The wheels appear to be coming off the micro-credit bandwagon. It was long touted by many, especially those on the by-your-own-bootstraps wing of development thinking, as the silver bullet that would end poverty, empower the powerless (especially women) and unleash a world of budding billionaires.

And every micro-lending organization can show you cases where the outcome has been true silver. Flourishing small-scale entrepreneurs who have turned a micro-loan into profits many times the value. Unfortunately, for others, the end was just a bullet, or pesticide, or a self-made noose. Persistent reports of debt-motivated suicides are coming out of India, which has embraced micro-credit with enthusiasm.

Why the benefits of micro-credit should not be the economic panacea that it was originally claimed to be is not a difficult question to answer.

Perhaps the first insight can come from a few simple changes to the language used. Micro-credit could just as accurately be called micro-debit (though it never has been) and by the inexorable logic of accountancy, every micro-loan is a micro-debt. And the recent economic history of Thailand should have taught us all how dangerous debt can be.

And for all the UN and World Bank endorsements of the idea, it’s been around for ever and can be found almost everywhere. Only in most cases it’s called loan sharking.

What is the difference between a government department, or the World Bank, or an NGO, or, increasingly these days, a for-profit micro-lender doling out mini-loans and the local ‘patron’ providing financial assistance, at a cost, to temporarily needy ‘clients’ under his care and protection?

One difference is supposed to be motivation. The development agencies are acting out of an altruistic desire to help the poor. Though the latest entrants into this game, publicly traded companies, are at the same time required to maximize profits for their shareholders.

Whereas loan sharks are in it just for the money. And the influence they can wield when elections are due, when the next rally needs numbers, or when the daughter’s wedding needs a good showing of enthusiastic well-wishers.

Another is supposed to be interest rates. The Bank for Agriculture and Agricultural Cooperatives, for example, gives out loans that carry interest rates lower than what most farmers would be quoted by a commercial bank. But most micro-lenders, arguing that their loans are inherently less secure and need more monitoring to keep them from going whoopsy, charge far more than the banks. Rates of 80% are not unknown and the Indian government has just decided that a cap should be set at 24%.

Loan-sharks’ loans of course cost an arm and a leg (or perhaps it would be more accurate to say a broken arm and a knee-capped leg). Typical rates in the Thai countryside run at around 5-6% a month, which compounded, puts you at 70-90% per annum. The worst I ever came across was 20% a day charged to market hawkers, which was in fact worse than it sounds since they had to pay the interest when they got the loan, not when they paid it back at the end of the day, so it was in fact 25% a day.

The closer you look, the more the difference appears to be one of degree, rather than of type.

Recent studies and exposés have shown that the benefits of micro-credit appear to be more hype than substance. The most successful beneficiaries of micro-credit turn out to be people who are already entrepreneurs. One recent study by MIT found no benefits in terms of health, children’s education or women’s empowerment, though the researchers do say that this may be because these things take time to appear.

Perhaps more interesting is the fact that this study is one of the few controlled studies ever done in the 3 decades or so when micro-finance in all its manifestations was the darling of the development world.

So why has a tried but not properly tested idea received so much traction in mainstream development thinking? I suspect it may have something to do with the idea that the fag of helping poor people needn’t cost any money. Just lend it to them and recycle the repayments. And for-profit micro-lending will appeal to many who think it’s marvellous that they can make the poor less poor by taking money away from them.

If these feckless poor can be turned into self-reliant middle-class types, we won’t even have to spend money on wasteful luxuries like public health services or free schooling. We won’t need to protect any rights apart from the right to make money.

Micro-credit appeals to free-market governments, institutions and individuals because it validates their view of the world. It says that the way out of poverty is by becoming a capitalist. Only a very small-scale capitalist at first, of course, but who knows how many would-be Bill Gates are lurking in the slums and village hovels of the third world?

Well, speaking for myself, I would hope none.