Tim Harford has an excellent article on the subject in FT:
This seems mysterious. How can a loan at 200 per cent APR help people to stay out of poverty? One answer is that most people turned down for a 200 per cent APR loan would be able to get one at 300, 500 or over 1,000 per cent from an informal moneylender. More important is that these loans were not used to start businesses but to help people keep jobs that they already had. If a smart new blouse or a spare part for the family moped is what it takes to stay in work, then who is to say that an expensive loan isn't a wise investment?
There is also a discussion of the battle for the soul of microfinance, with commercial interests on one side and charitable interests on the other. Many of the results discussed in the article are similar to those found by Karol Boudreaux and Tyler Cowen earlier this year:
For better or worse, microborrowing often entails a kind of bait and switch. The borrower claims that the money is for a business, but uses it for other purposes. In effect, the cash allows a poor entrepreneur to maintain her business without having to sacrifice the life or education of her child. In that sense, the money is for the business, but most of all it is for the child. Such life saving uses for the funds are obviously desirable, but it is also a sad reality that many microcredit loans help borrowers to survive or tread water more than they help them get ahead. This sounds unglamorous and even disappointing, but the alternative— such as no doctor’s visit for a child or no school for a year— is much worse.
In other words, microfinance may be a force for good, but not in the ways popularly imagined.
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