Does microfinance affect income inequality?

This study addresses the question whether participation of the poor in microfinance contributes to reducing a country's level of income inequality. Using data from 70 developing countries, we show that higher levels of microfinance participation are indeed associated with a reduction of the income gap between rich and poor people. We also show, however, that the effects of microfinance on reducing income inequality are relatively small. The results of this study add to the discussion on the impact of microfinance on poverty by showing that, although access to microfinance does seem to improve the relative income position of the poor, this improvement is modest, which is probably because the use of microfinance is generally small as compared to the size of the economy of the countries in our sample. Microfinance should, therefore, not be seen as a panacea for bringing down income inequality in a significant way.