what are the downsides to microfinance and micro-crediting? and what are effective alternatives to microfinance?

A main disadvantage to micro-finance is that the deal is too small for the lender to devote ample time and money to doing proper due diligence. As a result, default rates by borrowers are often rather high (witness Prosper.com). Borrowers seldom if ever give lenders the full story on their situation and with a small amount at risk, it does not make sense for lenders to spend a lot of money to check out the story. When lenders get burned, they decide to stop microlending and the next round of microlending must be done by greenhorns who have no idea what they are getting into. In other words, to some extent microlending depends on an ever-increasing number of lenders in order to be successful.

As for alternatives, there probably aren't many. Microlending is a promising area and I am hopeful that sites like Prosper and Zopa can use their size to reduce the due diligence costs to a point where microlending can be profitable.