Patronage behaviour of Ghanaian bank customers

CHAPTER ONE
INTRODUCTION

1.1 Country profile

Ghana is located on the West African Coast with a population of 24,223,431 and has a growth rate of 28%. The population consists of 48.7% males and 51.3% females (Census 2010). Cape Coast is the capital of the central region as well as the capital city of the Fante people (Mfantsefo). “It is the historical city of Ghana, the centre of British Administration and was the capital of the Gold Coast (Ghana) by 1700 until 1877 when the capital was moved to Accra. Most of the oldest and best schools in Ghana are in Cape Coast” Ghana web (2011). Cape Coast (Cabo Corso) is situated 165 km west of Accra, the capital of Ghana and has a population of 1,593,823 (census 2010).

1.2 History of Banking in Ghana

In 1397, Medieval Florence first introduced the concept of banking “as a network of shops to transfer large sums of money from one place to another against the risk of robbery (E Mubarak, et al.2011)”

The first bank in Ghana was found in 1953 and was called Bank of Gold Coast, with its main aim of providing banking services to the emerging nation for socio-economic development. The bank was to provide support to Ghanaian traders, business people and farmers who could not elicit support from the expatriate banks. A central bank was established in 1957 when Ghana attained independence and the Bank of Gold Coast was renamed Ghana Commercial Bank to focus on providing commercial banking services. The bank started with customers of small Ghanaian traders (now termed SMEs) and other nationals who were expected to maintain credit balance accounts since the bank was not adequately capitalised.

1.3 Current Banking system in Ghana

Now banks in Ghana has customers ranging from salaried workers through small and medium scale entrepreneurs to large trading concerns, quasi governmental institutions and corporate customers. Provisional estimates put the banking population at 2 million out of a total population of about 24 million (ModernGhana.com, 2011).

According to the Bank of Ghana website (2011), Ghana has 30 registered licensed banks and 135 registered Rural Banks. The registered Banks in Ghana can be grouped into Development, Merchant and Commercial banks. The Commercial banks (appendix 1) provide banking services to the general public and companies, the Merchant banks (appendix 1) deals in commercial loans and investment, Development banks (appendix 1) are commercial banks that operate with the aim to generate economic development in low-to moderate-income (LMI) geographical areas and serve residents of these communities. Rural banks (appendix 1) in Ghana provide banking services to the rural villages of the country. Cape Coast has three rural banks: Twifo Rural Bank, Assinman Rural Bank and Kakum Rural Bank.

The banks in Cape Coast are Ghana Commercial Bank (GH) Ltd., Social Security Bank, UT Bank, HFC Bank, Barclays (GH) Ltd., First National Bank, Prudential Bank, Agricultural Development Bank, Zennith Bank and National Investment Bank. The banks in Ghana provides a wide range of products and services for the benefits of its customers from traditional products of the current or savings accounts to specialised products and services including link2Home for Ghanaians resident abroad, door step cash collection, loans and overdrafts. Investment products like treasury bills as well as fixed and call deposits cut to suit the individual needs of customers, enhance Internet Communication Technology systems to introduce Internet Banking (Commernet Plus), Royal banking, Smart Pay (fee payment), Kudi Nkosuo, Inland Express Money Transfer, ATM services, International Money Remittance Payments, Kidstar Account and Master Card. All this is done to increase profit and enhance shareholder value.

The benchmark interest rate in Ghana is 13% (Trade economy, 2011). Banks in Ghana have a central governing body called Bank of Ghana (BOG). This body ensures systematic development of the banking system in addition to its traditional functions. For instance the Bank of Ghana is empowered by law to go beyond the approach of regulating interest rates and must oblige banks to stay within a limit in terms of interest rates. It also has the responsibility of ensuring that the banks are responsive to the needs of the public. The central bank of the Rural Community in Ghana is the ARB Apex Bank Ltd. The central bank in 1988 embarked on a Financial Sector Structural Adjustment Programme (FSSAP) to enhance the performance of the financial sector. Banking experts say that Ghana can boast of seven new banks because investors, both local and foreign are now eager to establish banks in the country since out of a total of about twenty-four million of the Ghanaian population only two million people are banked.

Customers of banks are trying to make a choice among suppliers which leads to a trade off between relationship and economies, trust and products, service and efficiency, etc. What is more, improved technologies are resulting in customer service advancement that significantly alters customers’ expectations and perceptions. ‘Perceived service quality’ has been defined as the consumers’ global attitude or conclusion of the overall excellence or superiority of the services, which can be measured by service quality dimensions. These factors increase the haste of processes such as solving customer problems, handling of customer complaints, service delivery, handling of applications, etc. When developing the retail banking business model, building customer relationship and long term profitability at customer level are crucial factors for future banking revenues.

