., 2023[6]). Regarding the development of capital markets, while a large majority of LAC countries face limited financial access to private companies through domestic equity and fixed-income markets, the region has increased its presence in international markets through debt issuance and the use of depositary receipts, and it continues to work towards regional financial integration.

This chapter explores the current status of financial markets in LAC and their role in achieving the region’s development objectives. It discusses the region’s banking system in terms of depth, access and efficiency, alongside the issues of risk and solvency. This overview of the region’s financial development landscape is followed by an examination of gaps in financial inclusion, the impact of digital innovation in removing barriers to access and the crucial role of financial education. The chapter then analyses the region’s capital markets, emphasising that their development can enhance liquidity and inclusion and increase access for medium-sized companies, especially in conditions of high solvency and balanced risk. It highlights the importance of regulation and concludes by exploring LAC's role in international debt markets and efforts to transcend national borders in financial market development via regional financial integration.

Within the financial system, banks are the main intermediaries for households and business. In regions with underdeveloped capital markets, such as Latin America, banking credit is particularly important since it serves as the primary source of financing for firms (Christiano Silva, Miranda Tabak and Tetzner Laiz, 2021[7]). Enhancing financial inclusion for small and medium-sized enterprises (SMEs) and households within the banking system, and developing more diversified and efficient financial markets, are critical imperatives for driving inclusive development in LAC (Arellano et al., 2018[8]).

To assess the functioning of the banking system, three aspects are commonly considered: depth, access, and efficiency (Čihák et al., 2012[9]). Depth measures the size of financial markets; access examines the extent to which individuals can use them; and efficiency evaluates the system’s effectiveness in delivering services. This approach can capture the key features of financial systems and the evolution of the financial structure in the region (De la Torre et al., 2011[10]).

Despite improvements over the last decade, financial depth in LAC remains low. Domestic credit to the private sector has doubled over the last 20 years, reaching 50% of gross domestic product (GDP) in 2022. Despite this growth, LAC lags behind regions such as the European Union (85%) and East Asia (170%), with depth similar to the levels of South Asia and sub-Saharan Africa (Figure 3.1). Domestic credit is mainly provided by banks. However, bank deposits as a percentage of GDP stood at 55.1% for LAC In 2021, compared to 99.3% for OECD countries (Figure 3.1). These figures highlight the importance of addressing barriers to financial inclusion for individuals and businesses. Although financial depth correlates positively with economic growth and stability, research suggests that there is a threshold beyond which its benefits diminish, notably when private sector credit reaches 80‑100% of GDP (Almarzoqi, Naceur and Kotak, 2015[11]; Arcand, Berkes and Panizza, 2012[12]; Easterly, Islam and Stiglitz, 2000[13]). Similarly, rapid expansion of the financial sector enhances risk-taking abilities but in the absence of a strong regulatory and institutional framework based on international standards and practices, it can also amplify systemic risks, heightening vulnerability to severe market downturns (Rajan, 2006[14]).

Financial depth exhibits heterogeneity across countries in the region. Countries such as Chile and Brazil exhibit greater levels of depth, with domestic private credit to GDP – an indicator of financial systems’ contribution to the real economy – standing at 83% and 71% respectively. In contrast, the ratio stands at 12% in Guyana and 8% in Haiti. In terms of bank deposits relative to GDP – an indicator of households and businesses’ savings levels –, the highest values are recorded in St. Kitts and Nevis (105%) and Belize (98%), while the lowest are seen in the Dominican Republic (29%) and Haiti (24%).

Savings in LAC have historically remained low, constraining credit provision and capital accumulation. Over the last two decades, gross saving levels in LAC have consistently been modest, reaching a peak of 22% of GDP in 2006 and stabilising in 2022 at 18%. In comparison, the level of gross savings as a percentage of GDP in 2022 stood at 38% in East Asia and the Pacific, at 25% in the European Union and at 23% in the OECD countries (World Bank, 2024[16]). Savings play a crucial role in providing funds for credit and facilitating investments. A rise in savings typically leads to increased investment opportunities (David, Goncalves and Werner, 2020[17]). Persistent low national saving rates are a significant constraint for capital accumulation in LAC (Cavallo and Pedemonte, 2015[18]).

The LAC region has seen an improvement in access to financial services for both households and MSMEs. Nonetheless, challenges persist, such as high costs, financial illiteracy, informality, and regulatory hurdles. Overcoming these barriers is crucial to ensuring broader access to financial services and for promoting inclusive economic growth across LAC.

Account ownership has doubled in LAC over a decade, but disparities in access to formal financial services and reliance on informal borrowing persist. Access to saving and borrowing instruments enables households to manage their finances, reducing their economic vulnerability by smoothing consumption over time and facilitating wealth accumulation. The share of LAC individuals aged 15+ reporting ownership of an account at a formal financial institution increased from an average of 29.6% in 2011 to 57.2% in 2021 (World Bank, 2021[19]; 2008[2]). However, significant disparities persist across the region. As of 2021, Chile led in access to formal saving mechanisms, at 87% of its adult population, while Nicaragua lagged with just 26%. This contrasts with OECD countries, where on average 93.7% of the age 15+ population report having an account at a formal financial institution (Figure 3.2, Panel A). As for borrowing, Latin Americans still frequently turn to informal lending sources. On average, 42% of the region's population take out loans, yet only 20.1% do so from formal financial institutions (Figure 3.2, Panel B).

Advancing financial access requires addressing several barriers. These include high transaction costs, lack of access to banking infrastructure, lack of quality products, limited scope of credit scores, regulatory hurdles and the need for financial literacy and digital skills (World Bank, 2021[19]). In 2021, among adults in LAC without an account, 59% on average said it was because they did not have sufficient resources and 55% declared that financial services were too expensive (Figure 3.3).

Despite improvements in access to financial accounts across socio-economic groups in LAC, gender disparity has amplified. While access gaps based on income, labour market participation, education and age have all shown reductions, gender disparity in financial account ownership widened by three percentage points between 2011 and 2021. Women are seven percentage points less likely than men to have an account in LAC (World Bank, 2021[19]).

Improving access to finance is key for MSMEs, which account for 60% of the employed population in LAC and contribute about 25% to its GDP (Herrera, 2020[20]). Providing businesses with the necessary financial resources allows them to invest in new technologies, hire staff, increase inventory and expand their operational capacity and productivity (OECD/CAF/SELA, 2024[21]) (Chapter 1). Access to other financial products, like insurance and derivatives, helps businesses to survive and safeguard against unforeseen events such as natural disasters, market volatility or operational disruptions (Morgan and Pontines, 2014[22]; Bruhn and Love, 2013[23]).

Firms use the financial system mostly for deposits and as a means of payment. 89% of small firms, 94.3% of medium-sized firms and 96.6% of large firms in the region have a checking or savings account in the formal financial system. However, less than 15% of total credit in the region goes to MSMEs, compared to OECD countries where it exceeds 25% (World Bank, 2024[24]).

The use of the financial system in LAC is proportional to the size of the company. For instance, on average, the share of small, medium-sized and large companies in the region with a bank loan or line of credit is 40.9%, 56.7% and 69.0%, respectively. In contrast, the value of collateral needed for a loan, expressed as a percentage of the loan, declines with the size of the firm (200.9% for small firms, 172.1% for medium-sized firms and 155.1% for large firms) (Figure 3.4).

Formal MSMEs face difficulties in accessing credit due to the high cost of financing. They typically pay higher interest rates than large firms due to their riskier profile. Around 30% of MSMEs in the region face credit constraints (IFC, 2017[25]). In 2022, the spread of interest rates between loans to SMEs and large firms was notably high in LAC countries (Figure 3.5). Apart from Mexico, where the spread has decreased since 2020, the rest of the region’s countries have experienced increases. Current spread levels in LAC exceed those of high-income countries (0.84%) (OECD, 2024[26]). Informality also increases the cost of financing. Borrowers often lack documents like financial statements and tax declarations, which limits the information they can provide to lenders. This can result in higher interest rates being imposed to mitigate the risks associated with adverse selection (Herrera, 2020[20]).

Lack of collateral is a main barrier for the region’s MSMEs in terms of accessing credit. For instance, collateral is needed by 9 out of 10 SMEs in Colombia to access bank credit. There is also a mismatch between the types of collateral demanded by lenders and the assets typically held by SMEs. Approximately 80% of lenders primarily request real property as collateral, while the asset base of around 75% of the region’s SMEs consists of movables such as inventory and equipment (OECD, 2024[26]).

