ABSTRACT
This chapter assesses the financial sector development in Latin America, both in the domestic banking system and in the domestic capital markets. The so-called “finance-led” economic literature on growth argues that financial development improves total factor productivity and, ultimately, economic growth through the functions inherent to the financial system, namely mobilizing savings, an allocating capital, monitoring borrowers and transforming risk. The sudden oil-related inflows of funds in the 1970s, channeled basically through foreign bank lending, allowed Latin American countries to finance large-scale import substitution projects and large budget deficits without the need to develop their banking systems. The chapter also discusses the banking sector in more detail, assessing its basic composition, efficiency, and ownership structure and concentration. It explores some of the factors that may explain the relatively low availability of bank credit to the private sector in the region.
