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Report Says Region Needs Stronger Banking Systems

December 3, 2004

WASHINGTON, D.C. – The countriesof Latin America and the Caribbeanmust strengthen and continue to reformtheir banking systems to achieve highergrowth rates, business competitivenessand stability, according to a report issuedlast month by the Inter-AmericanDevelopment Bank.Banking systems in Latin America havea disproportionate financial impact as creditand investment tools because other capitalmarkets, such a stock exchanges, are relativelysmall, leaving investors and entrepreneurswith few alternatives outside thebanking system to obtain funding, accordingto the Nov. 17 report.“Unfortunately, bank credit remainsscarce, costly and extremely volatile,” thereport states. As a result, “the developmentof stability of the banking sector is crucialfor achieving a stable economic path.”Banking sectors in other, faster-growingdeveloping regions of the world providemuch greater credit to the privatesector than does Latin America, the studyfound.“During the 1990s, the average levelof credit to the private sector in the regionwas only 28% of GDP, a rate significantlylower than that of other groups of developingcountries, such as East Asia and thePacific (72%) and the Middle East andNorth Africa (43%),” the report said.Private-sector credit in East Asia grewfrom an average 15% of the GDP in the1960s to 70% today, while in that sameperiod Latin America’s grew from 15% to28%, according to the report.To strengthen Latin America’s bankingsystems, the report recommendscountries take steps to reduce their vulnerabilityto financial crises, improveregulation and supervision, enhanceproperty rights – including creditors’rights and the effective use of collateralfor inducing greater lending – andimprove the availability of financialinformation, particularly through creditbureaus and credit registries.

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