The Relationship between Perceived Service Quality and

Customer Loyalty: An investigation of the Banking Industry in

Botswana.

Otsile Chelenyane

Student number: 200001411

Dissertation submitted in partial fulfilment of the requirements for the

degree of Master of Business Administration

University of Botswana

Supervisors: Godfrey Themba and Donatus Amanze

2019
TABLE OF CONTENTS

Page:

Chapter 1
Introduction
1.1 Background
1.2 The Banking Industry in Botswana: An Overview
1.3 Statement of the Problem
1.4 Research Objectives
1.5 Research Questions
1.6 Significance of the Study
1.7 Scope of the Study
Chapter 2
2.1 Introduction
2.2 The Service Concept
2.3 Characteristics of Services
2.3.1 Intangibility
2.3.2 Inseparability
2.3.3 Perishability
2.3.4 Heterogeneity
2.4 The Quality Concept 2.5 Service Quality
2.6 Service Quality Models 2.6.1 Introduction

2.6.2 Gronroos’s Service Quality Model ………………………………………………..16

2.6.3 The Conceptual Gaps Model ………………………………………………………

18

2.6.4 The SERVQUAL Instrument …………………………………………………...…21

[Link] Value of the SERVQUAL Instrument ……………………………

22

[Link] Criticisms of the SERVQUAL Instrument ………………………24

2.6.5 The SERVPERF Model

………………………………………………………….....26
2.7 Customer Loyalty
……………………………………………………………………..26
2.7.1 Introduction
………………………………………………………………………...26

2
 2.7.2 Customer Loyalty Dimensions
……………………………………………...28
2.8 Relationship between Service Quality and Customer Loyalty…………………………..30

2.9 Synthesis ……………………………………………………………………………………31

2.10 Proposed Model……………………………………………………………………………..31

2.11 Research Hypotheses

2.12 Theoretical Framework………………………………………………………………….…..
2.13 Conclusion…………………………………………………………………………………..33
Chapter 3 …………………………………………………………………………………………….34
Methodology
3.1 Introduction
3.3 Research Philosophy
3.4 Research Design
3.5. Sample population
3.6 Sampling Method
3.7 Sample Size
3.8 Data Collection
3.9 Data Analysis Methods
3.10 Reliability and Validity
3.11 Ethical Considerations
3.12 Conclusion …………………………………...…………………………………………….38

References…………………………………………………………………………………...39
Appendices…………………………………………………………………………………..51

LIST OF TABLES
Table 1
Table 2…………………………………………………………………………………………………37

LIST OF FIGURES
Figure 1
Figure 2
Figure 3……………………………………………………………..…………………………………19
Figure 4………………………………………………………………….…………………………….32

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 Chapter 1

Introduction

1.1 Background

The worldwide trend toward service quality was initiated in the 1880s when the business
world realized that maintaining competitive advantage was not guaranteed by product quality
alone (Van Der Wal, Pampallis, & Bond, 2002). As a result, a growing body of marketing
literature has been focused on this area. Parasuraman, Zeithaml and Berry (1985) were
amongst the earliest scholars who laid down the theoretical foundation with regard to the
conceptualization of service quality. Many researchers assert that offering quality service
enhances sustainable competition and creates an opportunity for initiating and maintaining
long-term relationships. Consequently, the business world appreciates the economic benefits
of improving customer loyalty. According to Zeithaml and Bitner (2003), when customers’
relationship with the organization is strengthened and perceptions of service quality are
positive, the behavioral intentions are favorable. Similarly, Zeithaml, Berry and Parasuraman
(1996) posit that when organizations enhance the quality of their services, customers’
favorable behavioral intentions are increased while unfavorable intentions are decreased
simultaneously. On the other hand, customers’ encounter with service firms often represent
less than satisfactory experiences that manifest as repeated customer service inquiries, low
customer satisfaction, and lost revenues (Meyer & Schwager, 2007).

The increasingly competitive and dynamic environment prevailing in the banking industry
has necessitated the need for an understanding of the economics of a good customer
experience. This understanding allows banks to make strategies geared towards reducing the
loss of existing customers to other service providers. According to Auka, Bosire and Matern
(2013), the ability to provide quality service improves the bank’s ability to increase market
share and profitability, whilst at the same time reducing their existing customer’s propensity
to switch to another bank. With the development of new technology, bank customers have
become a lot more demanding and financially wise. This has witnessed a common shift from

4
product, to customer-centric banking which now serves as the cornerstone of most banking
experiences. Kheng, Mahamad, Ramayah and Mosahab (2010) note that it takes constant
improvement of service quality for banking customers to stay loyal. In the same way, it is
how well customers are treated by the bank that keeps them, therefore, customers use service
quality as an evaluation of whether their expectations have been met.

Globally, empirical research has been conducted to investigate the association between
service quality and customer loyalty. However, results from the findings have produced
contradictory results. While some studies found a direct relationship between service quality
and customer loyalty (Chunxiao, Biyan, & Caifen, 2001; Han, Kwortnik, & Wang, 2008;
Boulding, Staelin, Kalra, & Zeithaml, 1993), other studies, in contrast, introduced customer
satisfaction as a mediating variable (Cuarana, 2002; Hou, 2008; Deng, 2013). In addition,
other mediating variables such as customer trust (Akbar & Parvez, 2009), customer perceived
value (Heung & Ngai, 2008) and switching costs (Ngo & Pavelkova, 2017) have also been
demonstrated to influence the service quality-customer loyalty relationship. A few studies
have been conducted in the African context (Auka, Bosire, & Matern, 2013; Nsiah &
Mensah, 2014; Iddrisu, 2011). However, in Botswana, no studies have been conducted to
examine this relationship. The present study seeks to investigate the relationship between
perceived service quality and customer loyalty, focusing on the banking industry in
Botswana.

1.2 The Banking Industry in Botswana: An Overview

Historically, Botswana’s financial sector was relatively small and dominated by Barclays and
Standard Chartered bank. Both of these banks’ operations in Botswana date back to the
1950s, and were originally run as branches of the groups’ South Africa subsidiaries (Jefferis
& Tacheba, 2011, p. 4). The two banks co-existed as a comfortable duopoly, with limited
competition between them. This situation changed somewhat in 1982, when the Bank of
Credit and Commerce Botswana was established, however, this bank remained relatively
small, and did not fundamentally challenge the dominance of the two major existing banks
(Jefferis, 2009). Since 1895 and post-independence, Botswana used various South African
currencies as it was a member of the Rand Monetary Area. This membership did not give the
government any monetary independence as the South African Reserve Bank dominated the
banking industry in Botswana (Ahmed, 2006). The discovery of diamonds in 1967 caused

5
rapid growth in the financial sector and this necessitated the formation of a central bank.
Consequently, Bank of Botswana was established in 1975, under the provisions of the Bank
of Bank of Botswana Act of 1975. The country then withdrew from the Rand Money Area
and issued its own national currency. The legislative powers granted to Bank of Botswana at
its inception effectively ushered in an era of banking regulation as the bank independently set
interest rates on banks' deposits and lending, fixed domestic liquidity requirements and
implemented exchange control regulations (Kayawe & Amusa, 2003).

During the late 1980s Botswana’s financial policy framework did little to encourage
competition in the banking sector, it was then realized that the policy had a range of negative
impacts. For instance, the licensing of new banks was restrictive, in that market capacity
issues were taken into account and the existing banks could object to the licensing of new
banks. Consequently, the country’s banking sector was fully liberalized in 1989 on the advice
of the World Bank. Observably, this was achieved through deregulation of interest rates,
eliminating credit limits, permitting free entry into the banking industry, private ownership of
banks and promoting independence of commercial banks as noted by (Odhiambo &
Akinboade, 2009, p. 2). According to Harvey (1996, p. 1) , the entry of new commercial
banks, all foreign, introduced some much needed competition and improved some aspects of
banking. Jeremiah and Swami (2014) investigated the impact of financial linearization
measures and reforms undergone by the Botswana’s financial sector and concluded that they
increased competition, improved the banking sector and subsequently the economy.

