MICROCAPITAL PAPER WRAP-UP: Microfinance and Inequality, by Hisako Kai and Shigeyuki Hamori

Written by Hisako Kai and Shigeyuki Hamori, published by the Macrothink Institute in 2009, 12 pages, available at: http://www.macrothink.org/journal/index.php/rae/article/viewFile/304/183

This study analyzes cross-sectional data from 61 low-income countries to determine whether microfinance is associated with reduced income inequality. The focus on microfinance is in contrast to considering “formal” financial institutions.

The “intensity” of microfinance in a given country is measured by the number of microfinance institutions (MFIs) and the number of borrowers from MFIs. The first model uses microfinance intensity to examine whether there is a correlation of microfinance with inequality, while the second model uses the logarithm of microfinance intensity for the same purpose. Inequality is measured using the Gini coefficient, a common measure of statistical dispersion. Several control variables are used, such as GDP per capita, inflation, democracy, openness (as indicated by trade to GDP ratio) and various dummy variables to correct for regional characteristics affecting inequality. World Bank data on income inequality from 2003 to 2007 is used, as is 2007 data for the number of MFIs and pooled data for the number of borrowers from 2005 to 2007.

The main results are as follows: There are significant, negative relationships between the number of MFIs and inequality and between the logarithm of the number of MFIs and inequality, both of which indicate an equalizing effect for microfinance. Similarly, there are significant, negative relationships between the number borrowers and inequality, and between the logarithm of the number of borrowers and inequality, thus further indicating an equalizing effect for microfinance. Therefore the authors believe that microfinance is likely to aid in decreasing income inequality. The authors find microfinance more useful for equalization in low-income countries than economic growth, which is correlated with increased inequality until a certain level of GDP per capita is reached, based on the data analyzed in this study.

By Christopher Maggio, Research Assistant

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