CHAPTER 1

INTRODUCTION
 Chapter I
Introduction

This chapter introduces the topic, casts a light on the background of the research problem,

discusses the research problem in the context of banking sector of Pakistan and highlights the

purpose of the research.

1.1. Background of the Study

Banking is one of the most important and significant businesses all around the world. It plays

very important role in financial markets as well as in the overall economy of a country. In

today’s dynamic and competitive corporate environment, quality of services is an essential factor

for enhancing customer satisfaction and loyalty which subsequently improves the performance of

financial institutions for successful survival.

Over the past few decades, due to privatization of banking sector in Pakistan, customers are

demanding more quality services from the financial institutions which boosts the competition

among the banks and compels them to deliver superior quality services to the customers so that

competitive edge can be attained in the form of satisfied and loyal customer-base (Wisniewski,

2001; Graack, 1996).

The premise of “service quality” as a competitive advantage in gaining leadership in a market

driven system has been well recognized by the financial institutions. However, it has become

increasingly important for the financial institutions to find different ways, not only to become the

market leader but also to maintain that top position in today’s dynamic and competitive corporate

environment (Zeithaml, 1996; Boltan, & Drew, 1991).

Researchers from all around the globe claim that offering quality services gives a financial

institution a sustainable competitive advantage, not only to fulfill present needs of customers
satisfactorily but also the ability to anticipate their future needs. This ability to anticipate future

needs of customers enables the service organizations to delight the customers through quality

services on consistent basis and subsequently enhance their satisfaction and loyalty to the

organization (Zeithaml, 1988; Naik, Gantasala, & Prabhakar, 2010; Curry, & Herbert, 1988;

Wisniewski, 2001).

It has been witnessed that in today’s market-driven system, customers are not loyal to one

particular financial institution. Today, the all what they need is quality of products and services

which satisfy their requirements effectively. Hence the major need of today’s financial

institutions is to find the ways to create satisfied and loyal customer base that can’t be eroded

even in the face of severe competition.

Therefore, these financial institutions must consider various antecedents (tangibles, reliability,

responsiveness, assurance and empathy) of customer satisfaction which might help them to

develop a happy and loyal customer base (Sharp, & Sharp, 1997) which subsequently enhances

their financial performance and profitability (Lewis, 1993; Andereson, Fornell, & Lehmann,

1994;Hackl, Scharitzer, & Zuba, 2000).

1.2. Banking Industry in Pakistan

Banking is one of the most important and significant businesses all over the world. Banks play

very important role in the financial markets as well as in the overall economy of a country and

Pakistan is no exemption. Banking industry in Pakistan accounts for 95% of the financial sector.

There are total 54 banks of seven types operating in Pakistan namely, public sector banks,

private banks, Islamic banks, developmental financial institutions, foreign banks, micro finance

banks and specialized banks. Banks are the biggest lenders of credit, and also attract most of the

savings from the public and hence, act as custodian to the assets of the general public.
Banks influence and facilitate many diverse but integrated economic and financial activities

including resources mobilization, poverty reduction as well as production and distribution of

finance of the general masses. Dominated by the private sector, banking sector in Pakistan has so

far played an excellent role in the development of different sectors of the economy.

Now a days, corporate environment is rapidly changing and in this uncertain corporate

environment there is a need for superior quality services. The is a need to become highly

cutomer focused which has forced the slow-moving banks to adapt a fast track and efficient

approach. After studying this study managers of the banks will come to know that they could

enhance customer stisfaction and loyalty to the organization only through superior quality

services.

1.3. Problem statement

One of the greatest challenges faced by today’s financial institutions is the continuous increase in

customer expectations in the form of superior quality services ( Joseph, & Walker, 1988;

Leonard, & Sasser, 1982; Takeuchi, & Quelch, 1983; Ettorre, 1994). Moreover, customers are

behaving more critically to the quality of services they experience (Albrecht, & Zemke, 1985).

Increasing customer demands together with ever growing competition are compelling the

financial institutions to get rid of traditional customer satisfaction and loyalty paradigm and to

adapt proactive competitive financial strategies which will help them to take the lead in the

market place in the form of loyal customer-base (Sellers, 1989).

Existing literature indicates that service quality is an excellent tool for enhancing customers’

satisfaction level and loyalty to the organization in today’s market driven system. The main

objective of this study was to find the impact of various service quality dimensions on customer

satisfaction and loyalty in banking sector in general and in banking sector of Pakistan in
particular. Therefore, the purpose of this study was to investigate the association of (a) tangibles

with customer satisfaction and customer loyalty, (b) reliability with customer satisfaction and

customer loyalty, (c) responsiveness with customer satisfaction and customer loyalty, (d)

assurance with customer satisfaction and customer loyalty, and (e) empathy with customer

satisfaction and customer loyalty in banking sector of Pakistan.

1.4. Significance of the Study

There are few research studies on service quality in the literature. This research work enhances

the understanding of a little studied topic. Moreover much of the research on service quality and

its impact on customer satisfaction and loyalty has been conducted in developed countries such

as United States. Relatively a very few research studies has been done elsewhere in the world.