In 2021 the average return on assets (ROA) in the region stood at 1.6%, higher than the OECD average of 0.9% (Figure 3.6). The ROA measures a bank’s net income relative to its total assets, assessing the ability of the bank’s management to generate profits from its asset base. While the ROA may be used as a measure of efficiency, high profitability can signal inefficiencies within the financial system and more generally in the economy (e.g. lack of reliable information on households and firms). While there is a high heterogeneity across LAC countries, the region’s net interest margin (NIM), at 5%, was superior to the OECD average of 1.7%. The NIM measures the difference between interest income from assets like loans and securities, and interest paid to depositors for savings. A high credit spread may limit access to credit, making it costly for both individuals and businesses, and discourages savings. Due mainly to their high net interest margins, banks in emerging economies may be more profitable than those in high income countries, rendering them more attractive to investors but also limiting access to credit (Arellano et al., 2018[8]). Profitability in the region is not driven by high interest rates, which had a limited direct impact in Brazil, Chile, Colombia, Mexico and Peru (IMF, 2023[27]). Previous studies show that it is rather associated with limited revenue diversification, high concentration, higher macroeconomic risks and weak legal and regulatory systems (Saona, 2016[28]; Bejar et al., 2022[29]).

High banking costs are prevalent in the region. In 2021, banks in LAC faced an overhead cost to total assets ratio of 3.7%, higher than the OECD average of 1.4%. This indicator evaluates the operational efficiency of a bank by quantifying the magnitude of its operating expenses relative to its total assets. Levels observed may be attributed to several factors and they differ across LAC countries. These include premiums associated with greater underlying macroeconomic risks, high levels of informality, tighter and inefficient regulatory requirements and the absence of strong competitive pressures within the banking sector (Maudos and Solís, 2009[30]; Gelos, 2006[31]). High overhead costs in banks can lower their profitability, causing them to charge higher fees or to offer less favourable terms to businesses and households. They may also limit banks’ ability to invest in new technologies and services that could benefit users.

Banking competition policies contribute to lower financial services costs and are associated with fintech emergence. Markets with high levels of competition and low entry barriers not only can reduce the cost of financial services, but they also tend to offer more credit (Carlson, Correia and Luck, 2022[32]). They are associated with lower lending spreads and fees, and with a broader offer of financial products (Joaquim, Van Doornik and Haas, 2023[33]). Banking competition also promotes digital transformation and increases investment in research and development (R&D), improving efficiency and customer service. In Brazil and Mexico, for instance, banking innovation, lower NIMs and lower fees in the payments segment are associated with less concentrated markets in the context of fintech emergence (Bejar et al., 2022[29]). Furthermore, in countries where transparency within the banking sector is encouraged, the banking industry tends to be characterised by higher levels of competitiveness and decreasing interest margins (Abuselidze, 2021[34]).

A sound financial regulatory framework and a well-supervised financial system are critical for minimising the risk of financial crises and financial system fragility, while also promoting orderly financial sector development and enhancing its contribution to the real economy. Such regulation is particularly essential in emerging economies and developing countries to support sustainable growth and avoid past experiences of banking crises and economic downturns.

The banking system in LAC maintains strong capitalisation, enhancing stability and an adequate environment to ensure access to finance. In 2022, the capital adequacy ratio of banks in the region stood at 16.9%, slightly below the 19.9% observed in OECD countries and above the regulatory minimum of 8% stipulated by the Basel framework (BIS, 2020[35]). National authorities in countries such as Brazil, Colombia, Peru, and Argentina require banks to maintain higher requirement levels than the Basel minimum requirement (OECD, 2010[36]). This indicates a robust capital position that provides a buffer against financial shocks. Regarding the impact of higher capital requirements on lending, it has been associated in Peru with lower credit growth only in the short term, with insignificant effect approximately after half a year. This effect is stronger during periods of lower GDP growth and for less profitable and less capitalised banks (Fang et al., 2022[37]).

High liquidity levels in LAC compared to advanced economies have supported the resilience of the banking system. The ratio of liquid assets to deposits and short-term funding remained robust in 2022 at 57.2%, surpassing the OECD average of 50.5% (Figure 3.7). High liquidity levels reflect the ability of banks to meet short-term obligations and cover unexpected liquidity shocks.

Adapting Basel lll standards to the specific conditions of LAC countries is essential for fostering financial system stability without impeding development in the region. Although the adoption of Basel regulations is optional for the large majority of emerging economies, and Basel III recommendations were calibrated primarily for advanced economies, several developing countries are in the process of adapting them to their local regulatory frameworks. Over half of the countries in LAC have incorporated some form of Basel III into their banking regulation framework (Galindo and Izquierdo, 2024[39]). However, developing and emerging markets countries exhibit specific characteristics that should be acknowledged, such as restricted access to international capital markets, underdeveloped domestic financial markets, high macroeconomic volatility and challenges related to transparency, regulatory effectiveness and institutional capacity (Beck and Rojas-Suarez, 2019[40]). For instance, Basel III implementation may impact lending for infrastructure projects, as the tightening of the large exposure rule restricts lending from small and domestic banks, and as tighter capital requirements for these projects increase lending costs. Additionally, liquidity requirements compel banks to align long-term lending with long-term funding and to hold more liquid assets for project financing, which is challenging due to limited access to capital markets in the region (Beck, 2018[41]). Finally, most assets and firms in LAC, especially SMEs, do not necessarily have the ratings or market information needed to adopt internal models to quantify their risk-weighted assets, and therefore the required capital could be higher than that required using the standardised approach.

The banking system in the region continues to manage credit risk effectively, demonstrating preparedness for economic downturns and potential for increased lending capacity. In 2022, the ratio of non-performing loans (NPL) to gross loans in the region stood at 4.8%, above the OECD average of 2.2% (Figure 3.8). However, this figure is largely influenced by elevated levels in five Caribbean countries; when they are excluded, the NPL ratio aligns with OECD trends, at 2.5%. In addition, NPL provisions in LAC remain adequate at 122%, compared to 70.6% for the OECD, while levels in some Caribbean countries are particularly low. NPL provisions indicate the level of preparedness for potential loan defaults, as they represent banks’ available resources to absorb potential losses from non-performing loans.

Financial inclusion is a multidimensional concept encompassing at least three key dimensions: access, usage and quality of financial services and products. The access dimension refers to making financial services and products available to all, especially underserved and lower-income populations. Over the last decade, all countries in the LAC region have made significant progress in terms of financial access. However, persistent vertical and horizontal inequalities leave some sectors marginalised and unable to access key financial products (Chapter 1). The usage dimension assesses how people engage with these services, measuring factors such as the regularity and frequency of transactions. This dimension is experiencing accelerated growth in LAC due to the proliferation of innovative digital solutions, which have exponentially increased digital payments in the region. The quality dimension of financial inclusion covers the ability of financial services and products to meet the needs of consumers, as well as clients’ awareness and understanding of financial products. This involves promoting financial literacy, implementing strong consumer protection frameworks, and offering responsible financial products tailored to individual needs (OECD, 2022[42]). In this dimension, LAC countries still face significant challenges in terms of financial education, which is crucial for people to better understand, responsibly use and benefit from financial products and services.

Increased financial inclusion, when paired with quality financial products and services, can bring significant benefits for households and firms in LAC, driving economic growth and people’s well-being (OECD, 2022[42]). Enhanced access to high-quality financial products and services, within the context of a strong financial consumer protection framework and with adequate levels of financial literacy, can allow households to increase their savings, smooth consumption and invest in housing, education and health, leading to improved living standards and reduced poverty (Banerjee and Duflo, 2011[43]). For firms, especially SMEs, quality financial inclusion facilitates access to credit, enabling investment in technology and expansion, which boosts productivity and job creation. At the societal level, broader financial inclusion with quality can contribute to reducing income inequality, promoting resource allocation efficiency, and fostering overall economic stability and resilience (Pal and Bandyopadhyayv, 2022[44]).

Financial inclusion strategies can play a critical role in addressing both vertical (income) and horizontal (e.g. gender, urban/rural, formal/informal) inequalities prevalent in the LAC region. Access to and usage of high-quality financial products and services not only can enable individuals and firms to manage their finances more effectively but can also serve to catalyse economic empowerment, social mobility and growth for enterprises (Beck, Demirgüç-Kunt and Levine, 2007[45]). However, gaps in access to financial services reinforce existing inequalities, exacerbating the disparities between different demographic groups. Moreover, traditional banking infrastructure often fails to reach underserved populations, particularly those depending on informal work or living in marginalised areas.

