Table of Contents

Abstract................................................................................................................. 2
Introduction........................................................................................................... 2
Literature Review................................................................................................... 3
Conceptual Frame Work......................................................................................... 4
Service Quality................................................................................................... 4
Tangibles......................................................................................................... 5
Reliability......................................................................................................... 5
Assurance........................................................................................................ 5
Empathy.......................................................................................................... 5
Customer Satisfaction........................................................................................ 6
Customer Loyalty................................................................................................ 6
Service Quality and Customer Satisfaction.........................................................6
Tangibles and Customer Satisfaction...............................................................7
Research Objectives.............................................................................................. 7
RESEARCH METHODOLOGY.................................................................................... 7
Data Collection Procedure:.................................................................................... 8
Hypotheses............................................................................................................ 8
Limitations............................................................................................................. 8
Test analysis and Results....................................................................................... 9
RESULTS AND DISCUSSION.................................................................................. 16
Conclusion........................................................................................................... 16
References........................................................................................................... 17

1 | Page

Impact of Service Quality on Customer

Perception
Abstract
Service quality has become a very important issue in marketing and has
received much attention and thus increased competition among the
banking sectors. The above point clearly defines that every organization
should think about the next rather than to be improved. Firm could have a
very good growth along with the profit only if they are practicing
distinctive marketing technique and appropriate strategy as there is no
warranty for business companies to survive and only through the loyal
customers. In todays competition perspective, customers have to make a
choice among various service providers by making a trade-off between
relationship and economies. Hence, measurement of service quality with
customer emotions is thus very important and the consistent delivery of
superior service is the key factor for the customer satisfaction and loyalty.
To upkeep these parameters, quality in service would be the pioneer in
any organization. Even in this study, the primary aim is to investigate
whether the quality in service is having a significant role in customer
perception.
The objective of this paper is to determine whether there indeed is an
impact of service quality on satisfaction of retail banking customers.

Introduction
Banks are key players in financial markets operations and play an
important role in keeping a countrys economy running smoothly. In
todays highly competitive corporate environment, quality of services is an
essential element for enhancing customer satisfaction and customer
loyalty. These are important factors in improving the performance of
banks and in determining their success, i.e. better profitability and a
bigger market share.
Privatization of banking sector in Pakistan during the past few decades
has resulted in higher customer expectations. Now customers demand
better quality services from financial institutions. It has boosted the
competition among various commercial banks particularly those in private
sector. This motivates them to deliver premium quality services to their
customers in order to gain competitive advantage i.e. more satisfied and
loyal customers.
The premise of service quality as a tool for gaining competitive
advantage and lead in a market-driven system has been well recognized
by the financial institutions. However in current highly competitive

2 | Page

corporate environment it has become increasingly important to not only

become the market leader but also to maintain that top position.
Researchers all over the globe claim that offering quality services give a
sustainable competitive advantage to any business. It enables them to
fulfill not only the present needs of their customers satisfactorily but also
to anticipate their future needs. This ability to anticipate the future needs
of customers allows them to delight their customers through quality
services on consistent basis.
Banks must consider various antecedents (tangibles, reliability, assurance
and empathy) of service quality in order to have delighted customers and
to enhance their performance and profitability. Although much empirical
evidence could be found in the literature worldwide investigating the
relationship between service quality and customer loyalty, this domain
has not been much considered in Pakistans context. A lot of research on
service quality and its association with customer satisfaction and loyalty
has been conducted in developed countries. Therefore, this study
contributes to the literature by studying this phenomenon in the banking
sector of a developing country i.e. Pakistan.
Banking institutions across the globe have recognized the importance of
customer satisfaction and of developing and maintaining enduring
relationship with their customers as two crucial parameters leading to
increased business profits. At the same time, several banking institutions
are experiencing increasing level of retail customer dissatisfaction.
Research suggests that customer dissatisfaction is still the major reason of
bank customers switch to other banks (Manrai and Manrai, 2007). This
dissatisfaction could be because of a variety of reasons.
Excellent service quality is not an optional competitive strategy which
may, or may not, be adopted to differentiate one bank from another:
today it is essential to corporate profitability and survival. The link
between service quality and customer satisfaction has been submitted to
intense scrutiny by leading service quality researchers (Bitner and
Hubbert,1994; Bolton and Drew, 1994), as well as the links between
quality, customer satisfaction, customer retention and profitability
(Storbacka et al., 1994). The connection between service quality and
corporate profitability is now seen to depend on high levels of customer
satisfaction, the successful targeting of quality customers and the
retention of those customers.

