1

Chapter I Introduction 1.1. Background The word bank characteristically refers to institutions providing deposit facilities to general people. Technically, a bank is a financial institution whose primary activity is to act as a payment agent for customers and to borrow and lend money (BankWikipedia). According to Woelfel (1993, p. 69), a modern bank is an institution responsible for receiving, collecting, transferring, paying, lending, investing, dealing, exchanging and serving money and claim to money both locally and internationally. Banks earn maximum returns from this intermediation in the means of interest. Banks charge higher interest on loans to envelop all the expenses, cost of fund and profit for the owners. Banks act as payment agents by conducting checking or current accounts for customers, paying check drawn by customers on the bank, and collecting checks deposited to customers' current accounts. Banks also enable customer payments via other payment methods such as Automated Clearing House (ACH), Wire Transfers or telegraphic transfer, and automated teller machine (ATM). Banking industries are mostly customer driven and their survival in competitive environment largely depends on quality of the service provided by them. In this context, quality of service furnished by banking sector is very important and profitability of their business is closely connected to the quality of service they render (Zahorik and Rust, 1992). Businesses seeking to improve profitability are, thus, advised to monitor and make improvements to their service quality on an ongoing basis (Gerrard and Cunningham, 2005). The near-collapse of the global financial system has left bankers searching for a profitable path forward in a permanently altered competitive landscape. Public trust in financial services companies has sunk to historic lows, underscoring the need for commercial bankers to repair badly damaged customer relationships. To do this, banks need to rethink deeply entrenched business practices. It is always costly to attract new customers, so the managers always try to find ways to retain their current customers and concentrate on different factors which enhances the customer loyalty among the customers of the organizations. Loyal customers are always considered an asset for any business. Success of a service provider depends on the high quality relationship with customers (Panda, 2003) which determines customer satisfaction and loyalty (Jones, 2002 as cited by Lymperopoulos

et al., 2006). Customers are the lifeblood of any business. Organizations can't afford to lose themand their repeat businessto the open arms of their competition. Research has shown repeatedly that service quality influences organizational outcome such as performance superiority (Poretla & Thanassoulis, 2005), increasing sales profit (Levesque & Mc. Dougal, 1996) and market share (Fisher, 2001), improving customer relations, enhance corporate image and promote customer loyalty (Newman, 2001; Caruana, 2002; Ehigie, 2006). Furthermore, service quality and customer satisfaction were found to be related to customer loyalty through repurchase intentions (Levesque & Mc. Dougall, 1996). Delivering quality service to customers is a must for success and survival in todays competitive banking. In accordance with Cahill (2007:6), the concept of customer loyalty was given much attention at the beginning of the 1990s when this topic was especially popular with business and marketing researchers. That period was marked by a growing degree of rivalry in the global market when companies attempted to develop efficient methods and techniques aimed at customer retention. Customer loyalty may be defined as a consumer behavior, built on positive experience and value, which leads to buying products, even when that may not appear to be the most rational decision (Kincaid, 2003:10). Peppers and Rogers (2004:57) differentiated between two types of customer loyalty concepts, namely behaviouristic and neo-behaviouristic. The behaviouristic approach to customer loyalty implies viewing and analyzing evident consumer behavior and purchase intentions, whereas the neobehaviouristic approach implied greater focus on loyalty causes and customer attitudes to the provided goods and services (Peppers and Rogers, 2004:57). As argued by Schweizer (2008:8), the contemporary understanding of customer loyalty incorporates two main dimensions of the concept, namely actual behavior and customer intentions. Even though the topic has been widely studied in the past, relatively little attention has been paid to customer loyalty in the context of the banking industry after the economic recession of 2008-2009. Though various types of classical banking facilities were provided by different governments in the past, the introduction of modern banking was made in Nepal only after the establishment of Nepal Bank Limited in 1994. In Nepal there are total of 31 commercial banks which run under the direct supervision of Nepal Rastra Bank. Nepal Rastra bank defines: Bank means a corporate body incorporated to carry on financial transactions. Along with the financial transaction banks are involved in

providing various services that help in facilitating the transaction. In the process of providing state of the art, Himalayan Bank Ltd. first introduced the Automated Teller Machine (ATM) and tele-banking services. Since then there has been continuous upgradation of facilities to the customers. Through these, banks hope of retaining their customers. According to Portela & Thanassolis, (2006), not only empirically studies of the relationship between service quality and customer loyalty in banking system are limited, but also the existing studies on bank branches efficiency in general do not account for the changing role of bank branches. Service quality is of utmost importance in analyzing the performance of bank branches, since their survival depends on their service quality levels they provide (Portela & Thanassolis, 2006). Excellence in service quality is a key to achieve customer loyalty which is the primary goal of business organizations, due to the advantages of customer retention (Ehigie, 2006). Today, the increasing awareness among bank customers of their rights, changing demands and highly competition requires constant progress in service quality from the bank for their customers to stay loyal. Some specific places of Kathmandu have been chosen for this research due to its centricity for Economical activities which requires active banking transactions.

