1 The past and future of innovations in microfinance Roy Mersland 1 and R. Øystein Strøm 2 SECTION 1: INTRODUCTION The microfinance industry carries every sign of an innovation in its take-off phase. The various aspects of the microfinance innovation were developed in the 1980’s, twenty years later the industry experiences a phenomenal growth rate, and it has diffused to most developing countries in the world. This review paper looks at microfinance as an entrepreneurial activity in its own right, contributing to the development of small and medium-sized firms in developing countries. We trace the innovations in microfinance, for instance group lending, loans to women, and their financing, and we ask whether the business model implied is sustainable once diffusion has gone far, competition enters, and customers enter higher income levels. In 1999 Jonathan Morduch wrote “The promise of microfinance was founded on innovation: new management structures, new contracts, and new attitudes”. He ends his survey calling for a second wave of innovation (Morduch, 1999). In this chapter we provide an update on the microfinance innovation, viewing the microfinance innovation as the discovery of a new market of poor people for financial services as well as new ways to address the financing needs in the new market. A common denominator for the microfinance innovations is that they solve asymmetric information and cost problems associated with serving poor customers with little or no 1 Agder University, Kristiansand, Norway. 2 Oslo University Colle, Oslo, Norway.