Good Customer Service Versus Bad Regulation

Abstract

Recent research suggests a positive connection between the quality of service provided by microfinance institutions (MFIs) and the propensity of borrowers to repay the loan. Good customer service improves borrower repayment behaviour, thereby increasing the likelihood of greater financial inclusion. However, good customer service also tends to increase the lender’s costs. In many cases the regulation of MFIs focuses on the price of credit, without attending to the way in which the credit is provided to the borrower. Regulation tends to increase the lender’s costs and where there is a cap on the cost of credit it also reduces the lender’s ability to increase income. Better regulation would attend to the quality of customer service rather than the price of the loan.

Keywords: Microfinance, regulation, relationship banking, customer service

JEL Classification: G21,O16