“During the past decade, the financial services sector has undergone drastic changes, resulting in a market place which is characterised by intense competition, little growth in primary demand and increased deregulation. In the new market place, the occurrence of committed and often inherited relationships between a customer and his or her bank is becoming increasingly scarce” (Levesque and McDougall, 1996). “Several strategies have been attempted to retain customers and attract customers. In order to increase customer patronage, many banks in Ghana have introduced innovative products and services” (Meidan, 1996), however, as such innovations are frequently followed by similar charges; it has been argued that a more viable approach for banks is to focus on less tangible and less easy-to-imitate determinants of customer loyalty such as customer ‘evaluative judgements like service quality and satisfaction” (Worcester, 1997; Yavas and Shemwell, 1996).

In addition, many banks are adopting value added model for its checking products which previously was free. The understanding of relationship status and sub segments within both customer and prospect groups is essential in such strategy” (Sullen and Mambaino, 2010) “Observations are that with the passage of a universal banking law in Ghana, all types of banking can be conducted under a single corporate banking entity and this will greatly reorganize the competitive scopes for several banking products in Ghana” (Hinson and Hammond, 2006). In the present environment of increased competition with rapid market entry of new banking services concepts and formats, the challenge of increasing patronage also presents a challenge of a more indepth understanding of the complex relationship between types of customer evaluative judgements and loyalty. “In most models of client evaluations of retail banking services, the focus has been on a comparative judgement of expectations versus perceived performance resulting in the two major evaluative judgements of perceived service quality and client satisfaction” (Murphy, 1996; Smith, 1992).

Since 2007, interest rate on savings accounts in Ghana has not been attractive since the banking industry and the lending industry started to fail simultaneously. The dismal rates of return have also affected saving habits of most Ghanaian bank customers because deposit amounts have decreased. Bankers have developed different attitude because small banking institutions like credit unions are offering high interest rates of returns on savings accounts, opening new branches to provide banking services to customers door step and lending massive loans to attract customers. Emerging banks are placing emphasis on high quality services and advertisement to attract customers.

Mr. Kofi Grant, an investment analyst with Databank financial services Ltd. said: “Ghana needs more banking institutions, specialised banks in particular areas to enable the country meet specific demands of customers.” Most banks in Ghana give customers massive loans, however, the prevailing practice of interest in the conventional banking system involves injustice to the borrowers since the interest on their loans have to be paid irrespective of the outcomes of their business. In Ghana, the interest spread between lending and deposit rates is too wide. Interest rate on deposit in most commercial banks is 7% and interest rate on loans is as high as 30% or more (Modern Ghana, 2011). This means that Banks in Ghana charge between four and six times as much on loans than they offer for deposits. A survey carried out a couple of years ago by CITI FM, an Accra based radio station and supported by the BUSAC fund (Business Sector Advocacy Challenge Fund), a Danish advocacy initiative revealed that interest spreads demanded by Ghanaian banks are significantly wider than those in most emerging African economies. The high interest rate spread in Ghana causes the economy to stifle. National Investment Bank (NIB) offers the best deposit rate at 8.99% followed by Stanchart and First Atlantic Merchant Bank at 8.72 and 8.24% respectively. Ghana records the highest interest rates in Africa and the second highest interest rates in the World second only to Brazil. This has resulted in the country recording the highest interest rate spread in Africa. The argument is that the interest rate of the country has increased to 13% but banks are given out low interest on deposit but a high interest on loans.

In addition, banks in Ghana focus on either retail banking or whole sale banking, a situation which fertilises the need to have more banks to provide specialised funding avenues and also help reduce the number of unbanked in the society. The BOG complains of inability of many banks in Ghana to reach out to the large population of the unbanked. The Deputy Governor at the central bank, Mr. Millison Narh have expressed concern of the bank about the phenomenon and pledged the commitment of the BOG to support banks that comes up with products that could positively help bridge the gap.

The question is “Do these emerging banking institutions understand the Ghanaian bank customer’s patronage behaviour and will be able to maintain its existing customers as well as attract new customers which will result in the collapse of the big banks?”

1.4 Aims

- The aim of this dissertation is to help bank executives to develop and deliver efficient quality services to satisfy the needs of existing customers as well as to attract large number of customers.
- It is hoped it will further enable the management of banks to stimulate and understand more fully customers since customers’ attitude can’t be controlled. It could contribute to discussion amongst the banking fraternity regarding issues surrounding customer preferences in banking services.
- As a researcher who is interested in working in a bank, significant benefits can be gained from knowing how the operations of a bank can be made more efficient and thus continue to attract and maintain customers.