Over the past two decades, the financial sector has experienced rapid growth due to, among
others, a favorable economic climate and well-targeted supervision of the Bank of Botswana
(Madigele & Mogomotsi, 2016). According to Moffat (2008), since 1975, the profitability of
this sector has been higher than other countries in Sub Saharan Africa. Jeremiah and Swami
(2014) postulated that the profitability of the banking sector is extremely high, adding that
this is despite the liberalization of the banking sector which introduced competition.
Botswana’s financial sector can be divided in two segments; the banking sector which is
regulated by the Bank of Botswana (the Central Bank) and the non-bank financial sector
regulated by the Non-Bank Financial Institutions Regulatory Authority (Gaborekwe &
Swami, 2016). At present, the banking sector comprises of Bank of Botswana, which is the
central bank; eleven commercial banks (Barclays Bank of Botswana Limited, First National
Bank of Botswana Limited, Stanbic Bank Botswana Limited, Standard Chartered Bank
6
Botswana Limited, Bank Gaborone Limited, Bank of India, Bank of Baroda, Capital Bank,
Banc ABC, State Bank of India and Kingdom Bank Africa Limited); one investment bank
(Investec Bank Botswana), three statutory banks (Botswana Savings Bank and National
Development Bank and Botswana Building Society) and one merchant bank (African
Banking Corporation). According to Bank of Botswana (2016) commercial banks dominated
the banking industry in 2016.

The entry of new commercial banks has made it mandatory for the industry to consider
service quality as a means to achieving sustainable competitive advantage. The dynamic, fast
paced competitive environment of the banking industry calls for an improvement in the
provision of banking services. Customers are now important stakeholders who determine
every bank’s long term business success. As a result, banks have shed their traditional
functions and are increasingly investing substantial resources into modern technology to
retain customers. In order to address the rapid and changing needs of customers, automatic
teller machines, internet banking, mobile banking and other fast and cost effective channels
dominate banking operations. Today’s banking customers are more informed about product
choices than ever, the local banking industry is therefore continuously seeking better ways to
enhance customer loyalty.

1.3 Statement of the Problem

As in most developing countries, the banking industry in Botswana dominates the financial
system and has grown significantly over the years. Some of the key changes in the banking
industry in recent years include increased financial services, introduction of advanced
technologies, heightened competition and the emergence of a new generation of customers. It
has therefore become common practice for banks to invest massive resources on improving
perceived service quality (i.e. quality as perceived by the customer) with the view to create
customer loyalty. While the relationship between perceived service quality and customer
loyalty is often taken for granted, empirical results worldwide have been mixed. For
instance, others found a direct relationship e.g. (Boulding et al., 1993; Chunxiao et al., 2001;
Han et al., 2008), while others reported an indirect relationship e.g. (Cronin & Taylor, 1992;
Minh & Huu, 2016; Akbar & Parvez, 2009). In Kenya, Auka, Bosire and Matern (2013)
found that perceived service quality has a positive influence on customer loyalty. Similar

7
studies in Lithuania e.g (Jasinskas, Streimikiene, Svagzdiene, & Simanavicius, 2016) and
Malaysia e.g. (Kheng [Link]., 2010) have shown that perceived service quality has a significant
influence on customer loyalty.

Although a few studies have investigated service quality and customer loyalty in Botswana
e.g. (Pansiri & Mmereki, 2010; Selelo & Lekobane, 2017; Manwa, 2011; Chiguvi, 2013;
Musikavanhu, 2017; Mmusi, 2010 & Mokabiri, 2009), none has focused on the relationship
between these constructs in the case of the banking industry. Therefore, there is a paucity of
studies focusing on the relationhip between perceived service quality and customer loyalty in
the context of Botswana. This study seeks to fill this knowledge gap by investigting the
relationship between perceived service quality and customer loyalty in the banking industry
in Botswana. The banking industry is one of the major sectors contributing significantly to
Gross Domestic Product, employment social & economic development of Botswana.
According to Jefferis (2009, p. 3), Botswana’s banking industry is an increasingly important
sector of the economy, both in its own right and in terms of the supporting role it plays in the
development of other sectors of the economy. During the third quarter of 2018, Botswana’s
financial sector represented approximately 13.8 percent of the country’s GDP (Statistics
Botswana, 2018).

1.4 Research Objectives

The main objective of the present study is to investigate the relationship between perceived
service quality and customer loyalty in the banking industry in Botswana. More specifically
the study seeks to:

i. Investigate whether a relationship exists between perceived service quality and

customer loyalty in the banking industry in Botswana, and if so,
ii. Investigate whether customer loyalty is a function of perceived service quality in
the banking industry in Botswana.
iii. Investigate whether the relationship between perceived service quality and
customer loyalty in the banking industry in Botswana is mediated by other factors.

1.5 Research Questions

8
In order to address the objectives of this study the following research questions are put
forward:

i. Is there a relationship between perceived service quality and customer loyalty in

the banking industry in Botswana? If so, what is the nature of this relationship?
ii. Is customer loyalty a function of perceived service quality in the banking sector in
Botswana?
iii. Is the relationship between perceived service quality and customer loyalty
mediated by other factors such as demographic characteristics and switching
costs.

1.6 Significance of the Study

The study findings will shed further insight into the posited relationship between perceived
service quality and customer loyalty in the context of Botswana and the banking sector in
particular. The study will also extend the existing literature on customer loyalty and its
relationship with perceived service quality. Lastly, this study is expected to inform banking
practitioners in Botswana and elsewhere on factors affecting customer loyalty including
perceived service quality.

1.7 Scope of the Study

This study attempts to investigate the relationship between perceived service quality and
customer loyalty in Botswana’s banking industry. There are 11 commercial banks operating
in Botswana. However, owing to the limited time, the present study will focus on branches
based in Gaborone, the capital city of Botswana.

9
10
 Chapter 2

Review of Related Literature

2.1 Introduction

This chapter presents a review of literature on service quality and customer loyalty. Its
purpose is to define the constructs under investigation, which is necessary for developing
reliable measures and obtaining valid results. In addition, a range of instruments and scales
used for measuring service quality will be reviewed.

2.2 The Service Concept

A plethora of definitions of the term service have been proposed in service marketing
literature, however, none is universally acceptable. Researchers note that this may limit the
understanding of the concept. According to Regan (1963), services represent either
intangibles yielding satisfactions directly or jointly when purchased with goods. Blois (1974)
on the other hand sees services as an activity offered for sale which produces benefits and
satisfactions without leading to a physical change in the form of a good. Quinn, Baruch and
Paquette (1987) describe services as all economic activities whose output is not a physical
product or construction, is generally consumed at the time it is produced, and provides added
value in forms (such as convenience, amusement, timeliness, comfort, or health) that are
essentially intangible concerns of its first purchaser. This definition affirms the view that
services are a created and used instantaneously.

Banks typically offer financial services in order to remain relevant and reach a wider
customer base. Examples of services offered include amongst others, loans, deposits,
mortgages, online and mobile banking and online bill payments. Digital service engagement
now serves as the cornerstone of most banking experiences. According to Gronroos (1990), a
service is an activity or series of activities of more or less intangible nature that normally, but
not necessarily, 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. Services could generally be referred to as any act or
performance that one party can offer to another that is intangible and does not result in the

11
ownership of anything, i.e. its production may or may not be tied to physical qualities
(Kotler, 1991).

2.3 Characteristics of services

Understanding services involves acknowledging their characteristics (see Figure 1). The
distinctive characteristics, as described below, serve as the foundation of service marketing.

2.3.1 Intangibility

A primary concept of marketing services, intangibility is often argued to be the major

characteristic that separates goods from services (Shostack, 1977). Intangibility refers to the
notion that services cannot be seen, tasted or smelled prior to purchase (Kotler, Armstrong,
Saunders, & Wong, 1999). Unlike tangible goods, which provide customers with personal
access for an unlimited period, customers have access to a service for only a limited time
(Kimmel, 2015, p. 286). All these characteristics create unique challenges in terms of
measuring service quality. Similarly, Laroche, McDougall, Bergeron and Yang (2004) posit
that service intangibility has a profound effect on the customer’s ability assess its quality.
Edvardsson, Gustafsson and Ross (2005) also note that it is challenging to develop and
communicate output measures for services.

