I’m not sure which is more striking—your prescience or your brilliance! What an excellent article. You composed this piece exactly 2 years and 11 days before Kiva began offering domestic microloans through its field partners Opportunity Fund and ACCION USA (I work for the latter). Can you say ahead of the curve much?! I’d love to respond to some of the concerns you raise, but since this article was written so long ago I think they’ve largely been addressed by the industry. So, in lieu of a dated rebuttal, I’d speak a bit about what I’ve learned and project into the future about related challenges and obstacles the domestic mifi field will face.

I think the first three concerns you pull from the paper have largely addressed themselves. Although the microenterprise sector is small, it has shown a robust turnover rate—business are closing as new ones are conceived and others are opened at an alarming rate. This ensures that there is always demand for financing.

Furthermore, even though the sector is much smaller nationally than it is abroad, it has at least equal potential to invigorate a local economy. Microenterprises overseas are inherently limited by scale; restricted access to capital imposes a ceiling on growth. In developing nations, while small businesses can spur limited job creation, the real potential for job growth exists in richer countries. Here, if a business receives a microloan and performs well, they may become eligible for a loan from a commercial bank. Moreover, in the First World microenterprises are more likely to occupy niche industries, filling gaps in local markets rather than comprising the main source of income for a community (as they would in the Third World). Therefore, successful microbusinesses not only tend to be creative (because of the competition from larger corporate ventures) but often possess a unique cultural or personal flair that attracts business. Likewise, because wage jobs tend to be unrewarding both personally and fiscally, people are drawn to microentrepreneurship. Microenterprise can succeed in the first world despite (and I’d argue because of) the challenges it faces. Especially given the surge of interest in local business, the most pressing issue is not whether it’s a good idea to lend to small businesses, but how to reach as many potential clients as possible.

Competition from commercial lenders—not too fast! Although credit cards are readily accessible, there are numerous pitfalls of revolving debt. I speak on a regular basis with people who have had their credit cards debt snowball on them as interest rates adjust, ceilings vary, and penalties are harshly meted out. Microlenders offer an alternative to such practices. At ACCION USA, we offer fixed rate installment loans with interest varying from 8-15 percent. We have no penalty for early repayment. We carefully study each person’s personal and business finances, maintaining direct lines of communication to ensure a loan is the right decision for our client and for us. We’ve adapted the group lending model by emphasizing the provision of cosigners rather than collateral; collections are messy, expensive, and very harmful to clients.

Your bit about regulations is almost prophetic; the internet has proven too crucial to even describe. From lowering costs, to publicizing, to attracting donors, it has (as for most businesses) become an amazing engine for service growth and enhanced efficiency in the microfinance sector. Our rates are competitive with private sector lenders and our reach is expansive. In my opinion, the greatest struggle for domestic microlenders will be the fight to achieve sustainability. Donations to organizations such as Kiva have an essentially infinite lifecycle (as people rarely pull their money out of Kiva) but don’t necessarily ensure full coverage of all worthy borrowers. Microfinance may forever rely on the generosity of donors, but I think the future will see a massive push towards self-sustainability—the challenge is going to be how firms achieve this.

If you’re interested in learning more about ACCION USA, please subscribe to our blog and begin following us on twitter (@ACCION_USA). Also, feel free to reach out to us directly (loans at accionusa dot org) if you’d like to discuss domestic microfinance further. And check out #mifimon (Microfinance Monday) on Twitter/Facebook to join a real-time conversation along with other microfinance experts and enthusiasts!