I’m very interested in the recent debate over microfinance interest rates (see our response to the NYT article, as well as Te-Ping Chen’s comments at Change.org).

It seems that realizing how high interest rates can be has been a wake-up call to many that microfinance can easily be doing damage as well as good. If someone is paying 150% interest a year, all it takes is some accounting errors for them to end up losing money and getting stuck in debt rather than helping themselves as intended.

But isn’t this concern equally valid for lower interest rates? The same people complaining about excessive interest rates imply that rates 10-30% above the cost of raising capital can be considered reasonable. 10-30% above the cost of raising capital is still significant – it’s more than most Americans pay on their credit card debt – and small losses could be especially risky and damaging to the very poor.

In my view, there is no substitute for asking tough questions about social impact and no excuse for donating to a microfinance charity that can’t answer them.