LAC countries have made considerable progress in increasing access, but averages conceal significant gaps, leaving some vulnerable groups excluded from essential financial products and services. As noted above, access to formal savings mechanisms in LAC increased to 57.2% in 2021, while access to loans in formal financial institutions grew to 20.1%. However, analysis of factors such as income level and the informal or formal nature of employment still reveals significant gaps in access. Access can be improved by identifying these gaps and removing barriers that prevent people from using financial services, alongside efforts to increase financial literacy.

Low income remains a significant barrier to accessing high-quality financial products and services in LAC. Financial products and services are both more accessible and more diverse for households in the richest quintile, facilitating investment in real estate, education and business ventures. This ease of access is largely due to higher incomes and the availability of collateral, which together reduce perceived lending risks for financial institutions. Conversely, households in the poorest quintile often find their financial options severely limited by their lack of collateral and lower incomes. This not only restricts their immediate financial mobility but also hampers their long-term economic growth, as they are unable to invest in opportunities that could improve their economic standing (Beck and de La Torre, 2007[46]). The disparity in access to credit starkly illustrates the economic divide: in LAC countries, a reduced number of individuals from the poorest quintile had access to homeownership loans compared to the wealthiest households (Figure 3.9, Panel A). In OECD countries, 24.7% of people live in households owned with a mortgage (OECD, 2024[47]).

Poverty drastically reduces access to financial products and services in LAC. This exclusion is primarily due to strict financial criteria, such as income thresholds, robust credit histories and collateral requirements, which are often unattainable for poor individuals, many of whom depend on informal work (Beck and de La Torre, 2007[46]). Without access to credit, the poor are more likely to remain trapped in a cycle of financial instability, unable to invest in assets that could offer long-term benefits, financial security, and economic mobility (Banerjee and Duflo, 2011[43]).

The widening gap in access to financial services between the rich and the poor underscores the need for targeted financial inclusion policies. Empirical evidence has shown that financial development benefits the poor by accelerating their income growth faster than the average per capita GDP, thereby reducing income inequality (Beck, Demirgüç-Kunt and Levine, 2007[45]). Alternative credit scoring and open finance offer significant opportunities for financial inclusion. By leveraging alternative data, fintech companies can extend credit access to underserved populations. Open finance regulations in countries like Brazil, Mexico, Chile and Colombia are fostering increased competition and innovation in financial services, ultimately enhancing financial inclusion and economic participation. These regulations mandate data sharing among financial institutions, which can lead to more tailored and accessible financial products for consumers. For example, positive information from payments can complement traditional data used in credit scoring, improving the prediction of credit behaviour for typically excluded populations and SMEs (Herrera et al., 2023[49]).

Informal workers also face access barriers to financial products. This is primarily due to their lack of formal employment records, which are crucial for financial institutions when assessing creditworthiness, and to a scarcity of assets that can be used as collateral (Beck and de La Torre, 2007[46]). Additionally, the lower and irregular incomes often associated with informal work exacerbate these challenges, creating compounding effects that further limit access to financial products. Households with formally employed individuals typically possess a greater array of assets suitable for collateral, thereby enjoying broader access to financial products. This facilitates investments in physical capital, such as real estate, and human capital through educational advancements (Banerjee and Duflo, 2011[43]).

While in some countries, including Chile, Costa Rica and Uruguay, a relatively notable share of the population resides in households with homeownership loans, the share is considerably lower in countries like the Dominican Republic and El Salvador. Furthermore, formal households represent the highest proportion of households with homeownership loans in selected LAC countries, compared to informal households and mixed households (i.e. households with both formal and informal workers). In contrast, depending on the degree of informality across LAC countries, there is no single pattern regarding which type of household (i.e. formal, informal, or mixed) is most likely not to have a homeownership loan (Figure 3.10, Panel A).

Important differences exist in access to credit between formal and informal households. For instance, in Mexico, close to 15% of formal households had access to housing loans in 2020, compared to a mere 2.3% of informal households. Costa Rica also reflected this trend, with more than 12% of formal households accessing housing loans in 2021, compared to only 4.2% of informal households (Figure 3.10, Panel B).

Higher levels of financial inclusion are associated with lower informality, after controlling for GDP per capita (Figure 3.11). Formal employment promotes financial inclusion by integrating individuals into the financial system, as it typically requires employees to have bank accounts for salary deposits. With proper documentation and a banking history, these individuals are more likely to access credit and other financial products (Aurazo and Gasmi, 2024[50]). Additionally, broader access to financial services allows enterprises to secure capital, stabilize cash flow, and enhance productivity and profitability. These benefits can encourage informal businesses to transition into the formal economy, creating more formal employment opportunities (Lahura and Vargas, 2021[51]).

Recent advances in women’s access to financial products and services have contributed significantly to narrowing the gender gap in financial access in LAC. Access to financial products empowers women to invest in education, housing, health, and businesses, enhancing their economic standing. Between 2011 and 2021, the percentage of women with a bank account increased from 34.9% to 69.3%, compared to 77% of men. The percentage of women who borrowed from a formal financial institution increased from 7.4% to 24.3% during this period (World Bank, 2021[19]), illustrating positive strides toward gender equality in financial access.

However, despite these improvements, women in LAC still face systemic barriers that hinder their ability to fully benefit from financial inclusion (Demirgüç-Kunt, Klapper and Sin, 2013[53]). Cultural norms, gendered expectations, and legal frameworks in many LAC countries continue to limit women’s autonomy and decision-making power over financial resources (Banca de las Oportunidades and CAF, 2024[54]; CMF, 2022[55]). For instance, women’s access to credit remains significantly lower than men’s, with only 25% of women borrowing from financial institutions – 11 percentage points behind their male counterparts. Furthermore, less than 5% of women who borrow funds use them for business purposes, highlighting a gap in women’s entrepreneurial opportunities (World Bank, 2021[19]). This imbalance is further reflected in the ownership of firms, where only 18.7% of businesses in LAC are majority female-owned (World Bank, 2024[24]). Moreover, women in developing countries are largely concentrated in small firms and hence are likely to face greater financial constraints (Maquera Sardon, 2022[56]).

Achieving gender equality in the region is not only a social imperative but also carries substantial economic costs. Recent estimates suggest that achieving gender equality, as measured by eight sex-disaggregated Sustainable Development Goals indicators, will require an annual investment of USD 1.6 trillion from 2023 to 2030 for the 19 LAC economies studied (see Chapter 1 (UNCTAD, 2024[57])).This is equivalent to 28.4% of their collective GDP needed to close gender gaps in crucial areas such as poverty eradication, hunger alleviation, and women’s equal participation in decision-making and the economy. This highlights the scale of investment required to promote gender equality, particularly through financial inclusion, as a key driver of broader development outcomes (Andrade et al., 2023[58]).

Gender differences in financial knowledge and resilience further complicate women’s access to financial products and services. Women still tend to score lower in financial knowledge compared to men in most LAC countries (Figure 3.14). This knowledge gap has significant implications, affecting women’s ability to manage their finances, build emergency savings, or access credit for entrepreneurial purposes (OECD, 2023[59]). Financial resilience is another critical issue, with women more likely than men to report that their income does not cover living expenses and that they lack sufficient resources to weather financial shocks. Women face additional barriers to achieving financial resilience due to their lower labour market participation, gender wage gaps, and interruptions in career continuity due to family responsibilities (OECD, 2023[59]).

Intersectional inequalities also exacerbate women’s financial exclusion. Women in rural areas, those from Indigenous and Afro-descendant communities, and informal workers face compounded barriers, including limited access to digital financial services and more stringent requirements for credit approval (UN Women, 2022[60]). Targeted financial literacy programmes, coupled with innovative financial solutions like microcredit and alternative credit scoring, could bridge this gap. For instance, leveraging non-traditional data sources for credit scoring – such as utility payments or mobile phone usage – can expand credit access to women in informal employment, a sector where they are disproportionately represented (Herrera et al., 2023[49]).

Addressing biases, both on the supply and demand sides, is also essential. Studies show that women often lack the self-confidence needed to engage with financial products or present credit characteristics clearly, leading to lower loan approval rates (Banca de las Oportunidades and CAF, 2024[54]). Financial institutions should consider implementing further gender-sensitive lending practices, such as offering tailored financial products for women or reducing collateral requirements, which disproportionately affect women who often lack property rights or formal employment records.