Therefore current study may be of significant importance both in contributing to the literature

and in terms of banking sector is concerned.

The research study is robust in many important points: Survey research method increases the

external validity of the results. It was preferred as an important research tool since exactly the

same questions about different items were asked from each respondent. In this way potential

error causing by the differences of the respondent styles was limited. The accuracy of the

responses also increased since each of the subjects himself / herself decided how much time

allocate to each question or item while recording his / her response to the questionnaire.

Conducting the research study across various banks of Pakistan is an important strength of the

dissertation. The sample data represents a variety of banks including public sector banks, private

banks, Islamic banks, developmental financial institutions, foreign banks, micro finance banks

and specialized banks. In the study described here, we used random sampling to make research
process faster and generalizable. Therefore, this research study will serve as a basis for further

research in that particular area with its tested model of the study.
 CHAPTER 2
LITERATURE REVIEW
 CHAPTER II
2. Literature Review

The impact of service quality on customer satisfaction and loyalty in the context of banking

sector is a widely discussed topic in the literature. The literature review targets the trade journals,

text books and various magazines that contain the information on various service quality

dimensions as well as customer satisfaction and loyalty.

2.1. Service Quality

The markets around the world have become more competitive due to availability of wide range

of products and substitutes. Every seller is trying to increase its market share by providing the

quality and convenience. Cronin, Brady and Hult (2000) provided that value and perceived

service quality are considered main determinants of the customer satisfaction and loyalty.

Services are intangibles, heterogeneous, produced and consumed simultaneously and cannot be

kept as stock like physical products. Grönroos (2004) defined service as a continuous process

consisting of a set of intangible activities which normally take place in consistent interactions

between customers and service staffs and/or physical resources and/or various systems of

financial service providers, which are provided as superior solutions to the problems of

customers. This definition tells us that there is a strong relationship between customer and

service providers because interaction between them increases enormously in case of services

(Grönroos, 2000). So in order to get long term profit, firm indulged in services should retain its

loyal customer by catering their needs and wants.

More and more interaction between customers and financial institution make it possible for

customers to intuitively perceive the quality of particular service offered by that financial

institution (Grönroos, 2000). Banks’ excellence and supremacy as perceived by its customers is
called service quality (Parasuraman, Zeithaml, & Berry, 1988). What customers think and

perceive, during the interaction between the bank and its customers, have a significant effect on

customers’ assessment of service quality relating to the services offered by that bank (Grönroos,

2000).

According to Grönroos (2000), professionalism and skills, employees’ attitude and behavior,

reliability, accessibility, flexibility, trustworthiness, service recovery, service cape and reputation

and credibility are the seven decisive factors to perceive a quality service. First factor is the

result oriented, while last factor is about the firm and brand image. The other five factors

represent the functional quality dimensions and operational oriented.

To achieve competitiveness in the service industry, a superior service quality is a key to success.

Customers’ satisfaction is influenced by their perception about service quality and their trust on

Service provider (Parasuraman, Zeithaml, & Berry, 1988; Aydin, & Özer, 2005; Ismail, Haron,

Ibrahim, & Isa, 2006). If a firm performs better than its customers’ expectations before

purchasing and utilizing the service or product, then it might be a reason for customers’

satisfaction. When a firm provides better services to its customers, then these better services will

enforce customer perception about quality. Superior service quality is a core indicator to evaluate

the performance of a service company particularly in banking industry. Customer satisfaction

and loyalty can be achieved by offering superior quality services to them. These superior quality

services will gain competitive advantage for the financial institutions and build a long term

patterning relationship with customers.

The evidence entails that there is a high correlation between service quality and customer

satisfaction (Boulding, Kalra, Staelin, & Zeithaml, 1993; Bitner, 1990 and Sureshchandar,

Rajendran, & Anantharaman, 2002). Spreng and Mackoy (1996) explored the model of Olive,
Oliver and MacMillan (1992) for its implication regarding service quality and customer

satisfaction and examined that service quality is one of the strong predictors of customer

satisfaction, particularly in banking sector. Same findings were provided by Spreng and Mackoy

(1996) and Bitner (1990), who provided evidence of the significant correlation between customer

loyalty and service quality.

Service quality could prove to be a competitive edge; the service organization could rely on.

Service quality could be defined as the evaluation process through which the customer compares

the actual services rendered and his expectation regarding the provision of the service (Grönroos,

1984; Parasuraman, Zeithaml, & Berry, 1994). The most famous measure of the service quality

is SERVQUAL model which was developed by Parasuraman, Zeithaml and Berry (1988), which

measures service quality through five dimensions i.e. reliability, responsiveness, tangibles,

empathy and assurance. These dimensions are explained as under:

2.1.1. Tangibles

Tangibles are the things which can be seen and touched. Bitner and Zeithaml, (2003) defined

tangibles in the service quality context as equipments, physical facilities and their appearance,

communication materials and personnel of the organization. The customer in this regard assesses

the quality and usability of the tangibles used by the organization to provide the service and help

customers.

