We construct a theoretical framework that puts the social worth of a microfinance organization (MFO) in terms of the depth, worth to users, cost to users, breadth, length, and scope of its output. We then analyze evidence of depth of outreach for five MFOs in Bolivia. Most of the poor households reached by the MFOs were near the poverty line-they were the richest of the poor. Group lenders had more depth of outreach than individual lenders. The urban poorest were more likely to be borrowers, but rural borrowers were more likely to be among the poorest.

Innovations in lending technologies and market saturation have made La Paz, Bolivia one of the most rapidly changing and competitive microfinance markets in the world. Two lenders stand out: the pioneer BancoSol, which first profitably expanded the loan market with group liability loans, and the later entrant Caja Los Andes, which offered individual liability loans using costlier screening. Using a simple model of credit market competition with moral hazard and adverse selection we analyse how the terms of loan contracts were adapted to changes in competition and how borrowers' incentive to remain diligent and repay loans was affected. Hypothesized behaviour derived from the model is tested and shown to be consistent with empirical evidence from loan records and a household survey. Copyright © 2003 John Wiley & Sons, Ltd.

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This paper examines the high degree of success of several systems of rural financial intermediaries in Indonesia, in terms both of self-sustainability and outreach. These systems have provided credit and deposit services, profitably and at low transaction costs, to large numbers of very small individual clients. This generalized success reflects both a hospitable environment for financial intermediation and, particularly, the elements of an effective organizational design, in reflection of an underlying concern with institutional viability. This design has provided both the incentives and opportunities for successful behavior. The provision of financial services to marginal clientele depends on the solution of the paradox resulting from those agents with inexpensive access to information and monitoring mechanisms not having enough resources or being too risk averse to locally provide sufficient credit, while those with the resources have no access to the required information and contract enforcement tools. Regulatory constraints may make this situation worse. The design of Indonesian locally-operated financial institutions offers a solution to this paradox. Character-based lending that relies on local agents is comparatively inexpensive. With the recruitment of local agents for lending, however, the information/ enforcement problem becomes an agency problem. In Indonesia, the solution has been a system of compatible incentives (performance-based remunerations and efficiency wages), coupled with the verification of profits. In practice, managers have been made co-owners. This requires that managers possess discretionary powers over performance-relevant variables. Thus, no loan targeting exists and financial policies, while not uniform, have been adequate to protect institutional viability. The one-time subsidies implicit in seed capital and start-up loans to these intermediaries have not created dependency on outside funds, while the extent of the interventions has been proportional to the magnitude of the problems to be solved, rather than being massive undertakings with large fixed-cost structures. Gradual growth, by trial and error, has been a good approach to institution building. These organizations have been credibly committed to collect loans, while borrowers have pledged their (valuable) reputation as collateral. Traditional hierarchical structures (village chief) have been used for contract enforcement. The chief may also be operating as an indigenous credit rating agency. The lessons learned in Indonesia shed light on successful institution building elsewhere.