Digital innovation has emerged as a powerful driver of financial inclusion. By leveraging new digital technologies, financial services in LAC can become significantly more inclusive (Sahay et al., 2020[61]). Emerging fintech platforms offer innovative, accessible and affordable financial services, bypassing the access barriers and limitations of traditional banking systems and reaching previously underserved segments of society (Bakker et al., 2023[62]). They encompass a wide range of innovative technologies and digital solutions, including online and mobile banking, lending, investment, and payments. This swift change can be seen through the proliferation of digital payment systems, the emergence of digital banks or neobanks, and the growth of alternative finance1 and insurance (Sahay et al., 2020[61]; Mastercard and AMI, 2023[63]). Digital payments also encompass payments made at physical or online merchants, sending or receiving remittances, paying utility bills, as well as receiving wages, government transfers or public pensions (Demirgüç-Kunt et al., 2022[64]). The integration of these technological advancements is not only streamlining and securing financial transactions but also fostering competition, reducing costs, and encouraging a culture of financial literacy and innovation (Chapter 1).

Although digital innovations are already supporting financial inclusion in LAC, gaps remain. Between 2014 and 2021, the percentage of age 15+ people who made or received a digital payment grew from 35.9% to 49.0% on average in LAC (Figure 3.12, Panel A). In some countries, such as Brazil or Chile, around 80% have made or received a digital payment, approaching the levels of OECD countries (95.6%). Similarly, the growth of mobile money accounts has surged in LAC, with countries like Argentina seeing an increase from 0.8% in 2014 to 27.0% in 2021. By delivering financial services via mobile devices, these platforms serve as crucial gateways into the financial system for individuals who have been excluded from traditional banking. This inclusivity not only expands the market but also plays a pivotal role in promoting financial literacy and stability among the population. Despite this expansion, significant gaps persist in most countries. For example, in 2021, 20.2% of men over 15 in Peru reported having a mobile money account, compared to only 8.9% of women (Figure 3.12, Panel B).

Fintech has simplified how financial services are accessed and used across the region. The fastest growing fintech verticals in LAC include digital payments, digital banks, alternative finance by fintech, insurtech (technological innovations transforming the insurance sector) and big tech, among others. While at a nascent stage, the alternative finance and insurtech sectors are expanding swiftly. Fintech transformation in LAC is characterised by the rapid growth of digital payment systems, which had 262.8 million users by 2023, and digital banks, with more than 58.7 million users by 2023, primarily in Brazil and Mexico. Other segments such as digital investments and digital assets, also led by Brazil, reached 43.2 million and 62.5 million users respectively in 2023 (Figure 3.13, Panel A). Digital payments in LAC grew from USD 89 billion in 2017 to USD 215 billion in 2021 (Bakker et al., 2023[62]). The transaction volume of fully online digital banks in the LAC-6 – Argentina, Brazil, Chile, Colombia, Costa Rica and Mexico – grew from USD 17 billion in 2017 to USD 123 billion in 2021 (Statista, 2024[65]).

Fintech innovations have made financial transactions instantaneous and facilitated online access to traditional banking services, enhancing competition and reducing lending spreads. Moreover, fintech has played a critical role in financial inclusion, bringing banking to the previously unbanked and underbanked, as well as fostering SME growth through alternative finance. This inclusive growth has contributed to reducing income inequality (Bakker et al., 2023[62]). In fact, about three-quarters of digital banks’ customers in LAC are previously unbanked and underbanked consumers and SMEs (Figure 3.13, Panel B). By extending financial services to previously unbanked and underbanked populations, as well as underserved SMEs, fintech innovations are dismantling longstanding barriers to financial access and promoting economic participation.

Credit scoring based on alternative data in their algorithms (e.g. positive information from payments) seems a promising path for complementing traditional data used in credit scores by improving the prediction of credit behaviour for typically excluded populations and SMEs (Herrera et al., 2023[49]).

The adoption by businesses of digital payment systems, online banking and mobile money solutions can streamline business operations, reduce transaction costs, and save time, as well as increase financial inclusion. These technological advances not only enhance the operational efficiency of businesses but also open up new avenues for reaching customers and markets. Fintech is particularly resilient in times of stress. During the COVID-19 pandemic, for instance, as fintech supported the continuity of economic activities, it attracted increased investment, further fuelling the sector's expansion and highlighting its vital role in both economic stability and growth. During the COVID-19 pandemic in Brazil, nearly 50% of MSMEs with up to 9 employees increased their use of digital financial products. This figure rose to over 60% for MSMEs with 10-49 employees. In contrast, in Mexico, the increase was more modest, with around 30% of MSMEs with up to 9 employees and approximately 45% of MSMEs with 10-49 employees increasing their use of digital financial products (OECD, 2021[66]). As of 2023, 92% of small businesses in LAC accepted any digital payment, and 82% accepted bank transfers, while fewer than 33% accepted other digital payment methods (Mastercard and AMI, 2023[63]).

However, the rapid expansion of digital financial services, accelerated by the COVID-19 pandemic, highlights the importance of equipping individuals with the knowledge and skills to use these services safely. Current levels of digital financial literacy may be inadequate to navigate the opportunities and risks associated with these services (OECD, 2023[67]). Enhancing digital financial literacy is essential for ensuring the safe use of digital financial products.

The quality of financial products and services is crucial to ensuring that increased access and usage in LAC contribute to greater well-being. High-quality financial services must be responsibly designed and delivered, incorporating strong consumer protection frameworks and promoting financial literacy (OECD, 2022[42]; OECD, 2023[67]). Financial literacy is defined by the OECD as a combination of “financial awareness, knowledge, skills, attitudes and behaviours necessary to make sound financial decisions and ultimately achieve financial well-being” (OECD, 2020[68]). It empowers consumers to make informed decisions, helping them to choose appropriate products and avoid pitfalls like over-indebtedness. Regulatory frameworks safeguard against predatory practices and ensure transparency, building trust in the financial system. Without these elements, increased financial inclusion can have unintended consequences, such as encouraging unhealthy financial behaviours and exacerbating financial stress, ultimately deteriorating people's well-being.

Despite recognition of financial literacy as a core 21st-century skill, financial literacy remains limited in LAC, with a significant portion of the population unfamiliar with basic financial concepts. Many adults lack the understanding and application of basic financial concepts necessary for making sound decisions in today's economically pressured environment. Key economic concepts, such as inflation and interest rates, remain unknown to many LAC citizens, with women being disproportionately affected. On average in nine selected LAC countries, more men understand the concept of interest rates (27%) than women (18%). In Colombia, only 13% of men understand interest rates, compared to just 6% of women (Figure 3.14, Panel A). Although Latin Americans and Caribbeans have a slightly better understanding of the concept of inflation and its effect on money, the gender gap remains, with an average of 50% of men understanding this concept compared to 44% of women in the nine countries. In Uruguay, for example, 65% of men and 53% of women understand the concept of inflation (Figure 3.14, Panel B). Moreover, in Brazil, Mexico, and Peru, male MSME owners have higher financial literacy than their female counterparts (OECD, 2021[66]).

Improving financial literacy not only facilitates sound financial decisions but also significantly enhances individuals’ financial well-being and resilience. According to the 2022 Programme for International Student Assessment (PISA), financial literacy performance in Brazil, Costa Rica and Peru lagged behind the OECD average. In these countries, 45%, 43% and 42% of students respectively did not achieve the baseline proficiency level (Level 2), compared to 18% of students in the OECD on average. At Level 2, students can identify common financial products and terms, distinguish between needs and wants, and make basic decisions on everyday spending based on personal experiences. The highest proficiency level in financial literacy, Level 5, was reached by only 2% of students in Brazil and 1% in Costa Rica and Peru, compared to 11% on average in the OECD. Level 5 students demonstrate advanced abilities in analysing complex financial products, solving unconventional financial challenges and understanding the broader financial landscape (OECD, 2024[70]).

The implementation of a National Financial Inclusion Strategy with a strong financial literacy component can significantly contribute to higher levels of financial literacy, lower market concentration2 (OECD, 2022[42]) and the adoption of new digital financial technologies. Evidence from nine LAC countries suggests that the implementation of a National Financial Inclusion Strategy has led to increased adoption of deposit products (López Marmolejo and Ruiz Arranz, 2024[71]). However, there has been no notable impact on other financial services, such as loans, highlighting the need for more effective design and implementation to achieve broader outcomes. Furthermore, improving financial literacy can help individuals and businesses better understand and evaluate their financing options, reducing involuntary exclusion by enabling more informed decisions about seeking credit (Zuleta, 2017[72]).

The linkage between higher financial literacy and greater individual financial well-being, as outlined in the OECD Recommendation on Financial Literacy (Box 3.1), serves as a foundation for policy recommendations aimed at enhancing financial resilience and well-being among populations. Policy suggestions include enhancing basic financial knowledge, fostering positive financial behaviours and attitudes, improving digital financial literacy, and targeting support to those with the lowest financial literacy levels, all aimed at bolstering individual financial well-being and resilience against economic shocks (OECD, 2023[67]).