1.2

Objective:

The general objective of the study is to test whether the bank customers are happy with the services provided to them, which will eventually lead to customer loyalty. The specific objective of the research are highlighted as under To see the effect of tangibles in customer loyalty and customer satisfaction. To see the effect of reliability in customer loyalty and customer satisfaction. To see the effect of responsiveness in customer loyalty and customer satisfaction. 1.2 To see the effect of empathy in customer loyalty and customer satisfaction. To see the effect of assurance in customer loyalty and customer satisfaction. Research question:

The aim of this research is to examine the main antecedents of customer loyalty. The major queries that the research will try to answer are: What effect will tangibles have in customer loyalty and satisfaction? What effect will reliability have in customer loyalty and satisfaction? What effect will responsiveness have in customer loyalty and satisfaction? What effect will empathy have in customer loyalty and satisfaction? What effect will assurance have in customer loyalty and satisfaction?

1.2

Conceptual Framework

Responsivenes Assuranc Customer Reliabilit Tangible Empath Customer Satisfaction Loyalty y e s

Source: Parasuraman et al.,

1.3

Operational definition: Tangible: Physical facilities, equipment and appearance of personnel. Reliability: Ability to perform the promised services dependability and accuracy. Responsiveness: Willingness to help customers and provide prompt service. Assurance: Knowledge and courtesy of employees and their ability to inspire trust and confidence. Empathy: Caring individualized attention the firm provides its customers. Source: Parasuraman et al., 1985

1985

1.2

Significance of the study:

Nepalese economic market has been ever increasing. Banks plays a significant role in the development of the economy. Apart from this, the competitions among the commercial banks are also increasing. Banking as a service industry, is fundamentally hinged on trust, sustained by attitude and managed by complex financial management skills and psychology of human relations. The more the customer trusts, the service provider as research indicates, the higher the perceive value of the relationship (Walter, Holzle, & Ritter, 2002). The research hopes to make important contribution in the field of customer loyalty and explain the relationship among the services and other facilities provided by Nepalese commercial bank with the customer loyalty. According to Gounaris (2005), the quality of bank service is influenced indirectly by trust. Although, trust is the cornerstone of the banking industry, the perceptual factors influence the customers choice of bank. The emergence of new forms of banking channels such as Internet banking, Automated Teller Machines (ATM), phone banking and also maturing financial market and global competition have forced bankers to explore the importance of customer loyalty. This research intends to help the service providers to better understand the service expectation and perception of consumers and, as a result, improve services (Parasuraman et al., 1988). The banking industry is highly competitive, with banks not only competing among each other; but also with non-banks and other financial institutions (Kaynak and Kucukemiroglu, 1992; Hull, 2002). Most bank product developments are easy to Introduction duplicate and when banks provide nearly identical services, they can only distinguish themselves on the basis of price and quality. This research determines the relative importance of the five dimensions (tangible, reliability, responsiveness, empathy, and assurance) in influencing customers overall quality perception. Study of this kind is very rare in the Nepalese financial market. This study will provide insights and new concepts towards the customers satisfaction, the kinds of services provided and the loyalty of customers towards the industry. 1.3 Limitation of the study:

According to Caruana (2002), education and age are found to be salient segmentation variables. The other limitations of the study are:

The respondent coverage in this study consists of only selected areas of Kathmandu

The result of the study may not be generalized to all the existing institutions. Since the research will be done by novice the findings may not be completely reliable.

1.2

Time factor.

Organizations of the study

Chapter I: Introduction Introduction chapter gives brief outline of the topic of the study. It describes what the research is all about and why project is worth undertaking. This chapter contains the introduction of the subject matter, significance of the study, research questions, and limitation and organization of the study. Chapter II: Literature Review The second chapter reviews the literature which deals with the major findings of the earlier research studies and other precious writings relevant the subject matter of the study. Previous research on customer satisfaction, customer loyalty and the relation between them are reviewed. Chapter III: Research Methodology The third chapter deals with the research design and methodology. This chapter includes various techniques and methods employed for conducting the research. It basically defines what research design was used for research, what is the population and sample of the study, how the sample was chosen, what methods were used to gather data from the respondents and what is the data processing and analyzing procedure. Chapter IV: Findings The fourth chapter represents the findings of the study. It deals with the presentation of relevant data through definite courses of research methodology. Chapter V: Discussion and Conclusion This chapter discusses and summarizes the whole research finding and the appropriate recommendations are forwarded on the basis of conclusion of the research. It relates the data finding in logical and rational fashion of the problem area.

