The recent experience in micro-finance of developing countries, e.g., Bolivia, Bangladesh, Indonesia and the Philippines to name a few, has shown its significant function in creating access to finance services by the poor. Access to finance services provides critical investment opportunities for the poor who have been traditionally shut out of financial markets. Access to finance services provide poor households the liquidity for consumption smoothing when confronted with economic and social shocks, e.g., sudden sickness in the household, crop failure. This paper describes some emerging innovations in micro-finance observed in south-east Asian micro-finance markets that make it possible for micro-finance institutions (MFIs) to reach a greater number of poor households on a sustainable basis. It discusses the nature, importance and types of innovations. Innovations help reduce the MFIs' transaction costs and risks. They also make it possible for poor households to satisfy their investment and consumption smoothing requirements. The paper draws some lessons from the experience with innovations and makes a case for government's important role in ensuring the proper functioning of markets. It points out government's pivotal role in system innovation because of the likelihood of its under-or-slow production by the private sector. MFIs have a clear advantage in process and product innovation to meet the requirements of poor clients. Thus, they should be given room in doing this. Innovations arise in competitive conditions as MFIs try to tackle the challenge of developing products and services suitable to their clientele, of expanding and maintaining market shares. This role includes the installation of an appropriate regulatory and supervisory framework for MFIs, promoting a competition policy and providing an environment conducive to the commercialization of micro-finance and to the rise of institutions that support the micro-finance industry, e.g., credit bureau, micro-finance trade associations and networks.
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