Most LAC countries still need to build robust regulatory frameworks to protect consumers from fraud, misconduct, error and abuse, and to sanction such activities when they occur. These frameworks, alongside strong supervisory mechanisms, build trust in the financial system by enforcing transparency in financial product offerings, which helps consumers to make informed decisions and avoid financial pitfalls (OECD, 2022[42]). Effective supervision plays a crucial role by ensuring that regulations are followed and that unethical practices are identified and penalised in a timely manner. This combination of regulation and supervision helps prevent predatory lending practices – unethical or exploitative actions by financial institutions that take advantage of vulnerable consumers by offering unfair loan terms, excessive fees or misleading information – by allowing regulatory bodies to monitor and penalise unethical behaviour (OECD, 2022[42]). Strong regulations also promote the development of financial products tailored to the needs of marginalised communities and support fintech innovations for more accessible services. By fostering a competitive and transparent financial market, these regulations enhance the quality of financial products and services, ultimately creating a safe and supportive financial ecosystem that drives economic growth and resilience (OECD, 2024[74]).

Furthermore, as financial institutions increasingly adopt emerging technologies, they must take proactive measures to protect themselves against escalating cyber risks (Atkins et al., 2024[75]). Cybersecurity has become a critical pillar of consumer trust and a key enabler of equitable financial inclusion to prevent fraud and predatory practices.

National and subnational development finance institutions (DFIs) play a crucial role in mobilising resources towards development goals. Public DFIs3 include mostly public development banks (PDBs). They also include specialised financial institutions and funds at the national and local levels. These institutions are mandated to promote economic development, employment and investment aligned with the country's development objectives (Chapter 4). DFIs remain crucial in promoting economic growth and development by providing credit and capacity-building services where private banks and capital markets fall short (De Luna-Martínez, 2017[76]). Besides, they address market failures such as information asymmetries and pro-cyclical lending from the private sector (Xu, Ren and Wu, 2019[77]).Moreover, they can help to address financial market depth issues, redistribute risks and foster inclusive markets. The LAC region currently has approximately 107 DFIs that operate at the national level. Of these, 73% function as first-tier banks and 20% as second-tier banks. The total assets of DFIs vary greatly across LAC countries, from almost 8% of GDP in Brazil to 0.2% in Argentina (AFD/Peking University, 2023[78]). These institutions vary significantly in size, financial profile and regional coverage, as observed in balance sheet indicators such as capital, equity, assets, liabilities and loan portfolios. DFIs, including national and subnational development banks, have extensive knowledge of local markets and strong relationships with both private and public sector actors. By leveraging their advantageous position, they can assess risks, develop project pipelines and facilitate domestic and international capital flows (OECD et al., 2023[6]). International initiatives, including Finance in Common, are fundamental for sharing experiences and information across DFIs, and therefore achieving greater impacts on sustainable development in emerging and developing economies (Box 3.2).

The classification of DFIs by mandate shows a clear productive specialisation in MSMEs. Out of a sample of 76 development banks and finance institutions in LAC, 34% have an institutional mandate focused on financial support of MSMEs (Xu et al., 2021[81]). Throughout the region, there is great heterogeneity in institutional mandates, with South America having the most DFIs focused on SMEs, while many in Central America focus on financial support for the agriculture sector (Figure 3.15, Panel A). DFIs offer the region’s MSMEs a variety of tailored financial instruments that cater to financial needs at every stage of development. These instruments can be grouped into five types of financing: i) financing day‑to‑day operations (working capital, payroll, inventory, rent); ii) financing investment; iii) financing foreign trade; iv) emergency financing; and v) risk mitigation and security instruments. A sample of 473 financial instruments from 38 DFIs across 13 LAC countries showed that the main types of financing offered are for investment (45%) and day‑to‑day operations (34%) (Figure 3.15, Panel B). This shows the commitment of DFIs to guaranteeing the working capital, liquidity and long‑term investment needs of MSMEs. Other types of financing are less common and are primarily intended to enhance the financial inclusion and competitiveness of MSMEs (OECD et al., 2023[6]).

In the aftermath of the pandemic, DFIs significantly expanded their lending activities and introduced innovations in their financial services to address the growing demand for financing among MSMEs. These efforts included new loan programmes tailored to payroll and working capital needs, expanded credit availability and the postponement of loan repayments. DFIs also provided guarantees for SME bond issuances, covering up to 98% of the loan amount (80-98% in the case of Argentina, and varying depending on the enterprise size in Peru). Innovative measures were introduced to benefit MSME financing, such as web platforms for enterprise-market connections and financial intermediary funding (for instance utilising fintech companies). In Mexico, Nafin and Bancomext allocated approximately USD 2.5 billion through financial intermediaries, extending creditor loan and grace periods, providing new working capital loans and offering stock market guarantees to improve liquidity (ALIDE, 2023[82]).

DFIs play a crucial role in promoting financial inclusion for MSMEs through key instruments such as guarantee schemes, loans and lines of credit, among others. Guarantee schemes prioritise MSMEs due to their structural vulnerability and significance in employment generation. They offer several advantages, including expanding credit supply, granting access to the formal financial system for companies lacking collateral or for startups, and improving credit conditions. Credit mobilised by guarantee funds in LAC increased from USD 3.6 million in 2004 to a historical high of USD 88.6 million in 2020 before declining to USD 66.9 million in 2021 (Figure 3.16, Panel A). Similarly, the number of SMEs covered by guarantee schemes increased from 688 000 in 2000 to nearly 6 million in 2021. The coverage by guarantees across the region is highly heterogeneous. Larger economies in terms of GDP levels, like Colombia, Mexico and Brazil, lead in SME coverage, accounting for 34%, 27%, and 18%, respectively, of the total SMEs covered, while smaller countries like Bolivia, Costa Rica, Ecuador, El Salvador, Honduras and Uruguay account for less than 1% (Figure 3.16, Panel B) (Red Iberoamericana de Garantías, 2023[83]).

DFIs have evolved across emerging and developing economies to confront more effectively new global challenges like the green transition and digital transformation (Rogozinski, 2017[84]). For instance, DFIs have expanded their role to confront the emerging challenge of double vulnerability, in which a nation faces both climate and financial insecurity. DFIs have adapted their financial instruments to address these intersecting vulnerabilities while ensuring that governments can still finance socio-economic policies (AFD, 2023[85]). DFIs are increasingly balancing commercial activities with their social mission, actively creating and developing markets in key sectors such as agriculture, infrastructure, energy, education and health.

While public DFIs in LAC have expanded their participation in the financial system, their activities in the green, gender, and digital agendas remain limited. During the COVID-19 pandemic in 2020, the loan portfolios of DFIs grew in most countries in LAC, with 71.2% of DFIs increasing their portfolios by 21%, primarily to support the production sector (ALIDE, 2023[82]). However, further commitment of DFIs to the SDGs could support the development of financial instruments for MSMEs that incorporate sustainable, gender-sensitive, and digital objectives. This can help channel private investments towards achieving key development goals. Of the 473 financial instruments for MSMEs offered by public DFIs in the LAC region in 2023, only 19% address at least one of the three cross-cutting challenges – 9.7% target the green transition, 5.5% target gender equality, and 3.8% target digital transformation or innovation (OECD et al., 2023[6]). Looking ahead, to further support climate financing, it is crucial for DFIs to build technical capacity both for their clients and themselves. (Box 3.3)

DFIs can play a pivotal role in facilitating the adoption of digital tools and emerging technologies across key sectors. In 2023, DFIs offered financial and non-financial services to multiple sectors with the aim of enhancing enterprises' digital capabilities and fostering investment. The most targeted sectors were information and communications technology (ICT) and the transport, storage and communications sector, each accounting for 20%, followed by the electricity, gas and water supply sector, and the agriculture, hunting and forestry sector, both at 15%. These services, tailored for digital transformation, can also lay the groundwork for developing sustainable digital financing ecosystems aligned with the Sustainable Development Goals (SDGs). For instance, these ecosystems can encompass infrastructure promotion including connectivity, digital identification and accessible data markets. In the agricultural sector, such services can stimulate projects for technological innovation in agricultural enterprises, addressing rural investments and associated costs. This may involve implementing activities with high technological content, ultimately leading to the generation of greater added value in regional economies.

DFIs will need to embrace digitalisation swiftly to maintain the competitiveness of financial products and boost financing. They will have to adapt their operations to the rapid consumer adoption of digital products and services. With the closure of physical branch offices during pandemic lockdowns, online and mobile banking emerged as the primary channels for bank interaction, resulting in a notable increase in usage worldwide (ALIDE, 2023[82]).