2.3.2 Inseparability

Inseparability means that a service cannot be detached from its provider, whether the provider
is a human being or a machine (Kotler and Burtons and Deans 2015). In effect, it means that
the production and consumption of a service happens simultaneously, which increases
chances of identifying errors which managers may not have control of. This places extra
responsibility on the service provider who has to place equal importance to the service and
the interaction with the customer. Gummesson (1994) suggests that simultaneity of
production and consumption is a distinctive characteristic of services with important
implications for marketing operations strategy. In case of an Automatic Teller Machine, the
presence of a customer is essential for service production and consumption to take place. This
implies that as opposed to goods, services cannot be produced now and sold at a later stage.

12
2.3.3 Perishability

Services are perishable, which implies that they cannot be stored for later use or sale
(Kimmel, 2015). According to Ghobadian, Speller and Jones (1994), in comparison to
manufactured goods, it is impossible to conduct quality checks on services, consequently, this
calls for operational excellence in order to match or exceed the customer’s expectations.
Zeithaml, Parasuraman and Berry (1985) note that because services are performances that
cannot be stored, service businesses frequently find it difficult to synchronize supply and
demand. Because of the perishable nature of banking services, they cannot be inventoried,
resold, saved nor returned.

2.3.4 Heterogeneity

Heterogeneity means that the quality of services differ subject to who provides them and
when, where and how they are provided (Armstrong, Adam, Denize, & Kotler, 2014). As
Zeithaml, Parasuraman and Berry (1985) point out, the heterogeneous nature of services
reflects the potential for high variability in service provision. Services are performed by
human beings, therefore it is challenging to guarantee consistency of behavior from one
period to another. Due to variations in customers’ priorities and expectations, frontline
employees are often required to customize the delivery of service, therefore service is always
unique as there is a limited scope for standardizing it. By nature, controlling quality levels of
services is difficult, this complexity is justified by the heterogeneous nature of services.

13
Figure 1: Characteristics of Services

Intangibility
Inseparability
Services cannot be seen, tasted,
felt, heard or smelled before Services cannot be separated
purchase from their providers

Services

Variability
Perishability
Quality of services depends on
Services cannot be stored for
who provides them and when,
later use
where and how

Source: Kotler and Armstrong (2012)

2.4 The Quality Concept

Although quality is a universal concept, its definition is often contested (Busari, 2012).
Different and contradictory positions have been proposed on the conceptualization of quality
and this attests to its complexity (Reeves & Bednar, 1994). According to Sower and Frank
(2005, p. 8), every expert defines quality differently and there is a variety of viewpoints that
can be taken in defining the construct. This view is also supported by Kiran (2016, p. 138)
who wrote that the definition of quality depends on the role of the people defining it. In a
similar vein, Takeuchi and Quelch (1983) also added that the underlying characteristics of
quality are not easily articulated by customers.

Several scholars advocate for a definition of quality from the customer’s perspective (Garvin,
1984). Therefore, this construct as conceptualized in services marketing literature, is based on
perceived quality (Hasan, Ilias, Abd Rahman, & Abd Razak, 2008), where it is defined as the
degree to which performance meets expectations (Deming, 1982). Other authors emphasize
conformance to requirements (Crosby, 1984), zero defect or doing it right the first time
(Parasuraman, Zeithaml, & Berry, 1985), fitness for use (Juran, 1974:1988) and meeting
customer expectations (Ryall & Kruithof, 2001).
14
From a historical point of view, the definition of quality originated from the manufacturing
industry Parasuraman et al., (1985), long before it was established in the service industry
(Gummesson, 1991). According to Kolb and Hoover (2012), the concept of evaluating
manufacturing methods to promote the quality of goods entered the American system in the
1920s and the 1930s when statisticians in Germany and America applied statistical methods
for analysing and controlling variations in the product manufacturing process. Berry,
Zeithaml, and Parasuraman (1985) assert that one reason why the issue of quality gained
considerable attention in the American industry was the rise of the “get my money’s worth”
consumer, a value-seeking customer who thinks in terms of total use cost rather than just
initial acquisition cost. It can therefore be inferred from this that consumers have a preference
for high quality. It also presupposes that until the consumer’s predicted expectations are
exceeded, quality will be perceived as low.

2.5 Service Quality

The groundwork of service quality conceptualization began in the product quality and
customer satisfaction literature (Brady & Cronin, 2001). Around the second half of the 20th
century, the quality debate was characterized by a shift from the original notion of the
manufacturing industry to a customer based definition which integrates service both within
the service sector and also the service element of manufactured products (Butler, 2009). A
substantial body of research exists in this area due to the enormous growth of service
industries. Service quality has also become a highly desired objective for businesses owing to
its strong effect on profitability, customer satisfaction and loyalty. Svensson (2002) observes
that service quality is recognized as one of the most important factors in developing and
maintaining successful relationships in the contemporary marketplace.

The general consensus amongst academics and practitioners is that service quality is an
elusive and abstract concept which is difficult to define and measure (Parasuraman et al.,
1985; Kotler & Armstrong, 2010). According to Brady and Cronin (2001), the
conceptualization of service quality is one of the most debated topics in service marketing
literature. The difficulty revolves around two differing schools of thought, one group of
researchers support the Nordic School, whilst the other group supports the American School
as described by (Brady & Cronin, 2001). The Nordic School is based on Gronroos (1984)’s
15
two service quality dimensions; technical quality and functional quality. The technical
dimension focuses on “what” the customer receives from a service encounter, whereas the
functional function touches on “how” the service is delivered to a consumer. On the other
hand, the American perspective is dominated by the SERVQUAL instrument which focuses
on functional quality attributes (reliability, responsiveness, assurance, empathy and
tangibility).

Against this background, these definitions are in line with the disconfirmation paradigm
which delineates the discrepancy between customers ‘expectations and their perceptions of
service delivery. A holistic, and perhaps most widely accepted definition of service quality is
provided by Parasuraman et al. (1985), they defined service quality as the discrepancy
between customer’s normative expectations for the service and their perceptions for the
service performance. Gronroos (1984) supports the same view and defines service quality as
the outcome of an evaluation process, where the customers compare their expectations with
service delivery. In a similar vein, Oliver (1997) describes service quality as the result from a
customer’s comparisons between their expectations about service encounter and their
subsequent perceptions. This implies that service quality is centered on perceived and
expected service assessment. It is therefore important to make a comparison between service
expectations and service perceptions of customers.

Reimann, Lunemann and Chase (2008) as cited in Oliver (1981) define service expectation as
a combination of customers’ predictions about what is likely to happen during service
delivery. On the other hand, service perceptions can be defined as a customer’s global
judgments or attitudes, which relate to the superiority of a service (Reimann, Lunemann, &
Chase, 2008). That is, during the service encounter, each customer will experience the service
differently and they will subconsciously evaluate the service quality. The above discussion
concurs with Parasuraman, Berry and Zeithaml (1991, p. 39) argument that understanding
customer expectations is a prerequisite for delivering superior customer service because
customers compare their perceptions with expectations when judging a firm’s service. Thus
the gap between customers’ expectations and perceptions is important in order to understand
service quality, not from the provider’s perspective, but rather that of the customer.

16
2.6 Service Quality Models

2.6.1 Introduction

The measurement of service quality is as controversial as its definition. Due to the

complexity of the construct, researchers have proposed dissimilar perspectives with regard to
its measurement. That is to say, notwithstanding the considerable work undertaken in this
area, there is no universal agreement amongst experts regarding the best approach to measure
service quality. Seth, Deshmukh and Vrat (2004, p. 914) posit that conceptual models in
service quality enable management to identify quality problems and thus help in planning for
the launch of a quality improvement programs thereby improving the efficiency, profitability
and overall performance.

2.6.2 Gronroos’s Service Quality Model

Gronroos (1984) developed the first service quality model in the 1980s based on the Nordic
School of thought (Abdul Khader & Madhavi, 2017; Polyakova & Mizra, 2015; Ghotbabad,
Feiz, & Baharun, 2015) and measured perceived service quality based on a test of qualitative
methods (Yarimoglu, 2014, p. 81). He postulated that customers’ evaluate service quality by
comparing expectations with perceptions of service, which implies that the customer’s
perception of service quality plays an essential role in his model. The importance of the
model lies in the fact that it captures the service delivery process. As shown on Figure 2, the
model divides the customer’s perspective into two principal dimensions, which are
recognized as forming critical parts of the service encounter: technical quality (what has been
provided) and the functional quality (how the service has been provided.

