This essay focuses on the importance of financial innovation in meeting the challenge of reaching poor households that still do not have access to financial services, providing more and better products and services to those that do, and in particular how the policy and regulatory environment can encourage innovation. The discussion is based on experiences in three countries in Asia, namely Bangladesh, Indonesia and Philippines, which have been at the forefront in developing innovative approaches to financial services for the poor. It explores the nature and importance of financial innovation, the importance of appropriate support from government and donor agencies, regulation of MFIs and the need to establish performance and reporting standards to encourage the development of a sustainable microfinance sector while at the same time facilitating innovation, and the regulation of banks engaged in microfinance.