To adapt to digital transformation, DFIs require innovative strategies, especially in the competitive landscape of LAC. This involves forming strategic alliances with tech firms, startups and venture capital funds to invest in fintech. Such collaborations not only validate fintech ventures and attract investment but also provide valuable expertise. In return, DFIs can offer access to a wide clientele, stability and know-how about regulatory compliance. Advancing virtual assistants based on artificial intelligence (AI) and chatbots for enhanced customer service is also essential to adapt to the new digital economy. With the rise of challenger banks and neobanks, DFIs need internal reforms to fully embrace the digital economy, including developing “banking as a service” to enhance customer retention. It is also imperative for DFIs to adapt to the growing trend of decentralised finance, aimed at eliminating intermediaries in financial transactions (ALIDE, 2023[82]).

Capital markets provide opportunities for firms and governments to long-term funding for productive development. These markets consist of equity markets and debt markets. Both equity and bonds can be acquired through the primary market where new securities are issued, such as new bonds and initial public offerings (IPOs), or directly from private companies that are not listed on a public stock exchange (private capital markets). They can also be acquired through the secondary market, which involves trading existing securities. These mechanisms enable efficient allocation of capital, supporting economic growth and development (OECD, 2023[88]). For example, capital markets instruments have proven useful to promote development priorities, such as the circular economy transition (UNEP, 2023[89]) (Chapter 4).

Equity markets play a key role in economic development by enabling long-term capital raising, providing markets with liquidity and expanding investment opportunities. Equity markets facilitate access to long-term financing that helps companies to invest and develop productive and innovative activities. They also provide an opportunity for households to participate in corporate value creation, giving them additional options for managing savings (OECD, 2023[88]).

Equity markets in LAC remain small and lack liquidity, with strong heterogeneity between countries. In 2022, market capitalisation in LAC stood at 35.9% of GDP on average, compared to 64.7% for OECD countries (Figure 3.18, Panel A). However, the depth of equity markets is heterogeneous, ranging from 94.4% of GDP in Chile to just 3.2% in Costa Rica. Moreover, the stock turnover ratio, which measures the frequency at which stocks are bought and sold within a given period, shows low levels of market liquidity and activity. In 2022, the LAC turnover ratio was 24.0%, compared to 53.8% for the OECD (Figure 3.18, Panel B). This ratio also varies widely among LAC countries. Brazil showcases robust trading activity and market liquidity, with a turnover ratio of 162.7%, while Mexico, the second most active country, has a ratio of 23.3% and Jamaica stands last with 1.4%.

For LAC economies, market concentration in equity markets is heterogeneous. The Herfindahl-Hirschman Index (HHI) is a measure of market concentration. The closer the index is to 0, the less concentrated the market, while a higher value indicates greater market concentration (FTC, 2023[90]). The HHI shows that there is high heterogeneity in market concentration across countries (Figure 3.19, Panel A). With the exception of Brazil and Chile, most LAC countries exhibit higher levels of concentration than Korea, which achieved high-income status in 1995 (Melguizo et al., 2017[91]). Moreover, concentration in the region is higher in all economies than in the New York Stock Exchange (NYSE). These results are consistent when measuring concentration based on the market capitalisation attributed to the top five companies in each country (Figure 3.19, Panel B). Similarly, large companies in LAC represent 80% of market capitalisation on average (OECD, 2023[88]).4

Secondary Public Offerings (SPOs) account for most equity market activity in LAC, as there has been a trend of negative net listings over the last two decades. In 2021, net listings in the region reached 30 after 13 years of continuous negative net listings. Nevertheless, the improvement was only temporary, and in 2022 and 2023, the negative trend continued (Figure 3.20). This delisting phenomenon is present in many markets, as large companies migrate to the US market while medium-sized enterprises have difficulties listing in domestic markets (Vest, 2023[93]; OECD, 2019[94]). SPOs therefore represented 75% of the total amount raised in public offerings in the region between 2012 and 2023. Over that period, Brazil, which was responsible for most activity in the region, represented 71% of the total amount raised in IPOs and 68% of the total amount raised in SPOs in LAC. The second-best performers in the region are Mexico in IPOs (18% of the total amount raised) and Chile in SPOs (14% of the total amount raised) (OECD, 2024[95]).

The equity markets in the LAC region have the highest ownership concentration in the world, predominantly driven by corporate investors. The region’s top 1% of shareholders hold an average of 46% of a company’s total holdings, while the global average is 31% (Figure 3.21, Panel A). Furthermore, corporations hold almost one-third of listed equity in LAC, while institutional investors dominate globally, with 45% of equity. Corporations hold up to 72.8% of listed equity in Peru, while institutional investors in the region hold between 6.3% (Peru) and 27.1% (Brazil), a minor share in terms of the global landscape. This is evidence of the strong presence of company group structures in the region. In Colombia, Argentina and Brazil, the public sector is an important investor, at 37.8%, 20.5% and 14.8%, respectively (Figure 3.21, Panel B).

Capital markets are further divided into public and private markets. Companies can finance themselves in the private or public debt market by issuing securities; in the public equity market by being listed in a stock exchange; or in the private equity market by privately selling stock. Medium-sized enterprises face difficulties in entering the public equity market and tend to resort to private markets (OECD, 2019[94]).

In private capital markets, venture capital (VC) accounts for the majority of operations. Investment in these markets can take the form of private equity, private credit or venture capital, or it can go specifically to infrastructure and natural resource projects. Venture capital is a type of equity financing for innovative young companies that have difficulties attracting standard financing. While it can provide high returns, it also brings high risk to investors (Rudolph, Miguel and Gonzalez-Uribe, 2023[97]). In the third quarter of 2023, venture capital accounted for 82% of the deal count (the total number of deals) and 47% of the total capital invested in LAC (Figure 3.22). Combined, other assets represented a larger share of capital invested, indicating larger deals. Private equity represented 27% of the capital invested in LAC, private credit 19% of the capital invested, and infrastructure and natural resources 7% of the total capital invested.

LAC has historically maintained low venture capital investments compared to other global regions. North America dominates as the primary investor in this field, while Europe and Asia also surpass LAC in terms of VC funding per capita (Rudolph, Miguel and Gonzalez-Uribe, 2023[97]). North America and Asia are also the regions with the largest deals on average, while LAC trails behind. After surging in 2021, it became the region with the lowest average deal size in 2023. Meanwhile, the Middle East and North Africa (MENA) region has strengthened its position since 2016 and now surpasses Europe (Figure 3.23, Panel A).

Venture capital dynamics have slowed recently in LAC after a boom in 2021. VC funding in the region increased from USD 1.1 billion (249 deals) in 2016 to USD 25.1 billion (859 deals) in 2021 (Figure 3.23, Panel B). This growth was driven by factors including post-COVID-19 incentives to reactivate the market; increased demand for digital services since the pandemic; participation of a few deep-pocketed, non-domestic investors; a surge of profitable exit opportunities; and the development of a supportive local ecosystem for startups (Rudolph, Miguel and Gonzalez-Uribe, 2023[97]). However, similar to other regions, investment in the region fell below pre-pandemic levels after 2021, declining to USD 5.4 billion in 2023.

Venture capital has a particularly important role for entrepreneurship, which is pivotal for economic growth, creating jobs and driving innovation across emerging sectors. Despite the recent VC evolution, LAC's start-up ecosystem remains robust, fostering resilience amid economic challenges. Start-up entrepreneurs are vital in leveraging digital technologies to address socio-economic issues. By disrupting traditional industries, VC-backed ventures are poised to enhance accessibility to technology and financial services, shaping a promising future for the region (Berg, Rubio and Lask, 2024[101]).

Compared to other global regions, LAC allocates significant VC funding towards the mobile apps and fintech verticals while trailing behind in manufacturing, Artificial Intelligence and clean technology. Mobile apps, which accounted for almost 28% of the capital invested in 2023, are the industry’s vertical5 that receive the most investment in the region (Figure 3.24). Other outstanding verticals include blockchain technology, health tech and e‑commerce. Regarding industries, the financial services industry accounts for roughly 19% of all VC funding in LAC, after information technology (41%) and the business-to-consumer (B2C) industry (29%). Globally, VC funding in LAC ranks first in terms of its concentration in the financial services industry and second in terms of the relevance of the fintech vertical (Rudolph, Miguel and Gonzalez-Uribe, 2023[97]).