2.1.2. Reliability

Bitner and Zeithaml, (2003) defined reliability as the ability of a service provider to provide

promised service accurately and dependably. The customer wants the trustable service on which

they can rely on.

2.1.3. Responsiveness

Bitner and Zeithaml, (2003) explained responsiveness as the willingness to serve the customer

with prompt service. The service provider must remain ready to serve customer anytime happily

and willingly.

2.1.4. Assurance

Assurance depends upon the knowledge and courtesy of the employees and their ability to impart

confidence and trust (Bitner, & Zeithaml, 2003).

2.1.5. Empathy

Empathy is caring the customer by providing him individualized attention (Bitner, & Zeithaml,

2003). It is the listening to the problems of the customers and providing attention to his concerns

and demands.

2.2. Customer Satisfaction

Customer satisfaction is a very much important variable widely studies in the literature both for

theoretical as well as practical implications. It could be explained as a feeling that arise from an

evaluation process by comparing what is received against what was expected from purchase or

consumption of a product or service (Kotler, & Keller, 2009). Koo (2003) also provided that

satisfaction relates to a person’s experience of pleasure or disappointment in comparison to the

perceptions of that person regarding the performance of that product or service. While Bitner and

Zeithaml (2003) elaborated satisfaction as an evaluation of a product or service against the needs

and expectations of the customer associated with the utilization of that product or service. Fe and

Ikova (2004) argued that customer satisfaction is associated with the activities that are conducted

to provide a satisfying product or service to the customer. Sureshchandar, Rajendran and

Anantharaman (2002) suggested that customer satisfaction is a multi dimensional construct and

overall satisfaction of the customer is related to the satisfaction of the customer for the multiple

consumption experiences with the product or service provider. So the ways through which the

service provider interacts with the customer determine the satisfaction of the customer. The

satisfaction could arise in a variety of ways i.e. from the quality of product or service, pricing

perceptions, brand image which could be postulated as the main factors determining the

customer satisfaction.

Fornell (1992) explained satisfaction as “an overall evaluation of the product or service

dependent on the overall purchase and consumption experience of the customer regarding the

performance of the target product or service in comparison to repurchase expectations over

time”. Oliver (1997, 1999) on the other hand explained the customer satisfaction as pleasure

associated with the consumption of a product or service.

In banking sector, customer satisfaction is also considered to be a key determinant of the

relationship quality that exists between customer and service provider. Customer perceptions

regarding the benefits and costs associated with long term relationship are based on the past

experiences of the customer with the service provider and if the experience was satisfying, it is

more likely that customer would maintain the relationship (Narayandas, 1996). Normally

customer’s perceptions and experience with utilization of product and service are used to

measure customer’s satisfaction. Liu (2008) provided the following criteria for measurement of

the satisfaction of the customer regarding the product or service:

1. Satisfaction: customer thinks that the product or service could be accepted or tolerated.

2. Content: the consumption experience regarding the product or service is positive and

happy.
 3. Relived: Negative state of people is removed by the product or service.

4. Novelty: the product or service provided to the people brings excitement and freshness in

the people.

5. Surprise: the product or service makes people amazed or unexpectedly pleased.

Apart from this customer satisfaction could also be measured with the help of customer

relationship life cycle phrases, which highlights different stages regarding customer relationship

and reinforces the need to focus on specific customer needs and expectations at different stages

of relationship (Ravald, & Gronroos, 1996). In a nutshell, customer satisfaction enhances the

relationship quality between service provider and customer, with leads towards the repeat

purchase and provokes a long term relationship among the parties.

2.3. Customer Loyalty

Customer loyalty is a widely studies variable in the marketing research and literature. It is the

tendency if the customer to stick to the product or service of the organization in preference to all

other competitors in the market. Heskett, Jones, Loveman, Sasser and Schlesinger (1994)

provided that customer loyalty provide motivation to the customer for repeat purchase and for

referring the product or service of the company to others. Duffy (2003) postulated that customer

loyalty is a feeling of association that customer feels towards a brand and this feeling induce the

customer for repeat purchase and ultimately produce measureable and positive financial

outcomes. Improvements in the market share and customer base are the main benefits of the

customer loyalty. Several studies focus on the different beneficial aspects of the customer loyalty

such like brand recommendations to other people and as a resistance mechanism to other

superior products or services available in the market (Narayandas, 1996), increased repurchased

intentions (Cronon, Taylor, 1992) and willingness of the customer to pay a premium price.
Bitner and Zeithaml (2003) related that service loyalty is an attitude of the customer which tend

to continue as an exchange relationship and which grows on the bases of the past experience.

