Microfinance Effect on Income Inequality in Latin America : A cross-country panel data study on the effects of microfinance on the income inequality in Latin America

Abstract: This paper examines if increased microfinance intensity reduces the income inequality in 11 Latin American countries from 2005 to 2015. Gini coefficient was used as a measure of income inequality, while microfinance intensity was derived by dividing the number of active borrowers by the country's population. A panel data was constructed with 384 microfinance institutes present in the countries studied. To examine the relationship, a pooled OLS and a country clustered fixed-effects model was conducted using the specific-to-general method. Both methods showed a significant negative relationship between the Gini coefficient and microfinance intensity. However, it was a relatively small impact at -0.004% for every percent increase in microfinance, which confirms our hypothesis that a higher MFI participation leads to a decrease in income inequality. These results are in line with previous studies conducted, although, to our knowledge, this is the first macroeconomic framework study conducted on multiple Latin American countries at once.