1.5 Objectives

The objectives of this dissertation are to:

- Clarify issues of loans that attract investment
- Determine whether high interest rate attract Ghanaian bank customers.
- Know the best medium for advertising banks. This will enable management to know the best means of advertising banks to the general public.
- Make management of banks know whether proximity or accessibility is the reason for a customer’s choice of a bank

1.6 Hypothesis

This dissertation is to test the hypothesis that:

- Efficient quality service delivery of banks enhances patronage behaviour of Ghanaian bank customers.
- Ghanaian banks understand customer behaviour.
- Ghanaian banks know customer needs and preferences.
- Issues of financial services of banks are best communicated through family and friends. Issuance of loans attracts customers to banks in Ghana.
- High interest rate on savings attracts customers to banks in Ghana
- Proximity or accessibility is the reason for a customer’s choice of bank.
- Good image of banks attract Ghanaian bank customers.
- Good reputation of banks attracts Ghanaian bank customers.

These hypotheses will be tested by the help of a survey, semi structured interview of management of the banks, followed by coding of the questionnaires to be entered into SPSS. Analysis of Variance (ANOVA) was used to analyse the data.

1.7 Dissertation structure

Chapter one introduces the research. It also defines the aims and objectives of the study, country profile of Ghana, history of banking in Ghana and an overview of the current banking system in Ghana and its operations as well as the high competition of the emerging banks with the big banks.

Chapter two presents a literature review on theory and empirical literature on patronage behaviour of Ghanaian bank customers.

Chapter three presents the methodology used. It is followed by Chapter four which presents presentation of results, findings and analyses of the research topic.

Chapter five presents a discussion on the analyses and findings. Chapter six provides concluding remarks as well as recommendations of sub segment section, referencing, bibliography and appendix

1.8 Chapter Summary

Chapter one introduced the research, provides background information of banking in Ghana (the country profile, history of banking in Ghana and an overview of the current banking system in Ghana as well as the high competition of the emerging banks with the big banks). In addition, chapter one discusses the marketing strategies the emerging banks are using to maintain customers, attract customers and thus places the research in context. It also defined clearly the aims, objectives, hypotheses and dissertation structure of the research.

Chapter two, the literature review will present a discussion and evaluation of theories of how perceived service quality, proximity of bank customers to banks, image of a bank, reputation of a bank, high interest rate on savings as well as how the level of construct dimensions affects patronage behaviour. Moreover, the literature review will also talk about how financial services of banks are best communicated in Ghana.

CHAPTER TWO
LITERATURE REVIEW

2.1 Introduction

Most of the empirical research on consumer behaviour in banking (McKechnie, 1992, Ennew and McKechnie 1998) was focused on customers in developing countries.

In Africa, financial institutions over the last twenty years have experienced a phenomenal acceleration of changes creating unparalleled challenges for more effective marketing management of the financial services offered. Lewis (1991) and McGoldrick et al. (1994) assert that the challenges in financial services have been brought about to a greater or lesser degree by the growing financial sophistication of customers. The greater use of information technology along with the entry of new aggressive competitors in the market place results in a growing competitiveness in the banking sector (Grady and Spencer, 1970) and the similarity of services offered by the banks (Holstius and Kaynak, 1995), it has therefore become essential for banks to categorize the selection criteria that their potential customers consider in selecting their financial services providers. Doyle (1994) “indicates that the task of marketing in the exchange process is to seek to understand what buyers want to receive and what they are willing to pay.”

In developing countries, it is acknowledged that only commercial banks that are best able to apply effective consumer oriented marketing management capabilities will grow and prosper (Shook and Hassan, 1998). “Retail banks are pursuing strategy, in part, because of the difficulty in differentiating service offering. Typically, customers perceive very little difference in the services offered by retail banks and any new offering is quickly matched by competitors” (Coskun and Froehlich, 1992; Devlin et al., 1995) The Ghanaian banking industry has experienced deregulation owing to increased competition. Banks in Ghana are challenged with the task of differentiating their products as a means of attracting new customers. Kotler, 1988; McIver and Naylor, 1986; Engel et al. 1993 asserts that understanding and adapting to customer motivation and behaviour is not an option but an absolute necessity for competitive survival. Empirical evidence and theoretical arguments recommend that there may be two overriding dimensions to service quality; the core or outcome aspects (contractual) of the service, and the relational or process aspects (customer employee relationship) of the service (Grönroos,1985; McDougall and Levesque, 1994; Morgan and Piercy, 1992; Parasuraman et al., 1991b).