Customer loyalty can be explained in the shape of following six necessary conditions:

1. The biased (Which is the random)

2. Behavioral response (Which is purchase)

3. It is expressed over time.

4. by some decision making unit

5. relating to some alternative brands

6. And is function of psychological process.

The basic aim of the financial institution is to earn profits to grow its business by increasing the

product or services offered and increasing market share, customer loyalty could contribute

towards the basic aim of the firm very effectively (Hayes, 2008) as it induce the customer for

repeat sale from the customer (Chu, 2009). These loyal customers could serve as a marketing

mechanism by referring new people towards the organization and this thing increase the

customer base and market share of the company on which the financial success of the firm is

dependent to a larger extent. The loyal customers do not leave the organization and can pay a

premium price for the services rendered to them. Apart from that loyal customers tend to

purchase more often from the product or service provider (Brown, & Shoemaker, 2003). Loyal

customer could be considered as most important asset of the firm (Bowen, & Shoemaker, 2003).

Thus, the firm must cultivate loyal customers in order to be successful in the marketplace as

these are the loyal customers who maintain a long term and profitable relationship with the

organization (Tseng, 2007) So, a good marketing manager should understand the importance of

customer loyalty as the road to success is built by the customers, which not only include new
customers but also the old customers who could easily be motivated to spend more and to spread

words of the product and services they are utilizing (Keiningham, Aksoy, Cooil, & Andreassen,

2008).

The basic aim of any businessis to promote and enhance customer loyalty. In words of Oliver

(1997) “customer loyalty is a strong and deeply held commitment of customers to repurchase

particular products or services in a consistent manner in future, irrespective of the market

conditions or influences”.

The financial institutions are mainly concerned with their profitability and growth and customer

loyalty could contribute towards the profits of the organization (Hayes, 2008) as customer

loyalty not only ensure future repeat sale from the customer (Chu, 2009) but also these loyal

customers can be a good marketing tool and could bring new customers and this thing can

contribute significantly to the future success and profitability of the organization. There is less

likelihood that loyal customer would switch to new service provider only because of price

consideration, as loyal customers are willing to pay more for the services provided to them.

Moreover, loyal customers are expected to make more purchases in comparison to the non loyal

customers (Brown, & Shoemaker, 2003). Loyal customers are the most important assets of the

financial institution. Thus, it is the key success factor for banks to retain loyal customers who

contribute towards the profits of the organization in a significant way in the long run (Tseng,

2007). Increased sales from the existing customers are also a way to sustain the financial growth

of the organization (Hayes, 2008) which is o a larger extent is depended upon the retention of

loyal customer force. Thus, a good manager must understand the importance of customer loyalty

as the road to success is built by the customers, which not only include new customers but also
the old customers who could easily be motivated to spend more and to spread words of the

product and services they are utilizing (Keiningham, Aksoy, Cooil, & Andreassen, 2008).

Customer loyalty could also be divided into two aspects of behavioral loyalty and attitudinal

loyalty (Aydin, & Ozer, 2005). Behavioral loyalty could be defined as a construct which is based

on the purchasing frequency of the customer and the money spent on the retailer in comparison

with money spent on all other retailers the customer buys (Wulf, Odekerken-schroder, &

Iacobucci, 2001). Morgan and Hunt (1994) provided evidence of the significant relationship

between cooperation, buyer’s relationship, his acquiescence and level of buyer’s relationship

commitment, which all are considered as behavioral outcomes of the relationship. Attitudinal

loyalty on the other hand, depicts costumer attitude towards the loyalty which is measured by the

factors like, customer buying intentions, customer preferences, and willingness of the customer

to make recommendation and supplier prioritization.

In nutshell, the financial institutions must cultivate loyal customers in order to be successful in

the marketplace as these are the loyal customers who maintain a long term and profitable

relationship with the organization and subsequently improves its financial performance.

2.4. Service Quality and Customer Satisfaction

The banking industry in Pakistan over the years has evolved from a merely financial service

providing agency to a combination of complete set of superior quality services to satisfy the

present and future needs of customers. This notion of customer satisfaction is purely attributed

to service quality. Hence a lot of research has been done over the years to rationalize and prove

a significant and direct association between the two.

The study of service quality gained much attention from the organizational researchers about

almost two decades ago, when Zeithaml, Parasuraman and Berry (1988) introduced Servqual. It
is an excellent empirical method which has been used by the financial institutions all around the

globe to improve their quality of services (Doney, & Cannon, 1997). It is multi-dimensional

scale particularly developed to assess the perceptions of customers regarding the quality of

services in service organizations. This renewed scale explains the concept of service quality in

the context of above said dimensions. The relationship between service quality and customer

satisfaction has been assessed by Cronin and Taylor (1992) who focus on the repurchase

intentions as determinant of the customer satisfaction. This study yielded a significant

relationship between service quality and customer satisfaction.

In banking industry, service quality is perhaps the most critical aspect of the customer

experience. Accordingly organizations regularly monitor quality of their services and satisfaction

in their quest to improve customer retention and loyalty. Customer satisfaction entails that

demands and expectations of the met and the services utilized by the customer were up to the

mark according to the customer and his experience is positive (Gitomer, 1998). If the customer is

satisfied with the consumption experience, his overall feelings for the product or service would

be positive or neutral. However, customer satisfaction does not guarantee customer retention,

repurchase and loyalty.

Organizational researchers claim that service quality is one of the strong predictors of customer

retention and satisfaction. Cronin, Brady and Hult (2000) provided that service quality is a drive

of the customer satisfaction and has impact on the loyalty intentions of the customer.