17
Figure 2: The Gronroos Model of Service Quality

Source: Gronroos (1990)

Another significant dimension of Gronroos’s Technical and Functional Quality Model is

corporate image. As Gronroos (1998, p. 335) puts it, the image of the service provider has an
impact on the overall quality perception. According to Gronroos (1984), several factors can
influence this dimension such as the technical, functional qualities, as well as customs,
ideology, word of mouth, pricing and public relationship. He also adds that the dimensions of
the Technical and Functional Quality Model are interrelated, therefore technical quality can
be a prerequisite for an effective functional quality. Ghotbabad, Feiz and Baharun (2015)
found that the customers’ expectation is influenced by how they perceive firm services. That
is, customers are not only influenced by the functional and technical dimensions, but also
form an evaluation of a firm’s image. Gronroos (1984) concludes that functional quality is
more important to perceived service quality than the technical quality as long as the technical
quality dimension is at a satisfactory level.

18
2.6.3 The Conceptual Gaps Model

As a result of research conducted with business executives from four service industries,
Parasuraman et al., (1985) proposed service quality as a function of the gap between
customers’ expectations of service and their perceptions of the actual service delivered. This
was the starting point of the Gap model (see Figure 3), whose attributes of service quality
stems from both the viewpoint of customers and service providers. The most important
insight obtained from the study was that; a set of key discrepancies or gaps exist regarding
the executives’ perception of service quality and the tasks associated with service delivery to
customers. These gaps were major hurdles in attempting to deliver a service which consumers
would perceive as being of high quality (Parasuraman et al. 1985). According to Brown and
Bond (1995) the gap model is one of the best received and most heuristically valuable
contributions to the service literature. Research has shown that for the past thirty years, it has
been widely used and its validity confirmed across industries such as banking (Ananth &
Ramesh, 2011) and health sector (Yadav & Dabhade, 2013) to integrate customer focus
across firm functions, identify pitfalls in service quality and diagnose their probable causes.

Parasuraman et al., (1985) identified four gaps (see Figure 3) that could impact service
quality from the service provider’s side. The fifth gap, which is caused by the service quality
shortfall as perceived by customers, is seen as the most important gap and serves as a key
conceptual basis for the SERVQUAL instrument. These set of gaps were viewed as major
barriers to achieving high levels of service quality. The upper part of the model revolves
around aspects related to the customer, whilst the lower part shows gaps on the service
deliverer’s side.

19
Figure 3: The Gap Model

Source: Parasuraman et al., (1985)

20
Gap 1: Customer Expectation - Management Perception Gap

This is the gap between management’s perceptions and actual customer’s expectations.
Managers do not always appropriately interpret the expectations of customers, this often
affects the way customers perceive service quality. The key to delivering high quality service
is by ensuring that the expectations of the customer are either matched or exceeded.

Gap 2: Management Perception – Service Quality Specification Gap

This is the gap between management’s perceptions of the customer’s expectations and the
service organization’s quality specifications. This gap often results from insufficient planning
procedures, resource constraints and management indifference. In order to close the gap,
management’s commitment to service quality is crucial (Parasuraman et al., (1985, p. 45).

Gap 3: Service Quality Specification – Service Delivery Gap

This is the gap between service quality specifications and actual service delivery. The gap
often affects service quality from the customer’s stand point (Parasuraman et al., 1985, p. 45).
According to Zeithaml and Bitner (1996, p. 44), this gap is caused by employee role
ambiguity, role conflict, poor employee-job fit, poor technology-job fit, inappropriate
supervisory control systems, lack of perceived control and lack of teamwork.

Gap 4: Service Delivery – External Communication Gap

This is the gap between actual service delivery and external communications about service
delivery. This gap occurs when the promises made by the service organization do not match
actual service delivery. Zeithaml and Bitner (1996, p. 44) state that the causes of Gap 4 are
poor inter-departmental communication, differences in policies and procedures between
branches or departments, and a tendency by marketing people to overpromise.

21
Gap 5: Expected Service – Experienced Service Gap

Also termed the service gap, it represents the difference between expected and perceived
service quality. Service quality as perceived by customers depends on the direction of Gap 5,
therefore, it is the function of the first four gaps. Zeithaml and Bitner (1996, p. 44) suggest
that Gap 5 is the most crucial gap as it forms the basis for managing the mismatch between
customer’s expectations and their perceptions of the service delivery.

2.6.4 The SERVQUAL Instrument

The SERVQUAL instrument is based on the original Gap model by Parasuraman et al.,
(1985). It was designed to uncover broad areas of a service firm’s shortfalls and strengths.
SERVQUAL is the most adapted and widely used instrument for measuring service quality as
perceived by customers (Parasuraman et al., 1985; Asubonteng, McCleary, & Swan 1996;
Gronroos 1982; Pansiri & Mmereki, 2010). It constitutes an important landmark in the
service quality literature and has been extensively applied in different service settings (Gorji
& Sargolzaee, 2011, p. 192). The model operationalizes service quality by evaluating the
difference between the customer’s expectations and the actual service delivered, it is
therefore based on the disconfirmation paradigm of perceptions minus expectations. The
famous equation, Q=P-E was derived from Gap 5, where Q=perceived service quality,
P=perceived service, and E=expected service. According to the equation, the key to
maximizing service quality is by minimizing the perceived service – expected service gap
(Dwayne, 2004, p. 183). In its original form, the SERVQUAL instrument was based on ten
service quality dimensions used by customers in assessing service quality (Parasuraman et
al.,1985).

Following numerous quantitative and qualitative researches, the ten dimensions of service
quality were reduced to five; tangibility, reliability, responsiveness, assurance and empathy
(see Table 1), using factor analyses. Subsequently, a 22-point SERVQUAL scale was
developed for the ‘expectation’ and ‘perception’ sections of the questionnaire (Parasuraman,
Berry, & Zeithaml, 1988). The last two dimensions (assurance and empathy) contain items
representing seven original dimensions; communication, credibility, security, competence,
courtesy, understanding/knowing customers, and access. Therefore, while SERVQUAL has

22
only five distinct dimensions, they capture facets of all 10 originally conceptualized
dimensions (Parasuraman et al., 1988, p. 23).

Table 1: Determinants of Service Quality

Tangibles Physical facilities, equipment and appearance of personnel.

Reliability Ability to perform the promised service dependably and
accurately.
Responsively Willingness to help customers and provide prompt service.
Assurance Knowledge and courtesy of employees and their ability to inspire
trust confidence.
Empathy Caring, individualized attention the firm provides its customers.

Source: Parasuraman et al. (1985, p.23)

[Link] Value of the SERVQUAL Instrument

The SERVQUAL instrument has been used extensively in industries such as banking
(Kumar, Kee, & Charles, 2010; Han & Baek, 2004; Ali & Raza, 2015; Aghdaie & Faghani,
2012); health (Umath, Marwah, & Soni, 2015; Zarei, Arab, Froushani, Rashidian, &
Tabatabaei, 2012; Babakus & Mangold, 1992; Peprah & Atarah, 2014); hospitality (Rauch,
2015; Mazumder & Hasan, 2014; Akbaba, 2006; Saleh & Ryan, 1991); higher education
(Donlagic & Fazlic, 2015; Cerri, 2012; Tan & Kek, 2004); public transportation (Kokku,
Ahmed, & Prince, 2011; Nutsugbodo, 2013; Cavana, Corbett, & Lo, 2007); restaurant
(Manwa, 2011; Andaleeb & Conway, 2006; Prybutok & Qin, 2009) and telecommunications
(Khatibi, Ismail, & Thyagarajan, 2002; Alnsour, Tayeh, & Alzyadat, 2014; Loke, Taiwo,
Salim, & Downe, 2011). Moreover, (Szwarc, 2005, p. 23) notes that the SERVQUAL
instrument has the following strengths;

 It enables users to segment their customers according to expectations and perceptions,

the segments can then be analysed with other data, such as demographics.
 The internal consistency of the SERVQUAL scale has been shown to be high in
various studies that have adopted it over the years.