VC investment in the region has been mainly supported by foreign firms. Non-domestic investors participated in about 74% of the value of the deals conducted during 2016-23 on average (Figure 3.25). This type of investor has also been important in terms of the number of deals: over the same period, about 68% of the deals had at least one non-domestic investor. However, not all foreign investors hold the same level of significance in the region, as 70% of the surge in non-domestic VC investment since 2019 can be attributed to four key investors: SoftBank, Tiger Global, DST Global and Ribbit Capital (Rudolph, Miguel and Gonzalez-Uribe, 2023[97]).

Corporate domestic bond markets play a crucial role in spurring economic growth and supporting macroeconomic stability (Powell and Valencia, 2023[102]). They support capital formation, investment diversification and risk management. By issuing bonds, the private sector can diversify its funding sources beyond traditional bank loans and equity financing. Issuing bonds in the local market offers companies a range of advantages, including lower transaction costs, familiarity with local investors, currency risk mitigation, support for the domestic economy and regulatory familiarity. A corporate bond issue is considered domestic when it meets four criteria: i) the issuer is listed on the local securities market; ii) the issuer is a fiscal resident; iii) the bond issued is governed by local law; and iv) the place of issuance is the domestic market (Aldasoro, Hardy and Tarashev, 2021[103]).6

Corporate bond market issuances remain largely underdeveloped in LAC. In 2023, the outstanding amount of corporate bonds in the region accounted for around 2% of the global total, a relatively small share compared to the United States (US), Europe and Asia (OECD, 2024[104]). Local fundamentals help to explain the development of local currency bond markets, while they have played a minimal role in foreign currency bond markets (Ayala Pena, Nedeljkovic and Saborowski, 2015[105]).

In most LAC economies, the public sector is the main issuer in domestic bond markets. Between 2015 and 2023, public national or subnational entities (including the Central Bank) accounted for 81% of the total amount of local bond issuances in LAC on average, while corporate bonds accounted for the remaining 19% (Figure 3.26). However, there is large heterogeneity in the region, with corporate issuances reaching the highest levels in Caribbean economies such as Bahamas, Barbados and Trinidad and Tobago.

The local corporate bond market in LAC is highly concentrated in a few economies. Between 2015 and 2023, 73% of the total amount of corporate bonds issued in domestic markets came from Brazil (37.7%) and Mexico (35.7%), followed by Chile (9.2%), Argentina (5.3%) and Colombia (4.3%). Other LAC economies have an active but much smaller private bond market; 13 countries in the region have participations smaller than 1%, making evident the need to develop local bond markets.

The demand for corporate bond market securities in the region is mainly driven by large pension funds, which mostly invest in investment-grade papers, keeping the lower-rated firms out of the market and subjecting them to funding through banks. The insurance sector and mutual funds are also relevant players in the “buy” side of private bonds (Vtyurina, Robles and Sutton, 2017[106]).The strong preference for top-rated issuers is a hurdle for new issuers, especially SMEs, which are usually considered riskier than investment-grade companies and face lower demand from institutional investors.

Non-financial firms are the most important issuers in corporate bond markets in the region.7 They account for around 67% of the total corporate amount issued and 63% of the total number of issuances from the corporate sector (Figure 3.27, Panel A). This implies that the average amount issued by a non-financial firm is 1.2 times higher than that of the average financial company (Figure 3.27, Panel B). This can be partly attributed to the types of bonds included in the analysis. Banks and other financial institutions tend to issue more instruments of smaller amounts compared to non-financial entities, particularly certificates of deposit and short-term bills, to address their short-term financing needs.

There is space to improve the currency composition of non-financial corporate bond issuances in domestic markets. Between 2015 and 2023, an average of 42% of the amount issued in LAC was denominated in local currency, while 58% was in foreign currencies. In contrast, globally, local currency accounted for 83% of the total issued amount and 86% in emerging markets (Figure 3.28, Panel A). This highlights the region's reliance on foreign currency borrowing and the currency mismatch in the firms’ balance sheets, which exposes them to exchange rate risk (Eichengreen, Hausmann and Panizza, 2005[107]). Nevertheless, the share of the amount issued in domestic currency has increased in the region in the last few years. Between 2022 and 2023, this share reached 71%, changing the landscape of currency composition (Figure 3.28, Panel B). This was due to two factors. On the one hand, there was an increase in domestic currency issuance, even above pre-pandemic levels. From 2019 to 2023, the amount of USD issued in domestic currency in LAC increased by 53%. On the other hand, over the same period the region decreased the amount issued in foreign currency significantly, showing lower net debt and no actual correction of the currency mismatches (Haussmann and Panizza, 2011[108]). Strengthening local currency bond markets is essential to mitigate these risks.

Non-financial and financial firms in LAC issue bonds with longer maturities compared to their counterparts in emerging markets. Between 2015 and 2023, the average maturity of issuances by financial companies was 7.7 years, while for non-financial firms it was 10.1 years (Figure 3.29, Panel A). Emerging markets show shorter and more similar maturities for both sectors: 5.3 years for financial firms and 5.1 years for non-financial firms. Average maturity has decreased in the last two years, particularly for non-financial firms. Between 2022 and 2023, average maturity in LAC for financial firms reached 6.7 years and for non-financial firms 7.5 years (Figure 3.29, Panel B). This decrease brings LAC closer to emerging markets, although the difference is still over 2.5 years for the average maturity. This change in maturity might be due to the decrease in foreign issuance mentioned before. The results for financial firms should be interpreted with caution, as many financial firms in LAC often use debt securities with maturities of less than one year, which are not included in the sample.

Local corporate bond markets continue to develop in LAC, but there is still potential for growth. These markets could develop further by increasing the amounts issued and thereby the market size; expanding and/or diversifying the number of issuers; lengthening maturity in non-financial bonds; and decreasing market access costs. Expanding maturities in local-currency issuances by non-financial firms is also important to avoid currency mismatches and to mobilise internal savings to finance long-term projects in the region. Similarly, the development of a robust sovereign local-currency bond market yield curve in markets could give the private sector a benchmark for medium- and long-term financing costs. Moreover, the role of Environmental, Social, and Governance (ESG) bonds in the market has increased in the last few years and they represent an opportunity for market development (Chapter 4).

Multiple policies could help to achieve the development of corporate bond markets. For instance, a partial private-public subsidy for the price of credit ratings wherever they are a requirement for first-time issuers could help lower the issuance cost. A similar initiative was implemented in Africa in 2004 with successful results (Grandes and Pinaud, 2005[109]). Correctly used tax exemptions could also help to lower issuance costs. In Brazil, for example, the government introduced a new framework in 2011 under which private companies could issue infrastructure bonds to promote the development of long-term private capital markets and strengthen financing for infrastructure projects. If funds are used to finance infrastructure projects, the securities’ interest and capital gains enjoy a tax exemption (Cavallo, 2023[110]).

Policy makers should consider the trade-offs between promoting the development of small local bond markets or encouraging regional domestic bond-market integration. Under the regional approach, smaller LAC countries could integrate into relatively more developed markets to decrease issuance costs and benefit from a more diversified, deeper and more liquid pool of investors. This could lead to the emergence of regional “financial bond market hubs” in the medium term, yielding benefits in terms of economies of scale and lower borrowing costs, as these hubs will provide deeper and broader pools of capital, in particular for medium-sized enterprises. However, less developed LAC economies would have to issue bonds in currencies other than their own, most likely in USD, and would need to be able to afford the technological, regulatory and cultural costs of integrating into those hubs.

Regional financial integration has the potential to expand access to capital markets, as it can increase efficiency, reduce transaction costs for investors, improve liquidity conditions and reduce risks. Integration can create incentives for foreign investors to acquire assets from different countries and therefore to diversify their portfolios in a single market. Moreover – considering that access to capital markets in LAC is mostly restricted to governments, large companies and state-owned enterprises – regional integration could increase the issuer base and bring investment into new sectors (Bown et al., 2017[111]). Finally, an increase in demand for assets quoted in a single market should contribute to reducing financing costs for issuers.

The region presents barriers to integration. These obstacles include the macroeconomic environment, low market supply and demand, regulatory frameworks, and market infrastructure. Regarding the macroeconomic aspect, the region presents high heterogeneity across countries in both the environment and stability, as well as different exchange rate regimes and volatile exchange rates. Furthermore, there is low supply of and demand for securities given both the small number of issuers and investors and the lack of financial education. Finally, the different regulatory and tax frameworks, as well as the use of different platforms in every stock exchange also pose challenges to integration in LAC (Bonita et al., 2020[112]).

