【正文】 in propoor (and pro rural) financial innovation is required. This holds true not only for microfinance, but for rural finance as well. Thus, public investment in rural finance can be justified, for example, to fund (action)research and promising institutional startups as well as institutional expansion until reaching financial sustainability within reasonable time periods, and to support pilot experiments with promising new products, technology or technical assistance, such as for training of staff and transfer of best practices. Given the long gestation periods required in building sustainable institutions, public investment in institutionbuilding requires longterm planning horizons with operational flexibility in instruments and timing. The required public investment in rural finance is more labor and knowledgeintensive, and far less capitalintensive than past investments following the old paradigm. The triangle of microfinance: financial sustainability, outreach, and welfare impact Internationally agreed principal objectives of development cooperation are the United Nations’ Millennium Development Goals (MDGs). These set targets to reduce poverty and make improvements in the various dimensions of poverty (or welfare) such as education, health, nutrition and women’s empowerment Following the concept of a logical framework, (financial) sector policy objectives need therefore to be consistent with these principal objectives Microfinance as well as rural financial policy has to be evaluated against three objectives: financial sustainability, breadth and depth of outreach, and the welfare impact. Financial sector policy can support the Millenium Development Goals (and thus poverty reduction) in two ways: Indirectly, through supporting a sustainable financial system as a precondition for economic and social development. This indirect pathway includes causal chains that can be summarized under the thesis of poverty reduction through economic growth. An example of one of these causal chains is that owners of wealthier enterprises who use the financial services create additional demand for goods and services of the poor thus increasing their ine. Directly, by increasing the access of poor people to financial services. Governments and donors may differ in their perceptions about the relative effectiveness and efficiency of the two pathways. Indeed, which one may receive more emphasis has to necessarily vary with country specific conditions. It follows that governments and donors also differ in their relative emphasis on the three objectives in micro and rural finance, . financial sustainability, depth of outreach, and welfare impact. This, of course, influences their view on the relative efficiency of different types of financial institutions, and thereby influences how financial policies are designed in practice and how the institutional landscape evolves. Because of market imperfections, the state has a legitimate role for investing in financial systems development. However, given the possibility of government failure(. governments may not be able to correct market failures), and social opportunity costs of public funds, there are of course also limitations of public investment in finance. There has been a shift in paradigm in rural finance in the late 1980s, and much of this can be traced to the failures of subsidized small farmer credit and the successes of a few MFIs. The objectives of financial policy have changed along with the paradigm shift. Initially, the focus was on improving the outreach of MFIs to the poor, that is, serve more of the poor (breadth of outreach) and more of the poorest of the poor (depth of outreach). Eventually, the objective of sustainability of financial institutions took on great importance. Following the work of Ohio State University and other institutions in the 1980s, the view emerged that the building of lasting, permanent financial institutions requires that they bee financially sustainable, that is, they cover their costs. Some analysts (for example, Christen et al. 1995。 Otero and Rhyne 1994) argued that increasing the depth of outreach and financial sustainability are patible objectives in the sense that increasing the scale of operations will also increase the absolute number of poor people among clients: “It is scale, not exclusive focus, that determines whether significant outreach to the poor will occur”. Several other authors present analysis that supports the notion of a tradeoff between improving depth of outreach, . reaching relatively poorer people, and achieving financial sustainability The tradeoff stems fr