23
Wisniewski (2001) as cited in Schalkwyk and Steenkamp (2014, p. 94) argued that the wide
use of the SERVQUAL instrument indicates that consensus has been reached in terms of its
basic values and application possibilities. No other instrument appears to be superior to
SERVQUAL, researchers believe it will dominate the field of service quality research for
many years to come. Cuarana (2002, p. 814) echoes the same sentiments and observes that
SERVQUAL represents one of the most widely used operationalization of service quality.
Accordingly, the use of SERVQUAL in measuring service quality in the banking industry is
not new. A review of the literature shows that the instrument has been used extensively in the
banking industry. Angur, Nataraajan and Jahera, (1999) argue that SERVQUAL is the best
instrument for measuring service quality in the banking industry. The instrument will
therefore serve as a foundation for this study since all the five dimensions are relevant for
measuring perceived service quality in the banking industry, based on the review of the
literature. This will also assist in identifying gaps in perceived service quality and find out
which dimensions customers are most loyal to. Furthermore, the study will follow
recommendations by Carman (1990) and Babakus and Boller (1992) who argued that the
SERVQUAL instrument cannot be applied universally, therefore, it should be customized to
make it more applicable and industry specific. Similarly, Schalkwyk and Steenkamp (2014)
noted that using the SERVQUAL instrument indefinitely as a methodology may not be
sufficient, hence it needs to be adapted to the needs of any institution in order to improve its
scope.

A careful study of the literature reveals that the SERVQUAL instrument has been applied
across various service industries in Botswana. In the health care services industry, Pansiri and
Mmereki (2010) evaluated the impact of public service reforms in the provision of primary
health care and used the SERVQUAL instrument on a sample of 151 clinic customers in
Botswana. The results indicated that the adoption and implementation of reforms in the
public health sector have not improved the level of service quality and customer satisfaction.

In a different study, Manwa (2011) measured the gap between customers ‘expectations and
their perceptions of service quality in Botswana’s restaurants. Data was collected among 166
diners and the SERVQUAL instrument was vital in investigating the extent to which
restaurants meet customer’s expectations. In this particular study, Botswana citizens
comprised of 70% of the respondents. The results of the study indicated that Botswana’s

24
restaurants only meet customer’s expectations in tangibles and perform below expectations
with regard to intangible dimensions.

Recently, Selelo and Lekobane (2017) used the SERVQUAL instrument to assess the effect
of service quality on customer satisfaction in Botswana’s telecommunications sector. The
study was conducted on 510 mobile telephone users randomly selected in Gaborone, the
capital city of Botswana. Their findings revealed that indeed there exists a strong relationship
between service quality and customer satisfaction in Botswana’s telecommunications sector.
The main results of the study showed that assurance, credibility, security and tangibles were
the major dimensions which were positively related to customer satisfaction.

In line with the above, it can be argued that an attempt has been made to extend the
understanding of SERVQUAL in the context of Botswana. Although these studies examined
customer based expectations and perspectives in relation to service quality dimensions, no
attempt has been made to investigate the relationship between service quality and customer
loyalty in the banking context. Hence the rationale for this study.

[Link] Criticisms of the SERVQUAL Instrument

Although the SERVQUAL instrument was initially designed to be a generic measure for all
service encounters, it has been extensively criticized on both theoretical and operational
grounds. The most notable criticism came from Cronin and Taylor (1992) who questioned its
conceptual, methodological and analytical basis. According to the researchers, the
perception-only-based measure is effective and accurate in the evaluation of service quality,
they argue that it is unnecessary to measure expectations since the perception minus
expectation gap theory is supported by little, if any, theoretical evidence. This debate led to
further research Brady, Cronin and Brad (2002) who echoed the same sentiments as Cronin
and Taylor (1992), they argued that service quality is properly modelled by measuring the
customer’s perceptions of the actual service delivery as opposed to the gap between
customers ‘expectations and perceptions. Similarly, Teas (1993) also identified problems
concerning the operationalization of the SERVQUAL instrument, he questioned whether the
perception minus expectation gap provides further information beyond that already contained
in the perception component of service quality. He therefore proposed alternative models for
measuring service quality. Brown, Churchill and Peter (1993) further extended on this

25
criticism and argued that the perception minus expectation gap theory has poor reliability and
its results have poor discriminant validity.

Additional criticism of the SERVQUAL instrument is focused on its generic nature. Various
researchers claim that the instrument cannot be universally applied across a broad spectrum
of industries (Carman, 1990; Babakus & Boller, 1992). According to Szwarc (2005, p. 32),
some industries may have only one or two dimensions of service, while others may be more
complex, having four or five, SERVQUAL makes no allowance for this. The following are
the limitations of the SERVQUAL model according to (Buttle, 1996, pp. 10-11):

Theoretical:

 Paradigmatic objections: SERVQUAL is based on a disconfirmation paradigm rather

than an attitudinal paradigm; therefore it fails to draw on established economic,
statistical and psychological theory.
 Gaps model: There is little evidence to suggest that customers assess service quality
in terms of performance minus expectation gaps.
 Process orientation: SERVQUAL focuses only on the process of service delivery and
not the outcomes of the service encounter.
 Dimensionality: SERVQUAL’s five dimensions are not universal; the number of
dimensions comprising service quality is contextualised.

Operational:

 Expectations: SERVQUAL fails to measure absolute service quality expectations

owing to the fact that the term means different things to different scholars
 Item composition: Each service quality dimension has four or five items, therefore
they cannot capture the variability within each dimension.
 Moments of truth (MOT): Customers’ evaluation of service quality may vary from
moments of truth to moments of truth.
 Polarity: The reversed polarity of items in the scale causes respondent error.
 Scale points: The seven-point Likert-type scale is flawed.
 Two administrations: Two administrations of the instrument cause boredom and
confusion.

26
  Variance extracted: The SERVQUAL score accounts for a disappointing proportion
of item variances.

2.6.5 The SERVPERF Model

According to Cronin and Taylor (1992), there is no real evidence to support that service
quality is directly affected by the perception minus expectation gap measure, therefore the
conceptualization of the SERVQUAL instrument is inadequate. The researchers maintain that
service quality is better visualized by rating only the perceptions of actual service received.
This led to the development of an alternative to the SERVQUAL instrument called the
SERVPERF. Gronroos (2000) asserts that the SERVPERF instrument is easier to administer
and analyse. In their study of service quality across four industries (banking, pest control, dry
cleaning and fast food), Cronin and Taylor (1992) found that the SERVPERF instrument
explains more variation in service quality than does SERVPERF. In addition, Seth,
Deshmukh and Vrat (2005) found that the performance based SERPERF is more efficient in
comparison with SERVQUAL as it reduces the number of items to be measured by 50
percent. Several other researchers also tested the SERVPERF instrument and found it to be
superior to the SERVQUAL (Hartline & Ferrell, 1996; Babakus & Boller, 1992; Bolton &
Drew, 1991).

Although the performance based SERVPEF was found to have greater validity, reliability and
methodological soundness by several scholars, a valid criticism for this instrument lies in its
weak diagnostic power. For instance, using data collected through a survey of diners at fast
food restaurants in Delhi, Jain and Gupta (2004, p. 25) found the SERVPERF instrument to
be deficient in its diagnostic power. In line with this view, (Bhatt & Sunil, 2012) identified
the SERVQUAL instrument as a more appropriate measure based on its diagnostic power, as
opposed to the SERVPERF.

2.7 Customer Loyalty

2.7.1 Introduction
27
Customer loyalty plays an important role in service literature. Research into the concept dates
back to almost 100 years ago (Copeland, 1923) and was defined as mere purchase behaviour
(Jacoby & Kyner, 1973). Original contributions to the discipline focused exclusively on the
loyalty customer’s display towards tangible goods, known as brand loyalty (Kim, Morris, &
Swait, 2008, p. 99; Gremler & Brown, 1999; Jacoby & Chesnut, 1978). However, these
findings could not be generalised to service organizations (Gremler & Brown, 1996;
Bloemer, Ruyter, & Wetzels, 1998), which typically provide intangible goods.
Consequently, more recent literature highlights the diversity of approaches applied to
understanding customer loyalty and characterize it is a multi-dimensional concept.

Customer loyalty is a widely discussed topic in marketing literature. Numerous studies have
acknowledged its importance in the banking context (Kheng et al., 2010; Shanka, 2012; Fasih
& Khan, 2014; Auka , 2012) owing to its ability to create and maintain competitive
advantage. Consequently, banks face an increasing pressure to match or exceed customer’s
expectations and cultivate long-term relationships. According to (Reichheld & Sasser, 1990)
a 5% increase in customer retention can increase a company's profitability from 25% to 85%.
On the other hand, a 5% reduction in customer defection can increase customer value by as
much as 85%, especially in the banking industry (Clow & Baack, 2010).

