Cheapness, for one thing - there are (or were, until Ryanair and EJ arrived) lots of old CFM B737's around (you used to need them to make money on charters - now, of course, you can't make money with them on charters - they don't have the range or the speed), and lease costs were low. Great for starting an airline. There simply aren't the number of MD's or airbuses around to compete price-wise.
A B737-300 in high density config has 150 pax seats, so needs three crew - but maximises the ratio of pax to crew (exactly 50:1). Ideal for that sort of service, and there is no Airbus that compares (319 is about 40-45:1). Also good field performance - a high power to weight ratio, especially with light fuel loads - although the wings aren't great, it doesn't matter on short sectors.
Having started getting B737's, you can then have derivative type ratings on the NG 737's. Having a single fleet of aircraft reduces training costs and allows optimum operational flexibility, even if they are different sizes.