Sureshchandar, Rajendran and Anantharaman (2002) also found a string relationship between

service quality and customer satisfaction. Oliver (1997) addressed the issue by entailing that

perceived service quality is an antecedent to the customer satisfaction. Same findings were

provided by Spreng and Mackoy (1996), Bitner, Booms and Tetreault (1990).
Meanwhile, Levesque and McDougall (1996) examined that quality of services significantly

makes the customers more satisfied loyal to the service provider and subsequently enhances

performance of financial institutions. Furthermore, bank’s interest rates also influence

customers’ satisfaction level (Levesque, & McDougall, 1966). The financial service provider’s

ability to provide such facilities and benefits on consistent basis probably has a significant and

direct impact on customers’ satisfaction level. Therefore, it is the foremost responsibility of a

financial institution’s service quality department to identify the discrepancies and subsequently

improve upon the factors that may increase customers’ value and satisfaction. Although, it has

been witnessed that for superior quality services, it is not enough to only focus on satisfying

customers, as customers often switch from one financial service provider to another because of

service quality problems and failures (Allred, & Addams, 2000).

This consumer behavior is a basic factor which significantly influences customers’ repurchase

intentions to engage in positive or negative decisions. Consequently, satisfaction is an essential

factor for building a strong and long term relationship with the customer and likely to enhance

his loyalty to the organization (Athanassopoulos, Gounaris, & Stathakopoulos, 2001; Bloemer, &

Ruyter, 1998).

In the services literature, organizational researchers placed much emphasis on the importance of

service quality and the association between service quality and customer satisfaction (Cronin, &

Taylor, 1992). Existing literature on the banking sector indicates that dimensions of service

quality are strongly correlated with customers’ satisfaction level (Jamal, & Naseer, 2003;

Levesque, & McDougall, 1966).

In the context of banking sector of Pakistan, is has been found that service quality and customer

satisfaction has a significant relationship. The findings of the study indicate that superior quality
services delivered by the financial institutions are most likely enhances customers’ satisfaction

level and subsequently organization’s financial performance (Reynolds, 1965). Meanwhile, a

research has been conducted in banking sector of UAE which indicated that top performing

organizations provide high quality of services to their customers so that they repurchase with the

organization on consistent basis in future (Jamal, & Naseer 2003). Parasuraman, Zeithaml and

Berry (1985) also found a significant association between service quality and customer

satisfaction. Thus, it can be concluded that provision of superior quality services on continuous

basis enables the financial institutions to fulfill current and prospective needs of their customers

which eventually enhances their satisfaction level (Parasuraman, Zeithaml, & Berry, 1988;

Spreng, & Mackoy, 1996; Jamal, & Naseer, 2003).

The most famous measure of the service quality is SERVQUAL model which was developed by

Parasuraman, Zeithaml and Berry (1988), which measures service quality through five

dimensions i.e. reliability, responsiveness, tangibles, empathy and assurance. This study also

examines the impact of various service quality dimensions on customers’ satisfaction level and

its influence on financial service provider.

2.4.1. Tangibles and Customer Satisfaction

Tangibles are the things which can be seen and touched. Bitner and Zeithaml (2003) defined

tangibles in the service quality context as equipments, physical facilities and their appearance,

communication materials and personnel of the organization. The customer in this regard assesses

the quality and usability of the tangibles used by the organization to provide the service and help

customers. Jabnoun and Al-Tamimi (2003) found that well furnished financial institutions

enhance customer satisfaction through tangible dimension of superior quality services. Zineldin

(2005) examined the association between service quality and customer satisfaction in banking
sector of Sweden and found that a financial institution can create a strong and long term

relationship with their customers by providing a set of tangible and intangible elements of

superior quality products and services.

2.4.2. Reliability and Customer Satisfaction

Reliability is the ability of a service provider to provide promised service accurately and

dependably. The customer wants the trustable service on which they can rely on. Ibáñez,

Hartmann and Calvo (2006) investigated the association between service quality dimensions and

customer satisfaction, and found a significant effect of reliability of services on customer’s

satisfaction level. In another research study, a conceptual framework was developed to measure

the reliability from the prospective of the customers, which then empirically tested and found

that reliability of services provided by the financial institutions significantly enhance customer

satisfaction and their loyalty to the organization (Saravanan, & Rao, 2007).

2.4.3. Responsiveness and Customer Satisfaction

Responsiveness is the willingness to serve the customer with prompt service. The service

provider must remain ready to serve customer anytime happily and willingly (Bitner, &

Zeithaml, 2003). Staff behavior has a significant impact on customers in every service industry,

particularly in banking sector. It was found that correct match between staff skills and

customers’ expectations resulted in superior quality services towards customers which

significantly enhances their satisfaction level and loyalty to their respective financial service

providers. Moreover service recovery and problem solving have also been recognized as

important parts of services quality (Ernst, & Young, 1995).

