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This article represents a valuable contribution to the existing literature on the relationship between financial sector growth ' specifically, of microfinance institutions (MFIs) ' and poverty levels in developing countries. We propose a concept termed herein financial permeation to describe how expanding financial activity affects low-income households; just as water permeates dry sand, an increase in the use of and access to financial services may spread more money among the poor, meeting their credit needs and improving their levels of well-being. Another feature of the presented study is that it is among the first to apply the logit transformation to the poverty ratio, thereby eliminating some of the problems of standard regression models. We measure financial permeation by applying three indicators related to MFIs and use panel data for 76 developing countries from the period 1995 to 2008. We find that financial permeation has a statistically significant and robust effect on reducing the poverty ratio.