Chapter II Literature Review Bank customer loyalty is critical to the conduct of business in todays competitive bank markets. Banks continuously focus on improving customer perceptions by the use of internal marketing to motivate and improve interactions with the client base. The closer the degree of interaction between customer and banking institutions, the more important are service, personnel and equipment (J Mylonakis, 2009). As stated by Richardson & Robinson (2007), each year nearly 40% of bank accounts closed are closed because of poor service, 13% terminate their accounts because of a rude or unhelpful employee, 11% maintain that the financial institution was cool and impersonal and 16% close accounts of poor service in general. Thus, quality customer service and satisfaction are recognized as the most important factors for bank customer acquisition and retention (Jamal, 2004; Armstrong & Seng, 2000; Lassar et al., 2000; Bloemer et al., 1998; Levesque & McDougall, 1996). Jamal and Naser (2002) found out that customer satisfaction is based not only on the judgment of customers towards the reliability of the delivered service but also on customers experiences with the service delivery process. If bank customers perceive (through purchase experience) that they are obtaining more benefits from their relationship (expectations) with their banks, their satisfaction level will increase. Each experience leads to a further evaluation and an accompanying emotional reaction by the customer (Molina et al., 2007). But in the current era of intense banking competition, bank customers perceive very little differences in the services offered by banking institutions and new offering is quickly matched by banks competitors (Coskun & Frohlich, 1992; Devlin et al., 1995). International Journal of Service, service management literature, proposes that customer satisfaction influences customer loyalty, which in turn affects profitability. Proponents of this theory include researchers such as Anderson and Fornell (1994); Gummesson (1993); Heskett et al. (1990); Heskett et al. (1994); Reicheld and Sasser (1990); Rust, et al.(1995); Schneider and Bowen (1995); Storbacka et al. (1994); and Zeithaml et al. (1990). These researchers discuss the links between satisfaction, loyalty, and profitability. Statistically-driven examination of these links has been initiated by Nelson et al. (1992), who demonstrated the relationship of customer satisfaction to profitability among hospitals, and Rust and Zahorik (1991), who examine the relationship of customer satisfaction to customer retention in commercial

banking. The Bank Administration Institute has also explored these ideas, in particular Roth and van der Velde (1990, 1991).The service management literature argues that customer satisfaction is the result of a customers perception of the value received in a transaction or relationship where value equals perceived service quality relative to price and customer acquisition costs (see Blanchard and Galloway, 1994; Heskett et al., 1990) relative to the value expected from transactions or relationships with competing vendors (Zeithaml et al., 1990). Loyalty behaviors, including relationship continuance, increased scale or scope of relationship, and recommendation (word of mouth advertising) result from customers beliefs that the quantity of value received from one supplier is greater than that available from other suppliers. Loyalty, in one or more of the forms noted above, creates increased profit through enhanced revenues, reduced costs to acquire customers, lower customer-price sensitivity, and decreased costs to serve customers familiar with a firms service delivery system (Reicheld and Sasser, 1990). According to Yis Critical review of customer satisfaction (1990); Many studies found that customer satisfaction influences purchase intentions as well as postpurchase attitude (p. 104). The marketing literature suggests that customer loyalty can be defined in two distinct ways (Jacoby and Kyner, 1973). The first defines loyalty as an attitude. Different feelings create an individuals overall attachment to a product, service, or organization (Fornier, 1994). These feelings define the individuals (purely cognitive) degree of loyalty. The second definition of loyalty is behavioral. Examples of loyalty behavior include continuing to purchase services from the same supplier, increasing the scale and or scope of a relationship, or the act of recommendation (Yi, 1990). The behavioral view of loyalty is similar to loyalty as defined in the service management literature. This study examines behavioral, rather than attitudinal, loyalty (such as intent to repurchase). This approach is intended, first, to include behavioral loyalty in the conceptualization of customer loyalty that has been linked to customer satisfaction and second, to make the satisfaction, loyalty and profitability demonstrated satisfaction/loyalty relationship immediately accessible to managers interested in customer behaviors linked to firm performance. Both the service management and the marketing literatures suggest that there is a strong theoretical underpinning for an empirical exploration of the linkages among customer satisfaction, customer loyalty, and profitability. The relatively small quantity of empirical research performed on these relationships to date (Storbacka et al., 1994) is