Literature Review
Service Quality is a qualitative factor that is extremely difficult to
standardize. However, most studies in this area have concluded that
service quality has a definite relevance on customer satisfaction. .
3 | Page

Mohammed Belal Uddin & Bilkis Akhter (2011) in a study conducted in

Bangladesh found that service quality and fair service charge both have
direct positive influence on customer satisfaction. Kotler & Armstrong
(1999), defined customer satisfaction as customers perception that
compare their pre-purchase expectation with post purchase perception.
Gaura Nautiyal & Banarsidas Chandiwala (2014) in a study conducted in
New Delhi assessed service quality based on five dimensions namely,
tangibility, reliability, responsiveness, assurance and empathy determined
that all the five dimensions considered in their study exhibited a positive
correlation with customer satisfaction, indicating an expected change in
the same direction. However the impact of Tangibility and Reliability on
customer satisfaction was of little statistical significance. Rashed Al Karim
& Tabassum Chowdhury (2014) in Bangladesh corresponds to this view by
stating that out of five service quality dimensions i-e tangibility, reliability,
responsiveness, assurance and empathy, Tangibility is having a high Mean
score and the bank should concentrate on Responsiveness as it has the
least mean score.
F. Amiri Aghdaie & F. Faghani (2012) while taking research on Mobile
Banking Service Quality and Customer Satisfaction in Isfahan, Iran
concludes that increase in service quality of the mobile banking can
satisfy and develop customer satisfaction that ultimately retains valued
customers. Dr. Snehal kumar H Mistry & Professor C.K.Pithawalla (2013)
while measuring Customer Satisfaction in Banking Sector in Surat city
provides evidence that the SERQUAL dimensions are useful tool to predict
over all service performance of banks. Further they have found in their
study that a customer gives highest impotence to reliability,
responsiveness and assurance. Ghalib Sanjuq & Al Imam ibn Muhammad
ibn Saud (2014) in their research The Impact of Service Quality Delivery
on Customer Satisfaction in the Banking Sector in Riyadh, Saudi Arabia
determined that, In order to retain customers, organizations must ensure
that they provide their customers with the right products and services at
the right time.
Tran Van Quyet, Nguyen Quang Vinh and Taikoo Chang (2015) in Thailand
founded that all five factors were positively related to customer
satisfaction. However, reliability had only partial support, indicating a
need to improve reliability for VCBs wishing to be more competitive in the
market. A. Rasheed*, Masoumeh F. Abadi (2014) while studying customer
loyalty in Malaysia found that good service quality could cause customer
perceived value and trust and customer perceived value and trust lead to
increasing loyal customer. Manilall Dhurup Vaal & Jhalukpreya Surujlal
South Africa (2014) concludes that an understanding of the dimensionality
and relative importance of the service attributes of online banking service
quality is of crucial importance to banks.

4 | Page

Conceptual Frame Work

The impact of service quality on customer satisfaction and customer
loyalty in the context of banking sector is a widely discussed topic in the
literature. This section targets popular journals, magazines and various
text books that contain fruitful information on various service quality
dimensions as well as customer satisfaction and customer loyalty.

