I'm not terribly familiar with micro-lending but I have heard many people refer to its high interest rates. I imagine in some instances it could be because of predatory lending but I suspect high interest rates are the result of:

a. Loans being made in countries with unstable currencies and very high inflation;

b. Banks "insuring" themselves against changing currency exchange rates vs. the US dollar.

c. Overhead rates being high in nations without established banking systems;

d. High cost of processing many small loans vs. fewer larger ones;

e. Minimum origination fees, regardless of the size of a loan; eg, a $3.00 funding fee on a $20 loan is 15%, not including future interest.

There is also you know

f. The increased risk of default when loaning to someone with almost no money/income.

I remain pretty unconvinced on micro-loans. I currently work helping people start small businesses in the US and the truth of the matter is most of them are in way over their heads and quit before they even start. Then most who do actually end up making it to starting the business fail, often miserably. For most people it is not a good experience for them financially or personally. Now a tiny fraction of the small number of success stories end up hitting it big and then employ the general population (including the failures). So there is that.

In a town with no money lending people capital to start a business just doesn't make sense, who are their customers going to be?

You can't lend your way out of poverty. Lending is the grease that helps new ideas more speedily overtake old ones. Economically it has little other purpose.

Becephalus:

f. The increased risk of default when loaning to someone with almost no money/income.

I was also wondering about that. I guess I don't fully understand how micro-lending works. I was under the impression that if somebody gave money to Kiva, this money would act as collateral against the loan and essentially insure the bank against default. If this isn't the case, then I could definitely see the bank hedging their investment, since it would be incredibly risky to loan money to somebody with no income, no credit history, no collateral, etc.

If someone who receives the loan defaults, who takes the hit? The donor to Kiva, the bank, both?

Becephalus:

I remain pretty unconvinced on micro-loans. I currently work helping people start small businesses in the US and the truth of the matter is most of them are in way over their heads and quit before they even start. Then most who do actually end up making it to starting the business fail, often miserably. For most people it is not a good experience for them financially or personally. Now a tiny fraction of the small number of success stories end up hitting it big and then employ the general population (including the failures). So there is that.

In a town with no money lending people capital to start a business just doesn't make sense, who are their customers going to be?

You can't lend your way out of poverty. Lending is the grease that helps new ideas more speedily overtake old ones. Economically it has little other purpose.

I have similar concerns regarding micro-lending. I'm on the advisory board of a local non-profit that acts as a catalyst for small business development, volunteer coordination, etc. We were recently presented with a proposal to bring a micro-lending institution (not Kiva) into our town (coordinated with local banks). Examples they gave were of successful projects on the west coast that provided start up capital to very impoverished areas, to start businesses like landscaping, hairdressing, etc. It's one of those things that seem great in theory but with a lot of potential risk.

From the way I understand it, you do not give your money to Kiva so that Kiva can then make loans, instead, you choose from a list of borrowers and loan them the money directly, albiet with the help of Kiva making the transaction. Potential borrowers post their business plans on Kiva and then you find the ones you wish to invest in. It is sort of like Donorschoose.org.

The customers can be anyone in the world! Loans provide the capital to get these businesses off the ground with the goal of sustainability. There are many, many, many documented examples. If you are interested in microfinance and emerging economies.I would recommend reading "The Fortune at the Bottom of the Pyramid" by CK Prahalad.