2.4.4. Assurance and Customer Satisfaction

Assurance depends upon the knowledge and courtesy of the employees and their ability to impart

confidence and trust (Bitner, & Zeithaml, 2003). Parasuraman, Zeithaml and Berry (1988) claim

that assurance is one of the strong and popular dimensions of service quality along with

tangibles, reliability and responsiveness which significantly enhance customers’ satisfaction. It is

suggested that financial institutions can enhance customers’ satisfaction level by ensuring

trustworthy behavior and reflection of genuine commitments to service provision which would

also most likely to influence customers’ repurchase intensions positively (Nelson, & Chan,

2005). Another study indicated that trust and commitment are important factors for customer

satisfaction regarding relationship quality (Nelson, 2006).

2.4.5. Empathy and Customer Satisfaction

Empathy is caring the customer by providing him individualized attention (Bitner, & Zeithaml,

2003). It is the listening to the problems of the customers and providing attention to his concerns

and demands. Organizational researchers claim that technological features of service quality are

more important than the human ones, in service industry and particularly in banking sector

(Sureshchandar, Rajendran, & Anantharaman, 2002). Iglesias and Guille´n (2004) found a

significant and positive association between empathy of services and customer satisfaction.

Similarly, in another research study it was examined that customers’ expectations might not met

due to major gap in the empathy part of service quality. Al-Marri, Ahmad and Zairi (2007) also

examined that empathy has a significant impact on the customers’ satisfaction which makes them

happy with their financial service provider and subsequently plays an important role in

enhancing organization’s performance in terms of profitability through influencing customers’

repurchase intentions positively.

In view of the above discussion, it can be concluded that service quality is an important indicator

of customer satisfaction (Parasuraman, Zeithaml, & Berry, 1988; Spreng, & Mackoy, 1996;

Jamal, & Naseer, 2003). So financial institutions of 21st century should adapt superior service

quality practices in order to enhance customers satisfaction level and their loyalty to the

organization which is critical to be a leader in today’s dynamic and competitive corporate

environment.

2.5. Service Quality and Customer Loyalty

In banking sector of Pakistan, privatization and deregulation has boosted the competition among

the financial institutions to attract the potential customers. Today, every financial institution tries

to deliver superior quality services to make the customers happy and satisfied and subsequently

enhance their loyalty to the financial institution. To achieve competitiveness in the service

industry, a superior service quality is a key to success. Customers’ loyalty is influenced by their

perception about service quality and their trust on financial service provider (Parasuraman,

Zeithaml, & Berry, 1988; Aydin, & Özer, 2005). If a financial institution performs better than its

customers’ expectations before purchasing and utilizing the service or product, then it might be a

reason for customers’ satisfaction and loyalty. When a financial institution provides better

services to its customers, then these better services will enforce customer perception about

quality. Superior service quality is a core indicator to evaluate the performance of a service

provider particularly in banking industry. Customer trust and loyalty can be achieved by offering

superior quality services to them. These superior quality services will gain competitive

advantage for the financial institution and build a long term patterning relationship with

customers.
A study has been conducted in banking sector and found that customers also compare the

benefits of products and services with their cost and thereafter evaluate the consumption value

(Zeithaml, Parasuraman, & Berry, 1990). Customers’ loyalty and satisfaction can be raised by

increasing the customer’s perceived benefits, which in turn will help to retain the customers for

long period of time (Ravald, & Grönroos, 1996).

A loyal customer is one whose expectations are exceeded or met and he proactively refers others

to the service provider. The nature of the loyalty has been changed over time. In the word we are

livening it depends on the continuous provision of superior value to the customer. Griffin (1995)

stated that loyal customer makes regular repeat purchases across product or service lines and

refers the financial service provider to the others. But aggressive pricing policies may lure the

customers away from one survive provider to the other despite the fact that the first service

provider was providing excellent services (Heskett et al, 1997). Still relationship between service

quality and customer loyalty and subsequent impact of this on the profitability of the financial

institution has its own worth (Hallowell, 1996).

Many researchers such like Ruyter and Bloemer (1999), Oliva et al. (1992) and Anderson and

Mittal (2000) provided evidence regarding a significant relationship between service quality and

customer loyalty. Heskett, Sasser and Schlesinger (1997) also advocated a strong and direct

relationship between service quality and customer loyalty. Ruyter and Bloemer (1999) on the

other hand stated that service quality leads towards customer loyalty and especially in case the

satisfaction level of the customers is relatively high, it would be the most important factor of

customer loyalty. These higher levels of satisfaction and loyalty sometimes seem to be very

difficult to achieve in the service industry.

When studying with the other variables, service quality was found to be the most significant

variable affecting customer loyalty as Ruyter and Bloemer (1999) analyzed the impact of service

quality, mood and value attainment and found that service quality and value attainment have a

stronger impact on customer loyalty. However organizational researchers claim that customers

may switch from one financial service provider to another. Switching behavior is the tendency of

the customer to terminate the relationship with the existing service provider (Anderson, & Mittal,

2000) and it could occur due to many reasons.

