Does Microfinance Reduce 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.