As postulated by Fasih and Khan (2014 p.331), quality of services is an essential element
for enhancing customer satisfaction and customer loyalty, which are important factors in
improving the performance of banks and determining their success. According to Reichheld
(1993), it is far cheaper to retain an existing customer than it is to attract a new one. It is also
believed that the cost of attracting a new customer may be five times the cost of keeping a
current customer (Kotler, Ang, Leong, & Tan, 1999), and that the longer the customer stays
in a long-term relationship, the more profitable the relationship becomes to the organization
(Sim, Mak, & Jones, 2006). One advantage of holding onto your customers is that in most
businesses, customer spending tends to accelerate over time (Reichheld, 1996).

Despite a plethora of studies on customer loyalty spanning over 100 years, no concensus
exists as to the definition of the concept. Several scholars have raised arguments that the
construct of customer loyalty differs from one context to the other and is more complex than
brand and store loyalty (Gremler & Brown, 1996). Pearson (1996) defines customer loyalty

28
as a mind-set of a customer who holds favourable attitudes toward a service firm, commits to
repurchase the company’s product/service and recommends the product/service to others.
This definition recognizes the multi-dimensional aspects of loyalty. First, it emphasizes the
relative attitude towards the service firm. At the same time, it identifies repeat patronage as
another essential variable for defining customer loyalty. In Gremler and Brown (1996),
customer loyalty is defined as the degree to which a customer exhibits repeat purchasing
behaviour from a service provider, possesses a positive attitudinal disposition toward the
provider, and considers using the provider when a need for this service arises. This definition
adds another orientation to the behavioural dimension, it is therefore consistent with Pearson
(1996)’s definition. It further reinforces Day (1969)’s notion that loyalty is a two dimensional
construct.

The concept of customer loyalty also extends to service organizations. According to Ziethaml
(1981), loyalty is greater or more prevalent among service consumers than among goods
consumers. Auka, Bosire and Matern (2013, p. 35) define loyalty in service businesses as the
customer’s commitment to do business with an organization, purchasing their products and
services repeatedly and recommending them to others. In order to have a more loyal customer
it is necessary to assess how the customer perceives organizations efforts (Goyal & Chanda,
2017). Despite a bold attempt by Reichheld (2003) to conceptualize loyalty as a uni-
dimensional construct (willingness to recommend), the current dominant view in service
literature is that loyalty is defined by taking into consideration both the behavioural and
attitudinal dimensions. The most commonly accepted conceptual definition which
incorporates the two dimensions is by Jacoby and Kyner (1973, p. 2) who describe loyalty as:

“the biased behavioural response expressed over time, by some decision-making unit
with respect to one or more alternative brands out of a set of such brands, and is a
function of psychological process.”

This definition is relevant to this study due to its widespread academic use.

2.7.2 Customer Loyalty Dimensions

The interest that marketing researchers have shown on customer loyalty has developed
through three different phases. Consequently, three dimensions of customer loyalty have been
29
identified in service literature; behavioural, attitudinal and composite. The first phase defined
loyalty exclusively on a behavioural scale, this involved total purchases (Cunningham, 1956;
Farley, 1964), probability of purchase (Harary & Lipstein, 1962), as well as frequency of
purchase or buying pattern (Turker, 1964). According to Gremler and Brown (1996, p. 172),
the behavioural aspect of loyalty can be seen as some form of conduct that is directed towards
a particular brand or entity over a certain period of time. O'Malley (1988, p. 49) notes that
behavioural loyalty provides a more realistic picture of how well the brand is doing vìs-à-vìs
competitors, and the data generated facilitates the calculation of customer life-time value and
enhance prediction of purchase probabilities.

Whilst behavioural loyalty is widely mentioned in service literature, it has been attacked by a
plethora of critics. Jacoby and Chesnut (1978) note that a behavioural definition is insufficient
because it does not distinguish between true loyalty and spurious loyalty. Dick and Basu
(1994) also expressed the view that behavioural measures are insufficient in determining the
factors which influence repeat purchase. Bobalca (2013) further added to this criticism by
stating that the main weakness of the description of loyalty in terms of behavioural
dimensions is the lack of interest in the reasons of consumers’ acquisitions. Bobalca (2013)
also affirms that before 1970, loyalty was not investigated as a construct but as a simple
variable measuring the frequency of customer purchase.

The behavioural dimension of customer loyalty could not stand the test of time. As early as
1944, Guest proposed measuring loyalty by means of an attitudinal dimension, this was the
beginning of the second phase. The attitudinal dimension contends that positive attitude
determines the customers’ allegiance to an organization or a service over a certain period of
time. A positive attitude can be assessed through things like pride, ego, emotions, beliefs and
goals of a customer (Du Plessis, Strydom, & Jooste, 2012, p. 548). Dick and Basu (1994) add
that attitudinal loyalty reflects a consumer’s desire to continue his relationship with the
company in spite of the lower prices of the competing companies and to recommend the
products or the services to others. These studies focused their entire attention on the
attitudinal aspect of loyalty and totally ignored the existence of purchase behaviour. As
loyalty research evolved, attitudinal loyalty was recognized as inadequate in explaining the
concept of loyalty. This is because it did not enter into the reasons why loyalty is developed.
As Lu (2007) puts it, there are instances when a customer holds a favourable attitude toward a

30
company, but he/she does not make any purchase from there. This led to the need for further
analysis of the loyalty construct.

While loyalty was traditionally conceptualized as a uni-dimensional construct in the sphere of

scholarship, during the third and final phase, Day (1969) argued that a two-dimensional view
of loyalty makes more conceptual sense. Jacoby and Kyner (1973) also agreed that
incorporating the behavioural and attitudinal dimension in the conceptualization of loyalty
conveniently and effectively provides a clearer view of the construct. According to Lutz and
Winn (1974) loyalty is not monolithic, thus the two dimensions play an important role on a
customer’s propensity to be loyal. Oliver (1999, p. 34) offers a definition which combines the
two dimensions and defines loyalty as a deeply held commitment to rebuy or re-patronize a
preferred product or service in the future, thereby causing repetitive same-brand or same
brand-set purchasing, despite situational influences and marketing efforts having potential to
cause switching behaviour. A recent stream of research has also imitated this two-
dimensional conceptualization of loyalty (Dick & Basu, 1994).

2.8 Relationship between Service Quality and Customer Loyalty

There has been relatively little empirical research addressing the relationship between
perceived service quality and customer loyalty. Furthermore, the question of whether a direct
relationship exists between service quality and customer loyalty has remained unclear
(Bloemer, Ruyter, & Wetzels, 1998). Several authors have reported a strong and direct
relationship between service quality and customer loyalty. For instance, following an
empirical study of three travel agencies in China, Chunxiao et al. (2001) found that service
quality has an influence on customer behavioural intention through a significant indirect and
direct effect. In their study which focused on elements of repurchasing as well as willingness
to recommend, Boulding et al., (1993) also found a positive relationship between service
quality and behavioural intentions. Regionally, these findings were similar to a study
conducted in the Kenyan banking industry where Auka (2012) observed a direct relationship
between service quality and loyalty. Chen (2008) following an investigation in a training
industry in China found that the dimensions of customer service quality: tangibles,
responsiveness and empathy also have a direct association with customer loyalty. The results
of these studies suggest that there is a relationship between perceived service quality and
customer loyalty.

31
Other schools of thought offer opposing views on the direct relationship between perceived
service quality and customer loyalty. In their empirical work on four industries, Cronin and
Taylor (1992) found that perceived service quality has an indirect relationship with customer
loyalty. Minh and Huu (2016) also found that customer satisfaction mediates the effects of
perceived service quality on customer loyalty in their study of service delivery in the
Vietnamese banking sector. Similar results were also obtained by (Akbar & Parvez, 2009) in
their study of a major private tele-communication company operating in Bangladesh. In
another study by Lam, Shankar, Erramilli and Murthy (2004), the authors also confirmed the
mediating role of customer satisfaction on the perceived service quality-customer loyalty
relationship.

