Assessing the Role of Microfinance in Mitigating Income Inequality: New Evidence from a Global Context

Abstract This paper examines the effect of microfinance on macro-level income inequality, a subject that is still underexplored in existing literature. The micro-level impact of microfinance initiatives is generally well covered in academic discourse, as is the relationship between financial development and income inequality. However, the global connection between microfinance and its macro-level impact on poverty remains understudied. Using unbalanced panel data from 123 countries over the period 2005–2019, the study suggests that increasing microfinance significantly reduces income inequality. These findings are robust when controlling for education, inflation, arable land, democracy, and trade, and are consistent when using alternative measures for income inequality, microfinance, and methods of estimation. From a policy perspective, the findings support the use of microfinance as a viable tool to combat income inequality for the poorest segments of society. The study further reflects on the implications of different inequality measures yielding similar results, while underscoring the importance of developing strong enabling environments for microfinance activity.