Abstract: Microfinance is the main means of reducing poverty, but whether microfinance can reduce the urban-rural income gap still needs further study due to the difference of economic development level in different regions. Basing on the provincial panel data of 2010-2016 of microcredit companies in China, this paper builds a panel smoothing threshold regression (PSTR) model to identify the nonlinear characteristics of the impact of microfinance on the urban-rural income gap. Furthermore, this paper uses the mediator effect model to examine the mechanism of microfinance on the urban-rural income gap. The result shows that, microfinance has played a better role in narrowing the urban-rural income gap. However, the degree of this effect gradually weakens as the level of economic development continues to improve. Further analysis shows that, this kind of weakening is related to the substitution effect of formal finance on the one hand, and on the other hand it is related to the commercial nature of microcredit companies seeking financial sustainability. Therefore, the formulation of policy related to microfinance should be in accordance with local conditions. In order to achieve the goal of narrowing the urban-rural income gap, we should adjust the policy emphasis according to the specific performance of microcredit companies in various regions.