The Latin American Integrated Market (MILA), launched in 2011, was the region’s first attempt at integration. MILA, an initiative of the stock exchanges of Chile, Colombia and Peru, was created as an opportunity to compete against larger markets. However, MILA’s trading volumes remained below those of Brazil and Mexico. In 2014, Mexico joined the group, and MILA reached a market capitalisation similar to that of the Brazil stock exchange but with lower trading volumes (OECD, 2019[94]).On paper, MILA aimed to facilitate the issuance, trade and settlement of securities across countries while allowing each stock exchange to maintain its independence (IDB/Wilson Center, 2016[113]). In practice, MILA did not achieve the expected performance and was largely led by Chile and Mexico, which reached more than 90% of the total traded volumes in 2018, leading the platform to stop operations (Figure 3.30).

Since 2020, nuam exchange has emerged as a new possibility for regional integration. Nuam exchange is a joint private initiative to build a regional market infrastructure, starting by integrating the stock exchanges of Santiago, Lima, and Colombia into one stock exchange. This initiative aims to integrate property and business models, by using one single platform and by advocating for harmonising regulations across countries (nuam exchange, 2024[115]).The three stock exchanges are now in the process of their integration. They are already legally integrated under nuam exchange and are working on the integration of operations and their trading platform, which is expected to be launched in 2025 (Rodríguez Martínez, 2024[116]). Nuam exchange is following the steps of Euronext, the leading pan-european market infrastructure born in 2000 with the merger of the Amsterdam, Brussels, and Paris exchanges.

This market integration has the potential to further develop local capital markets and attract international investors. In August 2024, nuam exchange reported a market capitalisation of almost USD 450 billion, 43% of this value coming from Bolsa de Valores de Lima, 39% from Bolsa de Comercio de Santiago and 18% from Bolsa de Valores de Colombia. In terms of the number of issuers, the integrated market reached 445 equity issuers and 345 fixed rent issuers (Figure 3.31). Under these conditions, nuam exchange is similar in size to the Malaysia exchange (in market capitalisation), the Istanbul exchange (in number of equity issuers), and the London Exchange (in number of brokers) (nuam exchange, 2024[117]). Moreover, between January and August of 2024, over USD 721 billion was traded on nuam exchange in over 12 million operations, including equity market, especial trades, fixed income, derivatives and monetary operations (nuam exchange, 2024[118]). To achieve the next steps of integration it is necessary for the authorities of Chile, Colombia, and Peru to approve mutual recognition of broker dealers and interoperability between central counterparty clearing houses (CCP).8 These translate into brokers from any of the three countries being able to enter any of the three markets and the CCPs of all three countries being able to communicate and work between them. Features that are common practice in the European markets.

Historically, regional integration of stock markets has been pursued via two paths: the creation of trading platforms, such as the no longer operational MILA, and the full integration of stock exchanges, as with the nuam exchange. The first type of integration has mostly been used by emerging markets. Examples are the South Eastern Europe Link, the Association of Southeast Asian Nations Trading Link and the Shanghai-Hong Kong Stock/Bond Connect (Pirgaip, Ertuğrul and Ulussever, 2021[119]). Full integration has been mostly used in Europe, with the Euronext merger, OMX integration, the merger between the London Stock Exchange and the Borsa Italiana, and the Central and Eastern Europe Stock Exchange Group (Dorodnykh, 2014[120]). Yet, it has been shown that integration with full harmonisation has a bigger impact on trading volume (Pirgaip, Ertuğrul and Ulussever, 2021[119]).

The issuance of LAC bonds by the public and corporate sectors in international markets increased in 2023, following a slowdown in 2022. This increase was supported by currency appreciation, decelerating inflation and the end of interest rate hikes. The region’s bond issuance (public and corporate) in international markets reached USD 89.15 billion in 2023, an increase of 39.7% over the year before (Figure 3.32). The region’s participation in the international bond market is very balanced between sovereign and corporate issuers. In 2023, sovereign bonds accounted for 51.8% of the total issuance (USD 46.17 billion) and corporate bonds for 48.2% (USD 42.98 billion) (ECLAC, 2024[121]).

Mirroring the situation in the region’s domestic markets, LAC’s international issuance activity is highly concentrated in a few countries. Four countries account for almost 70% of the total (public and corporate) international issuance: Brazil (21.1%), Chile (19.3%), Mexico (17%) and Colombia (10.1%) (Figure 3.33). Moreover, supranational9 bonds account for 8.6% of the total issuance, outperforming Costa Rica, the Dominican Republic, Panama and Peru, among others.

High solvency and balanced risk are crucial factors for maintaining well-developed and strong capital markets. Solvency is the ability to meet long-term obligations, like debt. It represents whether investors, creditors and other stakeholders can be confident enough that companies will repay their debts or produce returns, allowing the good functioning of the market (Factris, 2023[122]). As investors look for high returns, they will also look for higher risks. Therefore, it is in the best interest of investors and institutions to manage the risks the market is exposed to, in order to help maintain the stability of the market even when it faces shocks (Karacadag, Sundararajan and Elliott, 2003[123]).

Risk in the region decreased in 2023 after a difficult first quarter. Compared to other regions, LAC stood in the middle of the corporate bond spread ranking. The JP Morgan Corporate Emerging Markets Bond Index (CEMBI) measures the extra interest (in basis points) that a corporate international bond pays over a government international bond in emerging markets. This is a measure of how much risk emerging market corporations are perceived to have. The CEMBI for the region stood at 321 basis points at the end of December 2023 after losing 36 basis points during the year. This was 62 basis points lower than the region’s sovereign counterpart, the EMBIG. After an increase in corporate spreads in the region in the first quarter of 2023 due to the default of Brazilian Lojas Americanas in January, the region was able to readjust in the following quarters and outperformed the Middle East and Asia (Figure 3.34) (ECLAC, 2024[121]).

Regulation of capital markets in LAC has undergone various transformations in recent years in the aim of keeping risk low and increasing efficiency. In Chile, reforms were implemented to improve the international integration of the bond market, facilitating the participation of foreign investors. In Brazil, efforts have been initiated to modernise regulation with the purpose of reducing compliance costs for companies accessing capital markets and enhancing regulatory efficiency via new regulatory technologies (Miranda, 2018[124]). While Colombia has continued improving its implementation of the IOSCO principles of securities regulation (Superintendencia Financiera de Colombia, 2024[125]).

Significant regulatory challenges remain to be addressed in the region, especially in terms of facilitating processes and incentivising new issuers. Actions by regulators must underscore the importance of dynamic and adaptive regulation that can respond effectively to changing market conditions and technological advances, ensuring sustained growth and stability of capital markets in the region. Elements to have in mind are adapting regulations to encourage greater diversification in investments, reducing operational and fiscal barriers for foreign investors, improving the protection of minority investors' rights and promoting greater financial education among the population (Miranda, 2018[124]).

Large companies in LAC continue to use American Depositary Receipts (ADRs) to reach the equity market in the US. An ADR is a security representing shares of non-US companies held by a US depositary bank. For LAC companies, these instruments facilitate raising capital abroad, since they do not have to fulfil the listing requirements of the US market (SEC, 2012[126]). Brazil is the country in LAC with the most issuers of ADRs (72), followed by Mexico (38) (Figure 3.35). However, this is not necessarily the best option to gain access to markets, as it prevents the development of local capital markets and perpetuates the exit of companies from them. It is therefore necessary to explore other possibilities to facilitate the entry to local markets in LAC for them to expand.

Exploiting the potential of financial markets for advancing sustainable and inclusive growth in LAC requires channelling public and private resources effectively, boosting financing opportunities for SMEs, promoting financial inclusion and deepening capital markets. To achieve these goals, it is imperative that LAC governments formulate a co‑ordinated, long-term strategy, using institutional mechanisms like national and sectoral development planning. This approach will be effective in mobilising both public and private sectors towards national strategic objectives, transcending political cycles to establish enduring policies centred on improving people’s well-being (OECD et al., 2019[128]; OECD, 2021[129]).

Such a strategy has three important aspects. First, enhancing competitive banking system regulations and reducing entry barriers can foster a more dynamic financial sector, lowering costs and broadening access to financial services. Targeted measures aimed at improving access to finance for SMEs include developing specialised credit reporting systems and promoting alternative financing mechanisms beyond traditional collateral-based lending. Second, to promote inclusive economic growth, it is essential to ensure that high-quality financial products are accessible to underserved populations, to leverage digital innovations and to promote financial literacy. Finally, deepening capital markets through regulatory modernisation, encouraging institutional investor participation and promoting regional financial integration are crucial steps towards enhancing market efficiency and resilience across the region (Box 3.4).

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