10

probably the result of the paucity of organizations measuring soft issues, such as customer satisfaction and customer loyalty, in meaningful ways. Considering the competitive environment, there is a need for banks to plan their strategies that will differentiate them from another. This can be achieved through the delivery of high service quality. The practice of excellent service quality has been proven that customer satisfaction will significantly lead to customer loyalty (Caruana et al., 2000; Caruana, 2002). The present research employs SERVQUAL scale (Parasuraman et al., 1988) to measure the customers loyalty. 2.1 Service Quality Concept Gronroos (2000, p.46) defined service as, A service is a process consisting of a series of more or less intangible activities that normally, but not necessarily always, take place in interactions between the customer and service employees and/or physical resources or goods and/or systems of the service provider, which are provided as solutions to customer problems. Fogli (2006, p.4) define service quality as a global judgment or attitude relating to a particular service; the customers overall impression of the relative inferiority or superiority of the organization and its services. Service quality is a cognitive judgment. In the competitive business world, service quality is considered as a competitive factor of the Organizations. Moreover, it is also considered as an essential determinant that allows an Organization to differentiate from other Organization. It helps an Organization to gain sustainable competitive advantage. 2.1.1 Service Quality Model

Parasuraman et al (1985) undertook a Qualitative Research to investigate the concept of Service Quality. Parasuraman et al (1985) identified ten key determinants of Service Quality. They are: Reliability, Responsiveness, Competence, Access, Courtesy, Communication, Credibility, Security, Understanding, Tangibles. In 1988, Parasuraman et al arranged a quantitative Research. They revealed an instrument for measuring consumers perception of Service Quality, after that it became known as SERVQUAL. They collapsed their dimensions from ten to five. The dimensions were: Tangibles physical facilities, appearance of personnel and equipment

11

Reliability ability to perform the promised service dependably and accurately Responsiveness willingness to help customers and provide prompt service Assurance - Assurance (combination of items designed originally to assess Competence, Courtesy, Credibility, and Security) ability of the organizations employees to inspire trust and confidence in the organization through their knowledge and courtesy.

Empathy - Empathy (combination of items designed originally to assess Access, Communication, and Understanding the customer) personalized attention given to customer.

Organizations can use SERVQUAL in various ways. Parasuraman et al (1988) mentioned that SERVQUAL can help the Service and Retailing Organizations in assessing the expectations of customers and Service Quality perceptions. It can focus on the core areas where managers need to take attention and action to improve Service Quality. 2.1.1 Criticism of SERVQUAL

Much criticism emerged against the SERVQUAL. Gilmore (2003) summarised the criticism of SERVQUAL is as follows: The gaps model some researchers mention that there is a little evidence that customers access service quality in terms of performance and expectation gaps.

Dimensionality SERVQUALs five dimensions are not universal. The number of dimensions comprising SERVQUAL is contextualized and there is a high degree of intercorrelation between the five dimensions.

Expectations some researchers argue that measuring expectations is unnecessary. If they are to be measured, expectations and perceptions should be measured on a single scale.

Item Composition four or five items cannot capture the variability within each SERVQUAL dimension.

Scale Points the seven-point likert scale is flawed. The mid-range numbers can only be vaguely related to varying degrees of opinions and many respondents may rate these differently.

12

Polarity the reversed polarity of items on the scale causes respondent error. In the SERVQUAL instrument some items are reversed to ensure that respondents do not fall into the habit of marking the same scale point for each question; however this can cause confusion.

2.1.1

Service Quality in Retail Banking

Angur et al (1999) examined the applicability of alternative service quality measure in the Retail Banking industry in India. They conducted their research on the consumers of two major banks in India. They use SERVQUAL model to measure the overall service quality. They found that all the dimensions are not equally important in explaining variance in overall service quality. The result indicated that responsiveness Literature and reliability seem to be the most important dimensions followed by the empathy and tangible dimensions; whereas, assurance appears to be the least important dimension. Finally, they concluded that SERVQUAL is the best measure of service quality in banking industry, whether it is based on difference score, gap score or performance only. 2.2 Customer Value Designing and delivering superior customer value is the key to successful business strategy in the 21st century. Value reigns supreme in todays marketplace and marketspace; customers will not pay more than a goods or service is worth (Johnson and Weinstein, 2004). Customers are increasingly searching for and demanding value in products and services. Bhattacharya and Singh (2008) mentioned that managing organization from the perspective of customer value would increase the likelihood of success. Companies that provide superior value to their customers obtain a competitive advantage (Raich, 2008). Cohen et al. (2007) argued that customer value is more viable element than customer satisfaction because it includes not only the usual benefits that most banks focus on but also a consideration of the price that the customer pays. According to Day (1994), Perceived Customer Value = Perceived benefits Perceived cost. The core concept of the definition is benefits versus sacrifice. Roig et al. (2006) pointed out that the benefits component would include the perceived quality of the service and a series of psychological benefits. The sacrifice component, what the customer must contribute, would be formed by the monetary and non-monetary prices, i.e. money and other resources such as time, energy, effort etc.