Bitner, Booms and Tetreault (1990) explained that customer may switch due to factors such like

money constraints, out of habit, time limitations or access to unavailable information. Kesveney

(1995) on the other hand proposed eight factors that could cause customer loyalty and

subsequently switching behavior. These factors include pricing problems, inappropriate response

of service failure on the part of service provider, attraction of the offer made by competitor,

service encounter failures, core service failures, ethical issues, incontinence of the customer, and

changing of the market conditions. Switching costs are the costs associated with the switching

decision of the customer. These costs are born by the customer and are considered a barrier for

the customer to switch from existing service provider. Nandan (2005) provided that switching

costs include all the costs associated with the switching decision such like financial costs,

technical costs and psychological costs, which make it difficult for the customer to switch or

change the brand. Keller (1993) explains switching costs as the importance of the perceptions of

the customer regarding additional costs that are associated with ending up the relationship with

the existing service provider and establishing a relationship with the new one. Switching costs

could be of both monetary and non monetary nature while non monetary costs include

psychological implications, effort, time and risk taking, etc.

To consider switching cost while analyzing the customer loyalty is very much important because

high perceived switching costs may force the customer to remain with the current service

provider despite the fact that he is dissatisfied with the current service being provided to him. So

it is an important dimension that must be considered when studying customer loyalty.

The basic aim of any business is to promote and enhance customer loyalty. In words of Oliver

(1997) “customer loyalty is a strong and deeply held commitment of customers to repurchase

particular products or services in a consistent manner in future, irrespective of the market

conditions or influences”.

The service organizations particularly financial institutions are mainly concerned with their

profitability and growth and customer loyalty could contribute towards the profits of the

organization (Hayes, 2008) as customer loyalty not only ensure future repeat sale from the

customer (Chu, 2009) but also these loyal customers can be a good marketing tool and could

bring new customers and this thing can contribute significantly to the future success and

profitability of the organization. There is less likelihood that loyal customer would switch to new

service provider only because of price consideration, as loyal customers are willing to pay more

for the services provided to them. Moreover, loyal customers are expected to make more

purchases in comparison to the non loyal customers (Brown, & Shoemaker, 2003).

Loyal customers are the most important assets of the firm. Thus, it is the key success factor for

firms to retain loyal customers who contribute towards the profits of the organization in a

significant way in the long run (Sharp, & Sharp, 1997). Increased sales from the existing

customers are also a way to sustain the financial growth of the organization (Hayes, 2008) which

is o a larger extent is depended upon the retention of loyal customer force. Thus, a good

customer services manager must understand the importance of customer loyalty as the road to
success is built by the customers, which not only include new customers but also the old

customers who could easily be motivated to spend more and to spread words of the product and

services they are utilizing (Keiningham, Aksoy, Cooil, & Andreassen, 2008).

In service industry particularly in banking sector, superior quality services play an important role

in enhancing customer loyalty and their satisfaction level which is critical in boosting the

business and performance of the financial institutions in today’s competitive and market driven

system. Cronin, Brady and Hult (2000) provided that service quality is a drive of the customer

satisfaction and has impact on the loyalty intentions of the customer. Sureshchandar, Rajendran

and Anantharaman (2002) also found a string relationship between service quality and customer

loyalty. Oliver (1997) addressed the issue by entailing that perceived service quality is an

antecedent to the customer satisfaction and loyalty. Same findings were provided by Spreng and

Mackoy (1996), Bitner (1990).

The relationship between service quality and customer satisfaction has been assessed by Cronin

and Taylor (1992) who focus on the repurchase intentions as determinant of the customer

loyalty. This study did not yield significant relationship among service quality and customer

loyalty. Bitner (1990) on the other hand considered willingness to recommend along with

repurchase intentions as dimensions of the customer loyalty and found a significant and positive

impact of the service quality on the both dimensions of customer loyalty. A similar finding was

provided by Wong and Sohal (2003), Bloemer, Ruyter and Pascal (1998) and Ehigie (2006).

Most of the researchers agree that service quality provides behavioral outcomes such like word

of mouth, recommendation and switching. Organizational researchers suggested that customer’s

perceived benefits can be increased by making and implementing different value added superior

service quality strategies. These value added strategies retain the customer and build a long term
relationship between customer and the service provider (Ravald, & Grönroos , 1996). The

satisfied customer will increase his trust in the service and that would give a boost to customer’s

loyalty.

The most famous measure of the service quality is SERVQUAL model which was developed by

Parasuraman, Zeithaml and Berry (1988), which measures service quality through five

dimensions i.e. reliability, responsiveness, tangibles, empathy and assurance. This study also

examines the impact of various service quality dimensions on customer loyalty and its influence

on financial service provider.

2.5.1. Tangibles and Customer Loyalty

Tangibles are the things which can be seen and touched. Bitner and Zeithaml, (2003) defined

tangibles in the service quality context as equipments, physical facilities and their appearance,

communication materials and personnel of the organization. The customer in this regard assesses

the quality and usability of the tangibles used by the organization to provide the service and help

customers. Organizational researchers claim that tangible part of services play very important

role in enhancing customer loyalty and subsequently influences their repurchase intensions.

