Asia microfinance

 https://theconversation.com/microfinance-was-supposed-to-save-asias-poor-why-has-it-failed-to-live-up-to-its-promise-289887
I think the argument they present is essentially correct.  Pok provides fertilizer to farmers on good faith interest free, a sort of microfinance, Nana uses her excess cash to help the small local small purchase, most food, sellers carry over from week to week, but no entrepreneurship.

Yes. And I think your examples expose a distinction that gets blurred in the phrase “microfinance.”

What Pok and Nana are doing is genuinely microfinance in the older, almost literal sense: supplying a small amount of capital to somebody who needs liquidity, on terms that don't extract the benefit from the transaction. Pok's fertilizer arrangement is particularly sensible because the loan is tied to a productive input and repayment can come from the resulting crop. Nana's lending to the little food sellers is different but equally rational: she is smoothing their cash flow rather than pretending she is financing a new enterprise.

The crucial thing is what you add: “but no entrepreneurship.” That is probably the central weakness in the grander microfinance theory. A poor village does not necessarily contain a latent population of entrepreneurs waiting for $500 or $2,000 of capital. It may simply contain a lot of people trying to make a living from essentially the same limited local demand. One person opening another food stall doesn't create another customer. Research on Cambodia has made essentially this point: new microenterprises often face the fundamental problem that everyone around them is poor too, so there isn't enough additional purchasing power to support all the new businesses.

And that makes Nana's little loans quite different from a commercial MFI loan. She presumably knows the borrowers and their businesses. If the woman selling noodles normally makes enough to repay $20 next week, Nana can lend her $20 when she needs it. That's working-capital finance. But if an institution says, in effect, “Here's $5,000; now become an entrepreneur and escape poverty,” it has transferred the entrepreneurial risk to someone least able to bear it.

There is an especially interesting irony in Cambodia. The formal microfinance industry became very successful at providing credit, but a great deal of that credit has not gone into productive enterprise. Studies and investigations have found borrowing for consumption, medical expenses, education, debt repayment and other household needs, with some borrowers taking additional loans simply to service existing ones.

So I would distinguish three things:

Pok: productive credit, personally assessed, interest-free, with repayment naturally connected to the harvest.

Nana: liquidity/working-capital credit, based on personal knowledge and a continuing local relationship.

The commercial microfinance industry: credit treated as a financial product, with the assumption that the borrower can somehow turn borrowed money into a sufficiently profitable enterprise to cover the interest.

The first two can be quite useful even when nothing about the local economy changes. They make existing economic activity work more smoothly. The third was sold as a mechanism for changing the local economy, and that's where the grand promise becomes much harder to defend.

In fact, I suspect your observation about your village is more economically important than the absence of entrepreneurship: the people are already economically active. They're just operating at a very low level of capital and very low margins. Credit can help them get through the week; it doesn't necessarily give them somewhere to go. That is a much less glamorous proposition than “financial inclusion,” but probably a much more realistic one.

I suspect in the larger cities and certainly what I saw in HCMC was something a little less pleasant.  The small moneylender lives on interest and doesn't really want debt repayment, and the interest is considerable and strong-arm is used to collect it.

Yes—and that is almost the mirror image of Pok's arrangement. What you saw in HCMC sounds less like microfinance as development policy and more like informal moneylending as a livelihood.

The lender's incentive can actually become perverse. If the borrower repays the principal, the relationship ends and the lender's income stream disappears. If the borrower can manage the interest but not the principal, the loan becomes an income-producing asset. And if the lender has enough power to make default unpleasant, the borrower can be kept in that state for quite a while.

That also explains why high interest by itself isn't the whole story. A small loan to somebody with an irregular income is expensive to administer and risky to make, so some premium is perfectly understandable. The ugly part is when the lender's ability to enforce repayment substitutes for assessing whether the loan is economically sensible in the first place.

Your village arrangements have almost the opposite logic. Pok presumably wants the farmer to succeed because his repayment depends on it; Nana wants the little seller to remain a viable customer and neighbor. Neither has much interest in pushing somebody into a debt spiral. In a small community, the continuing relationship is part of the collateral.

And there is another rather nasty distinction: the formal microfinance institution may look respectable while reproducing some of the same economics as the street lender. The paperwork, offices and regulated interest rates don't necessarily make the underlying transaction productive. If the borrower has no profitable use for the money, you're still lending money to somebody who cannot generate enough return to repay it comfortably.

So I think your HCMC observation actually strengthens your original point about the article. Credit is not capital in the developmental sense unless there is something productive for the capital to do. Otherwise it can simply become a mechanism for transferring a little more of the poor person's future income to whoever has the money today.