13

Value is best defined by Zeithaml (1988). Based on her exploratory study, she found the patterns of consumers responses that can be grouped into four definitions: (1) value is low price, (2) value is whatever I want in a product, (3) value is the quality I get for the price I pay, (4) value is what I get for the price what I give. Zeithaml (1988) further captures the essence of the four expressions into a general definition: Perceived value is the customers overall assessment of the utility of a product based on perceptions of what is received and what is given. Chu (2009) pointed out that customer value is an important determinant of customer loyalty. 2.3 Customer loyalty Loyalty is developed over a period of time from a consistent record of meeting, and sometimes even exceeding customer expectations (Teich, 1997). Kotler et al. (1999) states the cost of attracting a new customer may be five times the cost of keeping a current customer happy. Gremler & Brown (1996) offers one definition of customer loyalty that is related to the purpose in this study: the degree to which a customer exhibits repeat purchasing behavior from a service provider, possesses a positive attitudinal disposition toward the provider, and considers using only this provider when a need for this service exists. According to Bloemer & Kasper (1995), loyalty is interpreted as true loyalty rather than repeat purchasing behavior, which is the actual re-buying of a brand, regardless of commitment. Zeithaml et al. (1996) states loyalty is a multi-dimensional construct and includes both positive and negative responses. However, a loyal customer may not necessarily be a satisfied customer. Colgate et al. (1996) also noted that it is not always the case that customer dissatisfaction is the inverse to loyalty, while Levesque and Mc Dougall (1993) suggested that, even a problem is not solved, approximately half of the customers would remain with the firm. This may be due to switching costs, lack of perceived differentiation of alternatives, location constraints on choice, time or money constraints, habit or inertia which are not related to loyalty (Bitner, 1990; Ennew & Binks, 1996). Gee et al. (2008) stated the advantages of customer loyalty are as: The service cost of a loyal customer is less than new customers They will pay higher costs for a set of products; and For a company, a loyal customer will act as a word-of-mouth marketing agent

Levesque and McDougall (1996) pointed out that by increasing loyalty, a retail bank: Decreases its servicing cost (i.e. customers do not open or close their accounts)

14

Fulfils customers need and gains knowledge of financial affairs Has an opportunity to cross-sell existing and new products and services.

2.1 Service quality Definitions of service quality hold that this is the result of the comparison that customers make between their expectations about a service and their perception of the way the service has been performed (Lehtinen & Lehtinen, 1982; Lewis & Booms, 1983, Gronroos, 1984; Parasuraman et al., 1985; 1988; Caruana, 2002). Service quality is defined as the degree of discrepancy between customers normative expectation for service and their perceptions of service performance (Parasuraman et al., 1985). The definition of service quality was further developed as the overall evaluation of a specific service firm that results from comparing that firms performance with the customers general expectations of how firms in that industry should perform (Parasuraman et al., 1988). Among general instruments, the most popular model used for evaluation of service quality is SERVQUAL, a well-known scale developed by Parasuraman et al. (1985, 1988). The attributes of (Parasuraman et al., 1985), were: tangibles, reliability, responsiveness, competency, courtesy, assurance, credibility, security, access, and understanding. Parasuraman et al. (1988) later reduced these ten dimensions into five by using a factor analysis. Although there has been criticism from some other researchers to SERVQUAL instrument (Johnston, 1995), yet SERVQUAL is the instrument most utilized for its confirmatory factor analyses in most cases. Thus, up to date, SERVQUAL has proven to be a economical model that has been used in various service organizations and industries to measure service quality including banks (Mc Alexander et al., 1994; Cowling & Newman, 1996; Levesque & Mc Dougall, 1996; Caruana et al., 2000; Caruana, 2002; Sureshchandar et al., 2002; Paswan et al., 2004; Seth et al., 2005; Lymperopoulos et al., 2006). 2.2 Customer satisfaction Perceived service quality is a global judgment or attitude relating to the superiority of the service, whereas satisfaction is related to a specific transaction (Parasuraman et al., 1988). On the other hand, customer satisfaction has frequently been suggested to be the leading determinant of loyalty (Lam & Burton, 2006). Ehigie (2006) suggests

15

that there is a significant positive relationship between customer satisfaction and customer loyalty/retention. As such, customer satisfaction in this research is acting as a mediator between service quality and customer loyalty.