Service Quality
Services are a continuous process of on-going interactions between
customers and service providers comprising a number of intangible
activities provided as premium solutions to the problems of customers and
including the physical and financial resources and any other useful
elements of the system involved in providing these services (Grnroos,
2004).
Premium service quality is a key to gain a competitive advantage in
services industry. The satisfaction level of customers is dependent on their
perception of service quality and the trust in service provider (Ismail et al.,
2006; Aydin & zer, 2005; and Parasuraman et al., 1988). By providing
better quality services to customers, a firm revives the perception of
customers about quality of services.
Particularly in banking industry, premium service quality plays a pivotal
role for customers in evaluating the performance of a service provider and
is the key to gain customer satisfaction and customer loyalty. A bank can
gain competitive advantage and build long term relationship with its
customers by providing premium quality services.
Several evidences found in literature establish that there is a significant
correlation between service quality and customer satisfaction
(Sureshchandar et al., 2002; Boulding et al., 1993; and Bitner, 1990).
While Spreng and Mackoy (1996) provided evidence of the significant
correlation between service quality and customer loyalty.
SERVQUAL scale, developed by Parasuraman et al., (1988), is the most
famous measure of service quality. It classifies and measures service
quality in five dimensions. We have taken four out of these i.e. tangibles,
reliability, assurance and empathy.
SERVQUAL scale has been the most widely used measure of service
quality. In many private research studies SERVQUAL has been
constructively deployed (Parasuraman et al., 1991). Moreover several
published research studies have positively discussed the SERQUAL
framework (Crompton & Machay, 1989; Webster, 1989; Woodside et al.,
1989; and Johnson, 1988) and have assessed the validity and reliability of
this measure (Babakus & Boller, 1991; Brensinger & Lambert, 1990; and
Finn & Lamb, 1991). Furthermore following the criticism on SERVQUAL
scale, proper refinements were made to it (Parasuraman et al., 1991, pp.
115-117).
5 | Page

A brief explanation of these dimensions is given below.

Tangibles
Those things which have a physical existence and can be seen and
touched. In context of service quality, tangibles can be referred to as
Information and Communications Technology (ICT) equipment, physical
facilities and their appearance (ambience, lighting, air-conditioning,
seating arrangement); and lastly but not least, the services providing
personnel of the organization (Blery et al., 2009). These tangibles are
deployed, in random integration, by any organization to render services to
its customers who in turn assess the quality and usability of these
tangibles.
Reliability
Reliability means the ability of a service provider to provide the committed
services truthfully and consistently (Blery et al., 2009). Customers want
trustable services on which they can rely.
Assurance
Assurance is developed by the level of knowledge and courtesy displayed
by the employees in rendering the services and their ability to instill trust
and confidence in customer (Blery et al., 2009).
Empathy
Empathy means taking care of the customers by giving attention at
individual level to them (Blery et al., 2009). It involves giving ears to their
problems and effectively addressing their concerns and demands.

Customer Satisfaction
Satisfaction is a feeling that surfaces from an evaluation process, i.e.
when the consumer of a good or service compares what is received
against what is expected from the utilization of that good or service
(Kotler et al., 2009).
The following criteria are laid down by Liu et al. (2008) for measuring the
satisfaction level of customers regarding purchase and subsequent
consumption of goods or services: Satisfaction: The perception
developed by the customers that the goods or services are acceptable or
tolerable. Content: The features of goods or services and the underlying
benefits gives customer a positive consumption experience. Relived:
The alleviation of the negative state of customers mind of by the goods or
services provided. Novelty: The goods or services bring freshness and
excitement in customers. Surprise: The amazement and unexpected
pleasure brought to people by goods or services consumed.
Additionally, studying the different phases of the customer relationship
life-cycle highlights important issues and helps to depict the level of
customer satisfaction at each phase. It also helps to emphasize on specific

6 | Page

customer needs and expectations at each stage of the relationship

(Ravald & Grnroos, 1996). Customer satisfaction signifies the relationship
between customer and service provider. It brings about customer loyalty
and incites a long term relationship between both sides.

Customer Loyalty
Heskett et al., (1994) suggested that customer loyalty motivates
customers for repeat purchases and persuade them to refer those
products or services to others. Duffy (2003) proposed that customer
loyalty is a feeling of association which a customer has towards a brand.
This feeling incites customer for acquiring a good or service repeatedly.
Subsequently this generates sizeable and better financial outcomes for
the firm.
Customer loyalty is formed under the six assumptions mentioned below:
1) It is a function of psychological processes; 2) It involves bias (which is
random); 3) It involves some decision making unit; 4) May relate to some
alternative brands; 5) Behavioral response (the final purchase); and 6) It is
expressed over time (post-purchase behavior).
Generally, every banking company aims at earning profits, expanding its
business by offering more diversified products or services over time and
capturing a larger market share progressively. Customer loyalty can
favorably contribute towards this basic aim of the banks (Hayes, 2008) as
it is an effective tool for generating repeat sales from the customers (Chu,
2009). Furthermore these loyal customers can serve as effective elements
in the marketing mechanism when they refer their bank to more people. In
this way these existing customers contribute towards increasing their
respective bankscustomer base and market share. The financial base of
any bank is largely dependent on this phenomenon.

