CHAPTER ONE
INTRODUCTION
1.1 Background of study
In recent years, the financial industry has witnessed a rapid transformation fueled by
technological advancements and innovation. These changes have had a profound impact on
various sectors, including microfinance institutions (MFIs). MFIs play a crucial role in
providing financial services to underserved populations, particularly in developing economies.
With the advent of financial innovation, MFIs have the opportunity to enhance their service
offerings and improve customer satisfaction. This paper aims to explore the effect of financial
innovation on customer satisfaction in the context of microfinance institutions. Microfinance
institutions have traditionally focused on providing basic financial services such as credit,
savings, and insurance to individuals who lack access to formal banking services. Aghanya
&Ayadi(2020). However, the emergence of financial innovation has expanded the scope of
services offered by MFIs. Financial innovation encompasses a range of technological
advancements, including mobile banking, digital payments and alternative credit scoring
methods. These innovations have the potential to revolutionize the way MFIs operate and
interact with their customers. With improved accessibility, affordability, and convenience,
financial innovation can significantly impact customer satisfaction. Zeller &Sharma (2018).
Financial innovation refers to the development and implementation of new financial products,
services or process that aim to improve efficiency, accessibility and affordability of financial
services in the contexts of micro finance institutions, financial innovation can take various
forms, such as the introduction of new mobile banking services Digital lending plate forms,
or new credit products. These innovations have potentials to enhance customer’s satisfactions
experience, increase access to finance and ultimately improve customers satisfaction(Christian et Al, 2014) Customer satisfaction is a critical factor for the success and
sustainability of MFIs. Satisfied customers are more likely to remain loyal, recommend the
institution to others and used a wide range of product and services. Therefore, understanding
the factors that influence customers satisfaction in the context of financial innovation is

essential for MFIs to design and implement effective strategies to attracts and retain
customers (Khan et Al).
One of the key advantages of financial innovation for microfinance institutions is the ability
to reach a wider customer base. Traditional banking methods often require physical presence,
which can be a significant barrier for individuals living in remote areas. Financial innovation,
particularly the use of mobile banking and digital platforms, enables MFIs to extend their
services to previously underserved regions. By providing access to financial resources, MFIs
can empower individuals and communities, fostering economic development and reducing
poverty. The increased accessibility offered by financial innovation is likely to enhance
customer satisfaction by meeting the needs of a larger customer base. Chakravarty (2019)
financial innovation also enables microfinance institutions to provide more tailored and
customized products and services to their customers. With the use of advanced analytics and
alternative credit scoring methods, MFIs can better assess the creditworthiness of borrowers and offer personalized loan products. Armendariz & morduch (2018). This not only improves
the efficiency of loan processing but also reduces the risk of default. Additionally, digital
platforms allow MFIs to collect and analyze customer data, enabling them to understand
customer preferences and behavior more effectively. By offering personalized solutions,
MFIs can enhance customer satisfaction and build long-term relationships. . Ojasalo, J., &
Ojasalo, K. (2018).
Financial innovation has also revolutionized the payment systems used by microfinance
institutions. Digital payment platforms, such as mobile wallets and online banking, offer
customers a convenient and secure way to conduct financial transactions. These platforms
eliminate the need for physical cash, reducing the risk of theft and improving overall
transaction efficiency. Moreover, digital payments enable customers to make transactions at
any time and from anywhere, enhancing convenience and accessibility. By providing
efficient payment systems, MFIs can enhance customer satisfaction and improve the overall
customer experience. . Bateman, M., & Wood, A. (2018). Financial innovation also opens up
opportunities for MFIs to improve their customer service through enhanced communication
channels. Digital platforms enable MFIs to communicate with customers in real-time,
providing timely updates, alerts, and personalized notifications. Additionally, the use of chat
bots and artificial intelligence-powered customer service tools can enhance the efficiency and
responsiveness of customer support. By leveraging these technologies, MFIs can provide
prompt and personalized assistance to customers, addressing their queries and concerns
effectively. Improved communication channels contribute to building trust and strengthening the relationship between MFIs and their customers, ultimately leading to higher levels of
customer satisfaction.
While financial innovation offers numerous opportunities for microfinance institutions to
enhance customer satisfaction, it is important to consider potential challenges and risks. One
of the key challenges is ensuring the security and privacy of customer data in the digital era.
With the increased use of digital platforms and data analytics, MFIs must prioritize data
protection and implement robust cyber security measures. Additionally, there may be a digital
divide among customers, with some individuals lacking access to the necessary technology or
digital literacy skills. MFIs need to address these disparities to ensure that financial
innovation benefits all customers and does not exclude marginalized populations.
Furthermore, regulatory frameworks and policies need to keep pace with financial innovation
to ensure consumer protection and maintain the integrity of the microfinance sector. Several
studies have examined the relationship between financial innovation and customer
satisfaction in the banking sector. However, there is limited research specifically focusing on
the fill this gap in the literature and provide valuable insights for MFIs operating in Tubah
sub division to enhance their customer satisfaction levels through innovative financial
solutions.
The research will adopt a mixed-methods approach, combining quantitative surveys and
qualitative interviews with customers of selected MFIs in Tubah sub division. The
quantitative surveys will gather data on customers’ perceptions of financial innovation,
satisfaction levels, and demographic characteristics. The qualitative interviews will provide
deeper insights into customers’ experiences, preferences, and attitudes towards innovative
financial products and services offered by MFIs (Dzansi et al., 2017).