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CHAPTER III METHODOLOGY 3.1 Research Model: Figure 3.1: Research Model

Concept Building

Review

Assessment of existing plan

Questionnaire Pretesting Finalizing Questionnai re

Data Collection

Analysis

SERVQUAL Model Microsoft Excel Graph

Summary and Conclusion

Data Presentation

Charts Tables

3.1 Study Design: The study design was descriptive cross sectional using both quantitative and quantitative methodology. Quantitative method was used to make the study or (result) as representative as possible of the population being studied. It also allows some quantification of the results and comparison with respect to predefined variables. Qualitative finding was used to support the quantitative findings.
3.2 Study Area:

The study was conducted in Baneshwor, Gausala and Putali-sadak. Those are the places with high volume of population and having large banking transaction in Nepal.

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3.3 Study Population:

The study population comprised of all the people visiting different commercial banks within the study area. 3.4 Sampling Frame: The study was based on people using banking services for different reasons. The study sample was taken by visiting different banks within study period and taking the available study population. Therefore, purposive sampling was used. The total number of sample for the study was 80. Feasibility was another aspect taken into consideration.
3.5 Sampling Size:

Sample size was determined according to the feasibility of the researcher and under time factor consideration. A total of 60 respondents were taken among which 31 were male, 22 were female and 7 questionnaires were not returned by the respondents. 3.6 Study Duration: The study was conducted for duration of three months from November 2011 to January 2012. Preliminary activities like meeting with officials and experts in the field, proposal development, pre-testing and adaptation of the questionnaire and interview or data collection guideline were done in November. Data collection from different Banks was done during November and December. The collected data was analyzed and findings were presented during December 2011 and January 2012. 3.7 Sampling procedure: First of all the banking institutions were visited and located for feasibility. After the feasible locations were identified the respondents were requested for participation in the study. Proper ethics as suggested by the experts in the field were maintained. The respondents were first approached for informed consent and then approached for data collection. 3.8 Validity and Reliability of the Research: The study was conducted using standard tool SERVQUAL, a multiple item scale for measuring consumer perception of service quality, developed by Parasuraman, A.,

18

Zeithaml, V. A., & Berry, L. L. (1988). The tool is tested for its reliability and validity for use in commercial business sector. Assurance of strict confidentiality while completing the questionnaire was another effort at ensuring maximum reliability and validity of the data. Internal Consistency: the questionnaire was pre-tested and changes were made accordingly in order to improve the quality of the data. External validity: comparing the results with those reported in the literature indicated a considerable degree of agreement with findings from within the country as well as those from similar socio-cultural backgrounds. 3.9 Biases: The questionnaire was self administered and filled by the respondents themselves. The study subjects were requested to fill up the questionnaire according to their personal assumptions, expectations and perception. The psychological concept of 'cognitive dissonance' explains why many customers provide 'good' ratings but are not really loyal. A customer does not like to admit to settling for a less than 'good' banking relationship. Due to these reasons the study might have faced personal bias. 3.10Data collection Tools and Techniques: Studies incorporated qualitative data. A structured self administered questionnaire was used for the collection of qualitative data. The study participants were approached and requested to fill up the questionnaire after acquiring an informed verbal consent. The unit of analysis in this study was individual. SERVQUAL, created by Parasuraman et al. (1988) was adapted as the instrument for service quality measurement and customer loyalty measurement. A 5-point Likert scale with the range of 1 (strongly agree) to 5 (strongly disagree) were used for the measurement. The questionnaire covered the demographic profile of respondents and items to measure the constructs. A pre-testing of the questionnaires was done with banks customers who have experience with banking services. The respondents were asked to provide feedback on the ambiguity and structure of the questions. With the assistance of the pre-test, the original questions were refined and some corrections were made. Self-administered questionnaire was used to gather data from various bank customers.

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3.10.1Steps to obtain unweighted SERVQUAL score: Step 1: A bank whose service quality would be accessed was chosen. Using the SERVQUAL instrument, score for each expectation question was obtained. Next, score of each perception questions were obtained. The Gap Score each of the statements were calculated (Gap Score = Perception Expectation). Step 2: Average Gap score of each dimension were obtained by assessing the Gap Scores for each of the statements that constitute the dimension and dividing the sum by the number of statements making up the dimension. Step 3: In TABLE 1 the average dimension SERVQUAL scores (for all five

dimensions) were transferred from the SERVQUAL instrument. The scores were summed up and divided it by five to obtain the unweighted measure of service quality.