2.9 Synthesis

This chapter provides a broader insight on the relationship between perceived service quality
and customer loyalty and the rationale for the hypothesis. Although there is no universally
accepted measurement of service quality, several researchers have proposed a multitude of
models during the past few decades, some of which are discussed in this chapter. An analysis
of the literature review shows that two schools of thought form the basis upon which
perceived service quality is measured i.e. the disconfirmation based (perceptions minus
expectations) and the performance based paradigm. Further analysis reveals that there are
common elements amongst the various service quality models. For instance, the Gronroos,
Gap and SERVQUAL models are all based on the disconfirmation paradigm. In addition, the
SERVPERF model uses all the SERVQUAL dimensions, although it neglects the use of
difference scores (perception minus expectation) which form the basis of SERVQUAL.

2.10 Proposed model

On cursory appraisal, it would seem that there is a direct relationship between perceived
service quality and customer loyalty. However, this relationship is more complex as it is
affected by other factors (see Figure 4). The basic premise of the proposed conceptual model
in this study is that, the relationship between perceived service quality and customer
satisfaction is better visualized by considering the mediating effects of switching costs and
demographic factors. Porter (1980) defines switching costs as costs that deter customers from

32
changing from one service provider to another. These costs involve the customer’s time,
effort, and knowledge that they invest in products, services, or associations with the service
provider (Hess & Ricart, 2003). On the other hand, demographic factors include age, sex,
occupation and frequency of use.

The proposed model also illustrates three major relationships. First, perceived service quality
provides a favourable condition for customer loyalty. Second, switching costs mediate the
effect of perceived service quality on customer loyalty. Third, demographic factors enhance
the effect of perceived service quality on customer loyalty.

Figure 4: Proposed Conceptual Model

Independent Variable Mediating Variables Dependent Variable

Switching
Costs

Perceived Customer
Service Loyalty
Quality

Demographic
Factors

Source: Compilation by author

2.11 Research Hypotheses

Based on the literature reviewed the following hypotheses are put forward:

33
H1: There is a positive relationship between perceived service quality and customer loyalty in
Botswana’s banking industry
H2: Switching costs mediate the relationship between perceived service quality and customer
loyalty in Botswana’s banking industry
H3: Demographic factors mediate the relationship between perceived service quality and
customer loyalty in Botswana’s banking industry

34
2.12 Theoretical Framework

This paper adopts the Social Exchange Theory which has its roots in economics, psychology
and sociology. The theory is a social psychological and sociological perspective that explains
social exchange and stability as a process of negotiated exchanges between parties. It states
that all human relationships are formed by the use of subjective cost-benefit analysis and the
comparisons of alternatives. For example, when a person perceives the costs of a relationship
as outweighing the perceived benefits, then the theory predicts that the person will choose to
leave the relationship (Siddiqui, 2008, p. 161). The theory expounds the associations between
service quality, satisfaction and loyalty, which is why it is appropriate for this study. In social
psychology, the intention to continue in a relationship is referred to as relationship
maintenance by social exchange theory (Thibaut & Kelley, 1959). According to Morgan and
Shelby (1994), another aspect of social exchange theory is commitment, which is fostered by
trust. The causal relationship between trust and commitment is based on the principle of
generalized reciprocity, because “commitment entails vulnerability and parties will seek only
trustworthy partners.

2.13 Conclusion

This chapter presented literature on different perspectives of perceived service quality and
customer loyalty. A brief overview of the relationship between these dimensions was also
discussed. A number of studies demonstrated a direct relationship between service quality
and customer loyalty. On the other hand, other scholars reported an indirect relationship
between these service dimensions. Chapter 3 will discuss the research methods that will be
employed to test the hypothesis proposed by this study.

The literature reviewed indicates that there is lack of empirical research on the dimensions of
perceived service quality in Botswana’s banking industry. To date, no study has investigated
the relationship between perceived service quality and customer loyalty in the banking
context in Botswana. Internationally, while several authors have reported a strong direct
relationship between service quality and customer loyalty (Chunxiao et al., 2001; Boulding
[Link]., 1993; Auka, 2012; Chen, 2008), others have reported that this relationship is indirect
(Cronin & Taylor,1992; Li, 2013). The current study seeks to add further insight to the

35
literature on the perceived service quality and its relationship with customer loyalty in the
context of the banking sector in developing countries and Botswana in particular.

Chapter 3

Methodology

3.1 Introduction

This chapter places emphasis on the framework upon which this study will be conducted. In
addition, it provides a detailed description of the research methodology employed in this
study in order to answer the research question and achieve the study’s objectives. In doing so,
the academic theories behind the selection of the techniques and methods selected will be
discussed and justified.

3.2 Re-instatement of the research objectives

The main objective of the present study is to investigate the relationship between perceived
service quality and customer loyalty in the banking industry in Botswana. More specifically
the study seeks to:

iv. Investigate whether a relationship exists between perceived service quality and
customer loyalty in the banking industry in Botswana, and if so,
v. Investigate whether customer loyalty is a function of perceived service quality in
the banking industry in Botswana.
vi. Investigate whether the relationship between perceived service quality and
customer loyalty in the banking industry in Botswana is mediated by other factors.

3.3 Research Philosophy

Two major research philosophies that are usually employed in consumer research are
positivism and interpretivism. This particular study is quantitative in nature and will follow
the positivist approach because it is essentially quantitative in nature. The choice of this type
of philosophy is based on the nature of the research problem. According to Berg (2001, p.
10), positivists utilize empirical methodologies borrowed from the natural sciences to
investigate phenomena.

36
3.4 Research Design

Burns and Grove (2003, p. 195) define research design as:

“a blueprint for conducting a study with maximum control over factors that may
interfere with the validity of the findings.”

Similarly, Churchill and Iacobucci (2005 ) call it a blueprint for a research to be followed in
order to successfully implement a research. On the other hand, McDaniel and Gates (1999)
see research design as a plan for a study that provides specification of procedures to be
followed by the researcher in order to achieve the research objective, as well as, to test the
hypotheses. In this particular study, a survey method will be employed.

3.5. Sample population

Polit and Hungler (1999) define population as an aggregate of all the objects, subjects or
members that conform to a set of specifications. Customers of the 11 commercial banks in
Gaborone, the capital City of Botswana will form the target population for data collection.

3.6 Sampling Method

To ensure a representative sample of all the banks operating in Gaborone, stratified sampling
will be employed in this study. Within each stratum, the selection of bank customers will be
done using random sampling, this will ensure that there is no opportunity for human bias.

3.7 Sample Size

An optimum sample is one which fulfills requirements of efficiency, reliability and

flexibility (Kothari, 2006). Consideration of the appropriate sample size has to be taken into
account in order to make generalizations about the study. Sample statistics need to be reliable
and represent the population parameters as close as possible within a narrow margin of error
(Sekaran, 2003). According to Crouch (1984, p. 142) minimum sample sizes for quantitative
consumer surveys are of the order of 300 to 500 respondents. Similarly, a sample size for this
study will be determined through the method developed by (Krejcie & Morgan, 1970, p.
608).

37
The formula is as follows;

S = X² NP(1-P) ÷ d² (N-1) + X² P(1-P)

S = required sample size.

X² = the table value of chi-square for 1 degree of freedom at the desired confidence level
(3.841).
N = the population size.
P = the population proportion (assumed to be 0.5 since this would provide the maximum
sample size).
d = the degree of accuracy expressed as a proportion (0.05).

3.8 Data Collection

As stated, this study investigates the relationship between perceived service quality and
customer loyalty in Botswana’s banking context. Primary data will be collected through self-
administered questionnaires which will be distributed among customers at selected branches
of the main banks in Gaborone.

Previous studies have found satisfactory loading of scale items when using SERVQUAL to
measure service quality in the banking industry (Cuarana, 2002). This study will adopt a
modified SERVQUAL instrument in order to achieve the objectives of the study. The
questionnaire for this study consists of four sections (see Appendix 1). The first section
contains questions about the respondent’s demographics including sex, age, occupation and
period with the bank. The second section contains a SERVQUAL questionnaire which
comprises of 21 questions related to the five service quality dimensions. A five point Likert
scale will be used to measure service quality and coded as follows, 1=”strongly disagree”,
2=”agree”, 3=”neutral”, 4=”agree” and 5=”strongly disagree”. The third section contains
questions related to customer loyalty, customer’s level of agreement will be measured on a
five point Likert scale coded similarly to the second section. In the last section respondents
will provide their opinions with regard to switching costs through a five point Likert scale
adopted in the previous sections. Table 2 below presents the sources of measurement
instruments adopted in this study.