Jabnoun and Al-Tamimi (2003) found that well furnished financial institutions enhance customer

loyalty through tangible dimension of superior quality services. Zineldin (2005) examined the

association between service quality and customer loyalty in banking sector of Sweden and found

that a financial institution can create a strong and long term relationship with their customers by

providing a set of tangible and intangible elements of superior quality products and services.
2.5.2. Reliability and Customer Loyalty

Bitner and Zeithaml, (2003) defined reliability as the ability of a service provider to provide

promised service accurately and dependably. The customer wants the trustable service on which

they can rely on. Organizational researchers claim that reliability is one of the most popular and

strong predictors of service quality besides good service staff along with right staff attitude, basic

knowledge and skills (Walker, 1990).

Berry and Parasuraman (1991) stated that reliability of services is the outcome of continuous

improvement and it significantly enhances customer loyalty and makes them happy and satisfied

with the services of the financial institutions. Similarly in another research study, it was

examined that reliability of services delivered by the financial institutions is the service “core” to

most present and prospective customers. So the customer services managers should utilize every

opportunity to develop a “do-it-right-first” attitude in order to improve organizational

performance through satisfied and loyal customer base (Berry, Zeithaml, & Parasuraman, 1990).

2.5.3. Responsiveness and Customer Loyalty

Bitner and Zeithaml, (2003) explained responsiveness as the willingness to serve the customer

with prompt service. The service provider must remain ready to serve customer anytime happily

and willingly. This dimension of service quality indicates the willingness of customer services

staff to provide prompt and quick financial services in a quality oriented manner. It has been

witnessed that customers are very sensitive to staff’s working environment in service industry,

particularly in banking sector (Brown, & Mitchell, 1993).

Sureshchandar, Chandrasekharan, and Anantharaman (2003) conducted a research study in

Malaysian banking sector to investigate the relationship between service quality and customer
loyalty and found that responsiveness is the strongest dimension of service quality. In another

research study it was found that proper communication, prompt delivery of services and effective

and efficient conflict handling results in highly satisfied customer base which subsequently

enhances their loyalty to the financial service provider (Nelson, 2006).

2.5.4. Assurance and Customer Loyalty

Assurance depends upon the knowledge and courtesy of the employees and their ability to impart

confidence and trust (Bitner, & Zeithaml, 2003). This dimension of service quality reflects that

services staff’s knowledge, expertise, courtesy, basic skills and ability to convey trust and

confidence to the present and prospective customers.

Service quality is also deeply linked to customer loyalty as how services staff utilize their job

knowledge, skills and abilities (KSAs) along with courtesy to effectively incorporate trust and

confidence. Bitner (1990) stated that assurance dimension of service quality has a much stronger

impact on customer loyalty than other service quality dimensions which subsequently enhances

their satisfaction level and improves the performance of the financial institution.

In another research study, the association between service quality and customer loyalty was

examined in the context of Malaysian banking sector and found that trust and commitment are

important predictors of customer loyalty (Nelson, 2006).

2.5.5. Empathy and Customer Loyalty

Empathy is caring the customer by providing him individualized attention (Bitner, & Zeithaml,

2003). It is the listening to the problems of the customers and providing attention to his concerns

and demands. This dimension of service quality indicates the magnitude of individual care and

attention given to different customers. In service industry, particularly in banking sector

individual care and attention is crucial for having a loyal customer base due to stiff competition

(Jabnoun, & Al-Tamimi, 2003). It is suggested that services staff’s commitment to deliver

superior quality services along with effective handling of conflicts in a consistent manner results

in a loyal customer base for long term benefits (Nelson, & Chan, 2005).

Malhotra, Francis, James, Shainesh and Lan (2005) investigated the differences in customers’

perceptions regarding various service quality dimensions between developing and developed

countries and found that in developing countries like India and Pakistan results were

significantly different as compared to developed countries. It was found that empathy is a least

preferred dimension of service quality in view of customers of financial institutions of Pakistan.

On the other hand, Parasuraman, Zeithaml and Berry )1991) examined that reliability of services

delivered by the financial service providers is highly concerned with service outcome while other

dimensions of service quality are limited to the service process only. Leeds (1992) reported that

service quality mainly depends upon the friendly and effective dealings of customer services

staff. It was found that approximately 40% of the customers switched from one financial service

provider to another due to poor services and nearly three quarters customers of financial

institutions gave the highest preference to tellers' courtesy. Moreover, customers of private

financial institutions have much higher perceptions and expectations as compared to the public

financial institutions (Kangis, & Voukeates, 1997).

In view of the above discussion, it can be concluded that customer’s perceived sacrifice is

reduced through giving value to them i.e. superior quality servies according to their point of view

(Wilson, 1979). The product or service, that customer perceives essential, must add something

of valuable and beneficial in order to increase the customers benefits. It is suggested that

customer satisfaction, trust and loyalty can be achieved in service industry particularly in
banking sector only by giving them special value added offers and superior quality services

which subsequently improves the performance of financial institutions in today’s competitive

and dynamic corporate environment.

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