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CHAPTER IV FINDINGS The data was collected from 53 respondents with respect to the dependent variables. The analysis was done with respect to the dependent variable of perceived service and expected service.
4.1 Personal information profile of respondents:

The profile of the sample has been presented in terms of variables like gender, age, educational, occupation, types of bank account held and the number of banks used by the respondents of the respondents. Table 4.1: Personal Information of Respondents (N=53) Characteristics Gender Groups Male Female Age in Years 18-23 22-28 28-33 33-38 Above 38 Permanent Residence Within Valley Outside Valley Educational Attainment Occupation Literate Illiterate Government Employee Agriculture Business Private Sector Employee Number 31 22 8 12 13 10 10 30 23 53 0 11 4 30 6 Percentage 58.49 41.51 15.1 22.6 24.5 18.9 18.9 56.6 43.4 100 0 20.75 7.55 56.61 11.32

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Others Type Of Bank Accounts Saving Account Fixed Deposit Account Current Account Number of Banks in transaction 1 2 3 4

2 30 8 15 19 22 10 2

3.77 56.60 15.09 28.31 35.83 41.51 18.90 3.76

Majority of the people visiting banks were male, 58.49% while female were 41.51%. The banking service is seen most used by the people of age group 28-33 compromising 24.5% of the total share of usage of banking services followed by age group 22-28 years (22.6%), 33-38 years and above 38 years (18.9%), and 18-23 years (15.1%) . Among the users 56.6% reside permanently within Kathmandu valley while others i.e. 43.4% reside temporarily in the Kathmandu valley. 100% of the respondents were literate and majority of them had bank account in two banks (41.51%), while those having bank account in only one bank were 35.83% followed by those having bank accounts in three banks (18.9%) and those having bank account in four banks (3.76%). The occupation of the users of the banking services were business (56.61%), Government employee (20.75%), private sector employee (11.32%) and others (3.77%). The most preferred banking account was saving account (56.60%), current account (28.31%) and fixed deposit account (15.09%) was preferred the least. 4.2 Profile of SERVQUAL model The profile of the sample has been presented in terms of variables like tangibility, reliability, responsiveness, assurance and empathy as provided by the respondents of the respondents. The following table presents the expectation of the respondents towards the banking industry and their perception after receiving the service. Table 4.2: Calculation of SERVQUAL unweighted Scores (N=53) Dimension Statemen t Perception Score Expectation Gap Score Score Average for Dimension

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1 Tangibles 2 3 4 5 6 Reliability 7 8 9 10 Responsiveness 11 12 13 14 Assurance 15 16 17 18 19 Empathy 20 21 22 Total SERVQUAL Score

216 209 210 181 181 166 191 169 175 194 187 190 182 182 222 194 208 178 185 160 176 177

226 210 235 193 213 216 227 211 192 188 217 211 177 200 185 203 206 177 190 173 186 186

-10 -1 -25 -12 -32 -50 -36 -42 -17 6 -30 -21 5 -18 37 -9 2 1 -5 -13 -10 -9 -61.6 -12.32 -7.2 3 -10 -35.4 -12

Unweighted Average SERVQUAL score (Total/5):

Gap Score for each of the statements is calculated by deducting expectation of the customers from the perception towards the banking services. Average of the gap score is calculated by diving the total gap score by the number of statements representing

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each variable. Reliability has the highest negative consumer gap or gap score (-35.4), followed by tangibles (-12), responsiveness (-10) and empathy (-7.2). Assurance is the only variable having positive consumer gap or gap score (3). The total gap score turns to be -61.6. The total unweighted gap score is -12.32. (A negative Gap score indicates that the actual service (the Perceived score) was less than what was expected (the Expectation score).)

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Chapter V Discussion and Conclusion 5.1 Discussion The SERVQUAL analysis shows that the expectation of the customers towards the tangibles is lower than the perceived tangibles. In fact the tangibles are negatively scored which means that they are far lower than what has been expected. Therefore, the bank must look into upgrading the interiors and other ambiance. Findings Mahamad and et al. (2010) considers tangibles as not significant in determining the customer loyalty. It is in contrary with the findings by Sureshchandar et al. (2003). According to Mahamad due to the emergence of IT, tangible has lost its importance as a measurement for customer loyalty. Figure 5.1: Gap Score of Tangibles
G a p S c o r e o f T a n g ib le s

G a p S c o re E x p e c t a t io n S c o re P e rc e p t io n S c o re

1 -5 0 0 50 100 150 200 250

The SERQUAL analysis shows the similar results with the reliability of the customers towards the banking industry. They expect a good bank to have higher reliability but their banks were not able to meet the reliability aspect of the customer. The findings by Nguyen & Leblanc (2001) and Bellini et al. (2005) reliability have a positive relationship with customer loyalty.

