Photo: Cassandra Nelson/Mercy Corps

James Surowiecki's commentary in The New Yorker this week offers a sobering reassessment of microfinance. His thesis is not that microloans are a bad thing, just that, if their goal is "to make poor countries richer," currently they aim at the wrong segment of the economy.

Surowiecki observes that often "Microloans are often used to “smooth consumption” — tiding a borrower over in times of crisis." This is much the same role that revolving credit like credit cards play in more mature economies. While this type of bridging consumer credit is tremendously important to the stability of a single household, it is isn't the type of credit that leads to the creation of jobs, something most developing nations are in dire need of.

"In high-income countries," Surowiecki writes, "more than sixty per cent of all jobs [are created by companies] bigger than a fruit stand but smaller than a Fortune 1000 corporation. It is this middle tier of small-to-medium-sized enterprises that a nation must cultivate if it is shooting for long-term economic growth."

Thatcher Cook for Mercy Corps

"Microloans" are all the rage these days, as more people embrace the theory that small loans to the poor can stamp out poverty everywhere.

But even one of the main proponents of microfinance — the founder of the Internet microloan site Kiva — told the Council on Foreign Relations that microfinance is "just one factor" in economic growth:

So my conclusion at this point is that microfinance is weakly associated with macroeconomic growth. It’s just one factor; it’s not necessarily going to cause a country’s GDP [gross domestic product] to increase. It has to be accompanied by things like good governance, infrastructure, transparency in economics, and all sorts of other things that microfinance cannot in and of itself to bring about.

Flannery also points out that loans of $50 or $100 cannot build roads or schools. Microfinance certainly has its place, but Flannery provides a nice reminder that it's not a cure-all.

In a land where three farmers commit suicide per day, microfinance is making positive difference in Vidarbha- India's primary cotton growing region. Over 500,000 female small entrepreneurs there are determined to lift their families from the burden of debt by forming microfinance groups and finding alternative ways to make an income.

The micro credit banks urges them to save with them, with each member depositing money, ranging from 50 rupees to 1,000 rupees every month. The bank in turn provides credit to the group, whose members borrow money from the group depending on their needs.

Thatcher Cook for Mercy Corps

Lucy Conger's story "The Big-Country Enigma" examines why micro-credit has flourished in smaller countries like Peru and Bolivia while remaining somewhat small in scale in countries such as Brazil.

Does both over and under government regulation stand in the way to microfinance?

Business Week's "The Ugly Side of Microlending” presents a seemingly untold story regarding microfinance. Many (if not all) in the aid and development sector laud the triumphs of micro-credit for the world's poor; and, in truth it has been a driving force for positive change in a number of people's lives. However, when there is a profit to be made a variety of more unsavory business practices arise.

Keith Epstein and Geri Smith do a great job of investigating the variety of for-profit banks that operate within Mexico, painting a bleak picture for unsophisticated and largely uneducated borrowers. Drawn by lack of regulations and a government bogged down by corruption Mexican banks are charging anyway from 50% to 120% annual interest on loans.

So, what does that mean exactly? After a 104 week payment plan of $23 a month, an average borrower will end up paying more than double for a $1,100 Whirlpool refrigerator. What's more-- large corporations such as Wal-Mart are moving onto the scene, having obtained their Mexican banking license last year.

The flip side of microfinance is one that should receive more attention. With the advent of micro-credit to the world's radar screen one cannot blithely assume that all lending institutions are created equal. So what's the answer? More regulation? Increased education? I suppose one cannot discount that America has similar institutions-- the Pay Day cash lending services that frequently appear in strip malls often invite sharp criticism domestically. Either way—it seems clear that for profit banking institutions charging astronomical interest rates seem to be perpetuating the very poverty they are supposedly attempting to alleviate.