The success (outreach and sustainability) of eight rural financial intermediation systems in Indonesia, in profitably reaching large numbers of small individual clients, is explained in terms of organizational design. Networks of semiautonomous units use local information and contract enforcement mechanisms to lower transaction costs. Reflecting basic concerns with institutional and financial viability, elements of mechanism design have included compatible incentives such as performance-based compensations (profit sharing, collection fees), efficiency wages (equivalent to quasi-equity), and system monitoring; managerial discretion over transactions conducted at market terms, policies to protect portfolio value, and no dependency-creating subsidies are important. Interventions have been appropriate for the problem at hand.
