Why Cost doesn't matter in Finance/Microfinance

Fascinating article here (Financial Times). Marginal Revolution highlights this passage:

Karlan and Zinman wanted to know what value there might be in expanding access to credit. ZaFinCo was no dewy-eyed social business, but a hard-nosed, profit-minded company, charging 11.75 per cent per month on a four-month loan, or 200 per cent APR, much more than Compartamos was generally judged to have been charging.

Despite the high rates, the results were astonishing. "We expected to see some good effects and some bad," explained Karlan, who checked in with the experiment's participants six to 12 months after they had filed their initial loan applications. "But we basically only saw good effects."

Most strikingly, those "treated" by the experiment - that is, those for whom the computer requested a second chance at a loan - were much more likely to have kept their jobs than the control group. They were also much less likely to have dropped below the poverty line or to have gone hungry. All these outcomes were recorded well after the loan had been taken out and (usually) repaid, so this was not measuring a temporary debt-funded binge.

More here (WSJ). There's a great deal of posturing going on in the microfinance world with the grand daddy of microfinance, Mohummad Yunus, opposed to blatent commercialization and claims he wants to "fight" the trend and anyone who supports it. Nevermind of course the empirical data that suggests not only is he wrong but he'd be hurting the very people who he claims he supports.

However, the same FT.com article quotes Dean Karlan, "a microfinance economist from Yale" who notes: "If you're trying to make the world a better place but you're not, that's bad. If you're trying to make profits and don't care about people, but make them better off anyway, that's good." My middle ground? Profit oriented microfinance practitioners both maximize profits and care about people. I really don't understand why the two are presumed to be mutually exclusive. Fortunately, the cat is out of the bag and commercialisation has proven potential. Even if those like Compartamos do not ultimately succeed it's too late for Pharisees like Yunus to stop commercial microfinance from succeeding on a far greater scale than inefficient and supposedly more altruistic firms.