Microfinance Products and Service Quality in Financial and Quasi‐Financial Institutions in China

• Date: 01 May 2015
• Author: Sow Hup Chan,Jason Jianxiong Lin
• Published date: 01 May 2015
• DOI: http://doi.org/10.1002/jsc.2008

Strat. Change 24: 267–284 (2015)

Published online in Wiley Online Library

(wileyonlinelibrary.com) DOI: 10.1002/jsc.2008 RESEARCH ARTICLE

Copyright © 2015 John Wiley & Sons, Ltd.

Strategic Change: Brie ngs in Entrepreneurial Finance

Strategic Change

DOI: 10.1002/jsc.2008

Micro nance Products and Service Quality in Financial

and Quasi-Financial Institutions in C hina

1

Sow Hup Chan

Faculty of Business Administration , University of Macau , Macau , China

Jason Jianxiong Lin

Tongshang Rural Commercial Bank , China

M i c r o  nance institutions (MFIs), and  nancial and quasi- nancial institutions

around the world, have increasingly provided loans to groups and to individuals

( Chan and Abdul Ghani, 2011 ; Ghatak and Guinnane, 1999 ; Hermes and

Lensink, 2007 ; Khandker, 2001 ; Kota, 2007 ; Morduch and Haley, 2001 ; Sebstad

and Cohen, 2000 ; Simanowitz and Walter, 2002 ; Wright, 2000 ), especially ben-

e ting the underserved population — even in remote geographical areas ( Chan

and Abdul Ghani, 2011 ). Within the last decade, the MFI channel has been

innovative in product diversity and technological innovation. A diversity of orga-

nizations are providing microcredit and micro nance services, and as the micro-

 nance sector has scaled up, it is essential to monitor the services provided and

to take swift action not only to subsist but to avoid crises such as those observed

in Andhra Pradesh in 2010.  e lack of available information on interest rates

and loan conditions also makes it di cult for policymakers and regulators to

control the operations of such institutions. Mystery shopping is a viable tool to

achieve this purpose.

Mystery shopping has been a diagnostic tool in many industries for evaluating

employee performance, monitoring the process and outcomes of service delivery,

benchmarking competitors ( Rood and Dziadkowiec, 2010 ), and assessing cus-

tomer experience ( Silver, 2000 ).  e mystery shopping approach has been applied

to performance assessment of services in health care and many major areas of

business — including  nancial services, retailing, direct marketing, fast food,

leisure/travel, transportation/utilities, and government departments ( Finn and

Commercial banks have

downscaled their products and

some banks regard MSEs as the

main target customers.

Product innovation is imperative if

the micro nance service providers

are truly interested in serving the

unbanked and underserved, and

supporting the development of

MSEs.

Mystery shopping is a viable tool

for the banking regulatory

commission to monitor the

micro nance sector, ensure that

MCCs follow their original stated

purposes, and encourage the

sustainable development of

micro nance.

1 JEL classi cation codes: C83, D24, F65, G21, G28, H81.

‘Mystery shopping’ can be a useful diagnostic tool for banking regulators to

monitor whether  nancial and quasi- nancial institutions are operating within the

legal regulatory framework, while micro nance service providers can use it to develop

innovative yet attractively priced  nancial products and services.

268 Sow Hup Chan and Jason Jianxiong Lin

Copyright © 2015 John Wiley & Sons, Ltd. Strategic Change

DOI: 10.1002/jsc

ing the Grameen Bank approach (GBA) has been linked

to sharing of the responsibilities of group and center

members, although loans are made to individual borrow-

ers who are ultimately responsible for the repayment

( Chan and Abdul Ghani, 2011 ; de Aghion and Gollier,

2000 ).  rough the use of social collateral, the poor

gained access to credit to pull themselves out of poverty

( Chan and Abdul Ghani, 2011 ; Copestake, 2002 ; Goetz

and Sen Gupta, 1996 ; Hulme and Mosley, 1996 ; Khand-

ker, 2001 ; Simanowitz and Walter, 2002 ), strengthen

their social assets, as well as improve aspects of women ’ s

empowerment ( Chan and Abdul Ghani, 2011 ; Morduch

and Haley, 2001 ; Sebstad and Cohen, 2000 ), while moni-

toring their peers ’ loan repayments and activities.

Group lending is costly to implement.  e various

costs include costs to maintain the regular center meeting

system ( Britzelmaier et al ., 2013 ), peer monitoring

systems, and opportunity costs to attend center meetings,

as well as high transaction costs and risks, particularly

when serving the poor in remote geographic regions

( Chan and Abdul Ghani, 2011 ). Since group lending is

costly to implement in the city and urban areas, MFIs

began to focus on giving individual loans rather than

group loans. In the case of Amanah Ikhtiar Malaysia

(AIM), in Malaysia, the group loan products were adapted

to individual loan products. Although the individual loan

repayment rate is not as high as for group lending, AIM

continues to provide individual loans to their borrowers.

Many commercial banks and  nancial institutions in

Malaysia started to o er micro nance to individuals fol-

lowing AIM ’ s success in reaching the poor. Similarly, the

role of micro nance is recognized by the Chinese govern-

ment ( Byström, 2007 ), leading various  nancial and

quasi- nancial institutions in China to o er micro nance

to individuals. Traditional commercial banks downscaled

their micro nance operations and new forms of MFIs

came into being ( Britzelmaier et al ., 2013 ). Foreign

entities also enter the Chinese market through collabo-

ration with a local partner to capture a slice of the lucra-

tive micro nance business. While various commercial

Kayande, 1999 ; Miller, 1998 ; Wilson, 1998 ).  e  nan-

cial services sector using mystery shopping programs

includes banks, building societies, general/motor insur-

ance, and estate agents (see, for example, Wilson, 1998 ).

Although mystery shopping has been popular in the UK

and in the USA since the 1970s ( Beck and Miao, 2003 ;

Dwek, 1996 ), there is surprisingly little discussion of this

approach in the academic literature ( Finn and Kayande,

1999 ; Wilson, 1998 ). To our knowledge, there is no avail-

able literature on how mystery shopping can be applied

in the micro nance sector.

With increasing competition, MFIs need to have

attractive product o erings and service quality to di er-

entiate from their competitors while achieving customer

loyalty and retention. While various researchers and prac-

titioners have paid attention to the growth of the micro-

 nance industry, and the People ’ s Bank of China (PBOC)

and China Banking Regulatory Commission (CBRC)

have played a key role in the development of micro nance

in China, few scholars document the functioning of the

MFIs or the costs to borrowers — such as interest rates

or other access barriers to microcredit. Given the lack of

a thorough understanding about the functioning of orga-

nizations providing micro nance, this study was con-

ducted using the mystery shopping approach to gather

primary data to shed light on micro nance operations in

China. It should be noted that determining the eligibility

for loans is not the objective of the study. We addressed

two speci c hypotheses. First, we hypothesized that similar

types of organization providing microcredit have similar

terms and conditions. Second, we hypothesized that the

services o ered by the organizations are similar.

Literature review

Access to microcredit

Our current understanding of access to micro nance is

limited by the lack of information and publications

regarding access to individual loans. Micro nance follow-