Microfinance - Leave Well Alone

As we heard from Scott Bellows, the use of microfinance as a poverty-alleviating tool has grown rapidly in many countries, but many criticize some of the for-profit microlenders, saying they exploit the borrowers through high interest rates. The Economist explains that microfinance institutions (even the for-profit ones) have small margins due to the high costs of dealing with many small borrowers; the high interest rates account for this added cost. When interest rates are capped (like in Bangladesh), the ability of microfinance institutions to attract capital and grow is diminished. Also, interest rate caps would cause impoverished people to take out more loans with informal loan-sharks, whose loans are usually more expensive.