Service Quality and Customer Satisfaction

In banking industry, service quality is one of the most important aspects
of the premium customer experience. Most organizations monitor their
services quality on a regular basis to ensure maximum customer
satisfaction and to improve customer retention and loyalty. Customer
satisfaction is attained by properly meeting the customer demands and
expectations and providing services which are up to the market standards
(Gitomer, 1998). A positive consumption experience of the customer
ensures that overall his feelings for the products or services consumed are
positive. However customer satisfaction does not guarantee repurchase,
customer retention, or loyalty.

7 | Page

Service quality has been suggested as a strong predictor of customer

retention and customer satisfaction by many organizational researchers.
Service quality is a drive of the customer satisfaction that impacts
customer loyalty (Cronin et al., 2000).
Service quality is a key factor for customer satisfaction. It is an important
tool for banks for augmenting their income and market share (Muyeed,
2012)

Tangibles and Customer Satisfaction

Jabnoun and Al-Tamimi (2003) found that banks with better ambience
enhance customer satisfaction in a better way. Association between
service quality and customer satisfaction in banking sector of Sweden is
examined by Zineldin (2005). He found that by combining tangible and
intangible attributes of premium quality in products and services provided
by banks, they may create a strong and long-term relationship with their
customers.
This service quality dimension comprises of bank ambience, service
equipment, human resources (staff) and the means of communication. In
simple words tangibles are about creating foremost impressions. All
organizations desire that their consumers get an exceptional and positive
foremost impression. Focusing on this particular dimension will help them
to gain maximum benefit.
Customer base and market share. The financial base of any bank is largely
dependent on this phenomenon.

Research Objectives
1) To exhibit the profile of the Customers.
2) To study the variance in the variables constructed for this study using
factor analysis.
3) To study Customer Perception on five-service quality dimensions of
SERVQUAL scale.
4) To analyze the association between the demographic and service
quality variables.

8 | Page

5) To identify the Service quality gap between customers expectation and

perception using SERVQUAL scale.

RESEARCH METHODOLOGY
In order to fulfill the proposed research objectives, this empirical research
was carried out with the primary data collected through a well-designed
questionnaire which has two parts. The first part contains the
demographic details like Status of age, gender, educational qualification,
occupation and frequency of visit to bank and the second part contains
fifteen items compiled with service quality variables Tangibility, Reliability,
Responsiveness, Assurance, and Empathy. All these variables were
measured with 5-point Likert type scale ranging from 1- Strongly Disagree
to 5- Strongly Agree. Convenient sampling was carried out and the
questionnaire was personally administered with 150 customers by
explaining the purpose of this survey. In order to understand better, the
questionnaire was framed in English and also in the respective local
language so that customers can get understandable information about its
content.

Data Collection Procedure:

A 15 item questionnaire was prepared which has been primarily adapted
from Asia Pacific Journal of Marketing & Management Review__ ISSN 23192836 Vol.2 (7), July (2013) and is based on SERVQUAL. Service quality
was assessed based on five dimensions namely, tangibility, reliability,
responsiveness, assurance and empathy. A 5- point likert scale where
1=strongly agree, 2=agree, 3=no opinion, 4=disagree, and
5=strongly disagree.

Hypotheses
We considered the following hypothesis in our study:

H0: Service quality has negative effect on customer satisfaction

in banking services.
H1: Service quality has positive effect on customer satisfaction in
banking services.

Service Quality is based on five dimensions namely, tangibility,

reliability, responsiveness, assurance and empathy.

9 | Page

Limitations
This study has certain limitations. Firstly, we did not consider control the
variables of socio-demographic variables. Secondly, the questionnaires
were only administered to respondents in Jhelum, Dina, Gujarkhan and
Gujrat; future studies could be extended to a wider population.