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Figure 5.2: Gap Score for Reliability

G a p S c o r e fo r R e lia b ility
5 4 G a p S c o re 3 2 1 -1 0 0 -5 0 0 50 100 150 200 250 E x p e c t a t io n S c o r e P e rc e p t io n S c o re

The results found by (Jun & Cai, 2001; Diaz & Ruiz, 2002; Joseph et al., 2005; Glaveli et al., 2006) state that responsiveness effect the customer loyalty. The result of SERVQUAL shows that the customers of Nepalese commercial banks are again dissatisfied by the related banking industries. The score for responsiveness is negative indicating consumer gap. Customer loyalty remains an important factor that bank has to ensure in order to make profit. Customer are more educated and knowledgeable, their demand is also on an increasing trend. In order to stay in the business, bank need to improvise their customer service campaign. Bank need to improve their service quality by providing more experienced employees to serve the customer in the operations. Results from hypotheses testing also show that responsiveness found to have positive relationship with customer satisfaction this is in line with Glaveli et al. (2006) who highlighted the speed of service delivery enhanced perception of service quality while Joseph et al. (2005) indicated that no waiting time raised customers satisfaction level. Figure 5.3: Gap Score for Responsiveness

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G a p S c o r e fo r R e s p o n s iv e n e s s

G a p S c o re E x p e c t a t io n S c o re P e rc e p t io n S c o r e

1 -5 0 0 50 100 150 200 250

Empathy has significant positive relationship with customer loyalty. This evidence is supported by the findings by Butcher (2001), Ndubisi (2006) and Ehigie (2006). As suggested by Butcher (2001), friendship between customers and particular service employees has a major influence on the development of customer loyalty. According to Ndubisi (2006), customer satisfaction can be achieved by offering personalized, flexible and adjustable services to suit the needs of customers. The empathy gap score is negative in relation to the services provided by the banking sector in Nepal. It indicates that the banking industry is not having flexible timing of operation, and other flexibilities as required by the customers. However the recent trend in Nepalese banking industry shows that they are trying to win the heart of customers by providing flexible timings. Yet, they are not sufficient to meet the customer desire.

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Figure 5.4: Gap Score for Empathy

G a p S c o r e fo r E m p a th y
5 4 G a p S c o re 3 2 1 -5 0 0 50 100 150 200 250 E x p e c t a t io n S c o r e P e rc e p t io n S c o r e

This study by Lymperopoulos et al. (2006) and Ndubisi (2006) shows a significant relationship between assurance and customer loyalty. In this study, assurance was found to have a positive gap score indicating that the expectation of the customers and the perceived service quality of the banks are in tune with each other. The study of Mahama and et.al shows that satisfaction has mediating effect on the relationships between service quality dimensions (tangibles, reliability, responsiveness, empathy and assurance) and customer loyalty. This result is consistent with studies done by Caruana (2002), Butcher (2001), Ehigie (2006) and Lam & Burton (2006).

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Figure 5.5: Gap Score for Assurance G a p S c o r e fo r A s s u r a n c e

4

G a p S c o re E x p e c t a t io n S c o r e P e rc e p t io n S c o re

1 -5 0 0 50 100 150 200 250

From this study, it can be noticed that the overall respondents evaluate the bank negatively, which means there are still rooms for improvements. Managerial implication of this research is that bank managers need effective recruitment and training program to: a) Ensure that employees offer professional services. b) Pay more attention to customer needs.

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Figure 5.6: Overall Gap score

O v e r a ll G a p s c o r e
250 200 150 100 50 0 -5 0 -1 0 0 1 2 3 4 5 6 7 8 9 1 01 11 21 31 41 51 61 71 81 92 02 12 2 P e rc e p t io n S c o r e E x p e c t a t io n S c o r e G a p S c o re

5.2 Conclusion Although customer service has been evaluated long time ago, but it is still one study that banks must continue to conduct in order to meet the changes in the banking industry. New technologies must be incorporated as a factor to measure service quality in future researches. Researches and related questionnaires must also be accommodated with the new banking requirements of the customer. A clearer understanding as to the sequence of relationship between service quality, customer satisfaction and customer loyalty can help to ensure better targeting of customer using limited marketing resources.