38
Table 2: Sources for Measurement Instruments

Construct Source
Service Quality Parasuraman et al., (1988)
Customer Loyalty Foster and Cadogan (2000)
Switching Costs Colgate and Lang (2001) and Wong (2011)

3.9 Data Analysis Methods

To explore the relationship between service quality dimensions and customer loyalty in the
banking industry in Botswana, the following procedures will be employed:

i. To ensure that data entry errors are minimized, descriptive statistics will be used
to summarize and observe frequencies that may emerge from data. All researchers
perform these descriptive statistics before beginning any type of data analysis
(Patel, 2009)
ii. Cross-tabulation will also be performed to assess the relationship between
perceived service quality and customer loyalty.
iii. Pearson and Spearman’s correlation coefficients will be used to examine the
direction and strength of a relationship between the dependent and independent
variables under investigation (Greasley, 2008)
iv. To determine whether there was a significant difference between the average
values of a sample of matched pairs of similar units, a paired sample t-test will be
employed.
v. To test the hypotheses, stepwise linear regression will be performed.
vi. Van der Waerden’s test will be performed on dependent and independent variables
that will not be normal.
vii. SPSS version 24 will be used to analyze quantitative data.

3.10 Reliability and Validity

According to Le Comple and Goetz (1982), validity is concerned with the accuracy of
scientific findings. Several quality control measures will be employed to ensure that the data
is of satisfactory quality. For instance, Cronbach’s alpha will be used to measure reliability

39
and internal consistency of items in the survey instrument (SERVQUAL) in order to ascertain
its reliability (Straub, Boudreau, & Gefen, 2004). Revelle (1979) posits that internal
consistency is the extent to which all of the items of a test measure the same construct, that is,
the general factor saturation. According to Hattie (1995), internal consistency frequently been
used to denote a group of methods that are intended to estimate reliability of a single-
administrated test. Prior to the data collection, the SERVQUAL instrument will be piloted to
ensure comprehensibility.

3.11 Ethical Considerations

To ensure that this study adheres to ethical considerations, the following measures will be
applied:

(i) The respondents will be asked to sign an informed consent form which explains
the purpose of the research and how issues relating to the confidentiality will be
handled.
(ii) The respondents will be informed that their participation is strictly voluntary, and
that they are free to opt out at any point.
(iii) Contact information will be provided for the respondents should they require
more clarification regarding this study.
(iv) A research permit will be sought through the University of Botswana’s office of
Research and Development (ORD).

3.12 Conclusion

This chapter described the research methodology that was adopted in this study. In addition,
the research objectives that guided the study have been chalked out clearly. Moreover, the
chapter clarified the sample population, size and methods that will be used during the data
collection phase. The data collection tools and analysis methods were also presented as well
as how their reliability, validity and trustworthiness will be ensured.

40
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53
APPPENDIX 1: SURVEY QUESTIONNAIRE

1st May 2019

Dear Respondent,

My name is Otsile Chelenyane. I am a University of Botswana student conducting a study as

part of my partial fulfillment for the award of Master of Business Administration. This
questionnaire consists of four parts and may take approximately 15 minutes to complete. The
major objective of this study is to examine the impact of perceived service quality on
customer loyalty in the banking industry in Botswana. As such, the study will be of use to the
management of commercial banks and financial institutions in general. Please be assured that
this is an academic research and your responses shall be kept strictly confidential and used
for academic purposes only.

For more clarifications regarding this study, feel free to contact either myself
(otsilechelenyane@[Link]; +267 71600443) or my supervisor Mr. Godfrey Themba
(THEMBAG@[Link]; +267 3552980).

Thank you for using your valuable time to fill this questionnaire.

Kind Regards,

Otsile Chelenyane (Mr.)

(+267 71600443)
This questionnaire is divided into four parts, demographics, service quality, customer loyalty
and switching costs.

QUESTION 1. DEMOGRAPHICS

The questions below relate to personal data. Please tick as applicable.

1. What is the name of your main bank?

______________________________________________
2. Sex
Male Female
3. Age
18-25 26-35 36-45 46-55
55-65 66-75 76+

4. Marital Status
Married Single Divorced Other (Please
specify)______________

5. Highest level of education you have completed

Primary School Junior Secondary Senior Secondary
Diploma/Certificate Bachelor’s Degree Postgraduate Degree

6. Your occupation
Professional Self-employed Student Civil Servant
Laborer Farmer Unemployed  Retired

Other

7. Your Monthly Income before tax

Less than P9, 999 P10, 000-P19, 999 P20, 000 - P29, 999
P30, 000 and above
8. How long have you been banking with your current bank? ____ (years)
9. How often do you visit the bank?
✘ Every day Every week Every Month Every Year

10. Do you bank with other banks?

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 Yes No

11. 10. If yes, which bank ______________________________________________?

12. What type of account(s) do you have with your current bank?
Cheque account Savings account Online account

Other (please specify) ______________________________________________

QUESTION 2. SERVICE QUALITY

Please circle where appropriate to reflect the extent to which you agree with the following
statements about your main bank.

Strongly Strongly
Dimensions Items Disagree Neutral Agree
Disagree Agree

[Link] bank has modern physical facilities and equipment 1 2 3 4 5

[Link] bank has visually appealing physical facilities associated with the
1 2 3 4 5
service
Tangibility
[Link] associated with service, such as pamphlets and
1 2 3 4 5
advertisements are visually appealing to me
[Link] employees have an acceptable appearance for their line of work 1 2 3 4 5

[Link] employees fulfil promises on time 1 2 3 4 5

[Link] employees are dependable in handling customer's service
1 2 3 4 5
problems
Reliability 1 2 3 4 5
7. Bank employees solve customer's problems sincerely
[Link] employees perform service right at the first time 1 2 3 4 5

[Link] employees provide service at the promised time 1 2 3 4 5

[Link] employees are prompt in responding to inquiries/requests 1 2 3 4 5

[Link] personnel informs customers exactly what services will be
1 2 3 4 5
Responsivenes performed
s [Link] personnel are knowledgeable and respond to queries
1 2 3 4 5
effectively
[Link] employees are never busy to respond to customers 1 2 3 4 5

[Link] behavior of the Bank's employees instils confidence in me 1 2 3 4 5

[Link] employees understand their customers 1 2 3 4 5

Assurance [Link] employees show sincere interest in solving customer's
1 2 3 4 5
problems
[Link] employees have the knowledge to answer my questions 1 2 3 4 5

[Link] employees have the customer's best interest at heart 1 2 3 4 5

[Link] employees are always willing to help 1 2 3 4 5

Empathy
[Link] employees provide individualized attention 1 2 3 4 5

[Link] operating hours are convenient to all customers 1 2 3 4 5

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QUESTION 3. CUSTOMER LOYALTY
Please circle where appropriate to reflect the extent to which you agree with the following
statements about your main bank.

Strongl
y Disagre Neutra Strongl
Loyalty Agree
Disagre e l y Agree
e
[Link] preference for this bank would not willingly change 1 2 3 4 5
[Link] would be difficult to change my beliefs about this bank 1 2 3 4 5
[Link] if close friends recommended another bank, my
1 2 3 4 5
preference for this bank would not change
4.I will utilize this bank the next time i need banking
1 2 3 4 5
products/services
5.I would always recommend my bank to someone who seeks
1 2 3 4 5
my advice
6. I will continue to patronize this bank even if the service
1 2 3 4 5
charges are increased moderately

QUESTION 4. SWITCHING COSTS

Please circle where appropriate to reflect the extent to which you agree with the following
statements about your main bank.

Strongly Strongly
Switching Costs Disagree Neutral Agree
Disagree Agree
[Link] would be expensive to switch to another bank 1 2 3 4 5
[Link] would cost me a lot of time to switch to another bank 1 2 3 4 5
[Link] would cost me a lot of effort to switch to another bank 1 2 3 4 5
[Link] would be risky to switch to another bank as the new provider
1 2 3 4 5
may not provide good service

14. In your opinion, what should your bank do to increase your loyalty?
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
________________________

THANK YOU FOR YOUR COOPERATION

57