Paper

Microfinance and Inequality

Focusing on the equalizing effect of microfinance
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This paper examines the relationship between microfinance and inequality by providing a cross-country empirical study of 61 developing countries.The paper shows that microfinance plays an important role in creating a financial system endowed with the equalizing effect. Findings include:

  • Empirical results confirm that microfinance lowers inequality, and can be used for an effective redistribution policy;
  • Economic development lowers inequality after country income reaches a certain level, while economic growth increases inequality up to a certain level of economic development;
  • Economic growth in developing countries does not have a significant trickle down effect or an equalizing effect, and it significantly increases inequality;
  • Poor countries need to focus more on the equalizing effect of microfinance;
  • High inequality in developing countries is largely due to credit constraints on the poor or financial market failure.

The paper states that microfinance can ease credit constraints on the poor and lower inequality. Since microfinance is unable to finance itself and relies on external support such as subsidies, governments need to help develop the microfinance market.