Test analysis and Results

Chi-Square Test
Frequencies
Account
Observed N

Expected N

Residual

current

82

50.0

32.0

saving

64

50.0

14.0

Fixed

50.0

-46.0

Total

150

bank.visit
Observed N

Expected N

Residual

Daily

11

37.5

-26.5

once a week

12

37.5

-25.5

Twice a week

16

37.5

-21.5

onec a month

111

37.5

73.5

Total

150

REL1
Observed N

Expected N

Residual

Disagree

37.5

-33.5

No Opinion

12

37.5

-25.5

Agree

100

37.5

62.5

Strongly Agree

34

37.5

-3.5

Total

150

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REL2
Observed N

Expected N

Residual

No Opinion

50.0

-42.0

Agree

105

50.0

55.0

Strongly Agree

37

50.0

-13.0

Total

150

Observed N

Expected N

Residual

No Opinion

60

50.0

10.0

Agree

68

50.0

18.0

Stronglly Agree

22

50.0

-28.0

Total

150

Observed N

Expected N

Residual

No Opinion

50.0

-45.0

Agree

102

50.0

52.0

Strongly Agree

43

50.0

-7.0

Total

150

Observed N

Expected N

Residual

Disagree

10

37.5

-27.5

No Opinion

40

37.5

2.5

Agree

31

37.5

-6.5

Strongly Agree

69

37.5

31.5

Total

150

REL3

RES1

RES2

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RES3
Observed N

Expected N

Residual

Strongly Disagree

71

30.0

41.0

Disagree

15

30.0

-15.0

No Opinion

16

30.0

-14.0

Agree

36

30.0

6.0

Srongly Agree

12

30.0

-18.0

Total

150

AS1
Observed N

Expected N

Residual

Disagree

37.5

-35.5

No Opinion

37.5

-34.5

Agree

98

37.5

60.5

Strongly Agree

47

37.5

9.5

Total

150

Observed N

Expected N

Residual

No Opinion

50.0

-46.0

Agree

53

50.0

3.0

Srongly Agree

93

50.0

43.0

Total

150

Observed N

Expected N

Residual

No Opinion

50.0

-45.0

Agree

125

50.0

75.0

Srongly Agree

20

50.0

-30.0

Total

150

AS2

AS3

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EMP1
Observed N

Expected N

Residual

Disagree

37.5

-30.5

No Opinion

40

37.5

2.5

Agree

58

37.5

20.5

Strongly Agree

45

37.5

7.5

Total

150

EMP2
Observed N

Expected N

Residual

Strongly Disagree

21

30.0

-9.0

Disagree

43

30.0

13.0

No Opinion

27

30.0

-3.0

Agree

48

30.0

18.0

Strongly Agree

11

30.0

-19.0

Total

150

Observed N

Expected N

Residual

Strongly Disagree

30.0

-26.0

Disagree

41

30.0

11.0

No Opinion

14

30.0

-16.0

Agree

56

30.0

26.0

Strongly Agree

35

30.0

5.0

Total

150

EMP3

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TANG1
Observed N

Expected N

Residual

No Opinion

50.0

-44.0

Agree

106

50.0

56.0

Strongly Agree

38

50.0

-12.0

Total

150

Observed N

Expected N

Residual

No Opinion

50.0

-47.0

Agree

35

50.0

-15.0

Strongly Agree

112

50.0

62.0

Total

150

Observed N

Expected N

Residual

Disagree

37.5

-33.5

No Opinion

67

37.5

29.5

Agree

39

37.5

1.5

Strongly Agree

40

37.5

2.5

Total

150

TANG2

TANG3

Test Statistics
RES RES RES
REL1 REL2 REL3
ChiSquare
Df
Asymp

EMP EMP EMP TANG TANG TANG

AS1

AS2

AS3

151.7 99.16 24.16 95.56 47.92 82.06 165.3 79.48 171.0 37.68 31.46 58.46 104.3 125.5 53.36
60a

0b

0b

0b

0a

7c

60a

0b

00b

0a

7c

7c

20b

60b

0a

.000 .000 .000 .000

.000

.000

.000

.000 .000 .000 .000 .000 .000

.000 .000

. Sig.
a. 0 cells (.0%) have expected frequencies less than 5. The minimum expected cell frequency is 37.5.
b. 0 cells (.0%) have expected frequencies less than 5. The minimum expected cell frequency is 50.0.
c. 0 cells (.0%) have expected frequencies less than 5. The minimum expected cell frequency is 30.0.

