At Zidisha, we don't restrict the purpose of loans (other than requiring that it be legal and ethical). The vast majority of applications nevertheless feature small businesses. This may be because the applicants are simply telling the lenders what they think the lenders want to hear, but the business uses of the loans have usually been confirmed when our volunteers visit the borrowers. (See this blog kept by an intern in Kenya last year for some good examples http://talkingstorykenya.wordpress.com/.)
When funds have not been used for revenue-generating purposes, this is usually due to an unplanned contingency, such as a health emergency in the family or a time of financial scarcity coinciding with school tuitions falling due.
I personally would not object to more loans being used for purposes such as tuition or home improvements, but understand that it is often too risky for individuals without regular sources of income to use debt to finance assets that do not generate revenue.