14 | P a g e

Chi-Square Tests
Value

Df

Asymp. Sig. (2sided)

Pearson Chi-Square

12.511a

0.039

Likelihood Ratio

14.136

0.078

Linear-by-Linear
Association

6.076

0.014

N of Valid Cases

150

7 cells (46.7%) have expected count less than 5. The minimum expected count is
1.19.

By applying Pearson Chi-Square test, it was observed that the chi-square value was 12.511a
and Asymp. Significant value was 0.039 which was found less than the critical value for this
study (p=0.05). Hence, H0 was rejected and revealed that there was significant relationship
between service quality and custome satisfaction.

Reliability

Case Processing Summary

N
Cases

Valid

%
150

100.0

.0

150

100.0

Excludeda
Total

a. Listwise deletion based on all variables in the

procedure.

Reliability Statistics
Cronbach's Alpha

N of Items
.776

15

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Reliability statistics: service quality expectations and

perceptions
Reliability statistics: service quality expectations and perceptions
Service Quality Dimensions:
Service Quality Dimensions: Perception
Expectation
Cronbach's Alpha
N of Items
Cronbach's Alpha
N of Items
0.954
27
0.867
27

Test for sampling adequacy for service quality in

banking sector
KMO and Bartlett's Test
Kaiser-Meyer-Olkin Measure of Sampling
Adequacy
Approx. Chi-Square
Bartlett's Test of
DF
DF
Sphericity

0.863
2.048E3
351
0.000

Descriptive Statistics
Descriptive Statistics
N

Mean

Std. Deviation

Minimum

Maximum

REL1

150

4.0600

.70692

2.00

5.00

REL2

150

4.1933

.51418

3.00

5.00

REL3

150

3.8200

.66625

3.00

5.00

RES1

150

4.2667

.53928

3.00

5.00

RES2

150

4.1467

.90773

2.00

5.00

RES3

150

2.4200

1.48039

1.00

5.00

AS1

150

4.2467

.55486

2.00

5.00

AS2

150

4.6333

.51052

3.00

5.00

AS3

150

4.1467

.42389

3.00

5.00

EMP1

150

3.9267

.80349

2.00

5.00

EMP2

150

3.0533

1.18030

1.00

5.00

EMP3

150

3.5267

1.12743

1.00

5.00

TANG1

150

4.1933

.51418

3.00

5.00

TANG2

150

4.6533

.51796

3.00

5.00

TANG3

150

3.7800

.85035

2.00

5.00

16 | P a g e

RESULTS AND DISCUSSION

Analysis of the demographic data shows that out of the 150 valid respondents,
148, i.e. 77%, were male and 23% were female. On the other hand the above
results shows that there is positive correlation between each of the five
dimensions of service quality and customer satisfaction. Assurance and Empathy
indicated the highest correlation with customer satisfaction. The remaining three
dimensions, Tangibility, Reliability and Responsiveness indicated a relatively
moderate degree of positive correlation with customer satisfaction.

Conclusion
All of the components in a service quality program assurance, empathy,
reliability, tangibles, and customer satisfaction should be followed and
implemented effectively. Managers should not focus on the banks profit-related
objectives, but must also look at the needs of the banks customers. From
Analysis it was found that a customer gives second importance to
responsiveness of bank employees. It includes various criteria like, promptness in
giving service, willingness to help customers etc. Customer gives third
preference to assurance factor, it include criteria like safety of transaction,
consistency in service etc. So, banks whether they are private sector bank or
public sector bank they should give more focus on increasing reliability,
responsiveness and assurance. For that they can give training to their employee
which will help them to give personalized service. It will also help to implement
empathetic approach.

17 | P a g e

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