Early Academic writers (Engel et al: 1993; Martineu, 1958) have indicated that a variety of characteristics are vital to understanding the customer. The characteristics can be divided into external factors, internal factors and buying process. External factors relates to culture and context, for example: social class, reference groups, family, roles and status. Internal factors are from internal attributes of individuals and have been identified as motives, attitudes, learned behaviour, economic standing and perceptions. The customer buying process is a series of stages in contemplating the purchase of financial services (Meidan, 1996). Zeithaml et al. (1993) examined “the different evaluation process customers adopt towards services and products referring to three “groups” of quality characteristics”. These are basically described as search qualities, that is attributes consumers might see, feel or touch and hence help in evaluation prior to purchasing the goods), experience qualities are attributes that may be evaluated after purchasing and during or after consumption and credence qualities (elements that a customer might find difficult to evaluate after purchase or use).

Banks in third world countries like Ghana offers products and services without considering its customers. Anderson et al. (1976) established that, “whilst one segment of customers saw meaningful differences between banks, a larger segment of consumers viewed banks as institutions which offer largely undifferentiated services and, consequently, selected a bank based primarily on the locational convenience it offered". Kaufman (1967) investigated that “the determinant factors used in bank selection decisions by consumers and business firms in the US and found that the influential factors included convenient location (near home or place of business), length of bank customers’ relationships and quality of services offered by the bank.” Mason and Mayer (1974) revealed that “customers select banks based on locational convenience, friendly personnel, favourable loan experience, advice and influence of friends and relatives.”, however location convenience of the bank was paramount of importance (Reed 1972, Riggall, 1980, Kaynak and Kucukemiroglu, 1992). Conversely, Yue and Tom (1995) assert that “efficiency of services offered, bank fees, convenient location, interest rates on savings accounts and loans are the major determinant factors for customers’ selection of financial services provider.” Competitive interest rates are a determinant of bank choice (Laroche and Taylor, 1988). “While differences in rates, either savings or borrowings, are likely to be least between competing banks, customers are concerned that they are getting competitive rates on savings or loans because of the impact on their financial situation” Levesque et al. (1996).

A major motive why customers switch service providers is unsatisfactory problem resolution (Hart et al., 1990). Financial factors such as bank reputation, safety of funds, interest on savings account and availability of loans were also considerations potential bank customers consider before patronising a bank (Javalgi et al. 1989). Kazeh and Decker (1993) “studied the opinion of two hundred and nine university students in the US and found that the highest ranking determinant attributes were: service charges, interest charged on loans, quick loan approval and friendly tellers. Haron et al. (1994) surveyed 301 Muslim and non- Muslim commercial bank customers in Malaysia to determine the selection criteria used in a dual banking environment like Islamic commercial bank. The results indicated that fast and efficient services, speed of transactions, friendliness of bank personnel and confidentiality of the bank were the highly scored factors influencing their choice of banks.

“In response to challenges faced by the financial services industry of Ghana, focus will be on the needs of personal customers through socio-economic and demographic segmentation to satisfy the diverging needs of groups of targets customers” (Kotler, 1988; Della Bitta and Louden, 1990). It is important to understand segments and their needs since true marketing is necessary for a presentation of service to a target market in a way perceived to be advantageous and different from all competing offering (GroÈnroos, 1990; Johnson, 1988; Engel et al., 1993; Della Bitta and Louden, 1990; Kotler, 1988). “The cost of poor quality relates to complaints and adverse word-ofmouth communication” (Maria and Bingham, 1986). Customer satisfaction and loyalty, attraction of new customers, higher market share, improved employee morale and profitability are the benefits derived from good quality service.

In retail banking sector, customers who use specific products such as loans or mortgages may aim at service features, such as competitive interest rates, more than customers who do not hold these products. Therefore, the determinants of customer satisfaction towards the service provider may vary depending on customer or segment characteristics. These measures communicate to attitudes or future intentions towards the service provider. “Customers make their buying decisions based on product comparism, not on the relationship they have with the company. To ensure customer satisfaction, banks have found the need to explore the conceptual foundations of managing relationships with its customers” (Levitt, 1983). Good customer relationship is not the sole responsibility of customer service group or an IT team. Customer relationship must be regarded as a way of thinking about, treating or dealing with customer relationships. Customer relationship can be regarded as a strategy and that sets direction for the organisation. It can be recognised from a department level or area level. Customer relationship management serves as a prominent business strategy to identify the bank’s most profitable customers and prospects, consequently more time and attention must be spent to attend to account relationships with those customers through individualised marketing, repricing and discretionary decision making etc. “Ghanaian bank customers are resistant to long term investment and the most effective media that best inform customers of bank services are word-of-mouth, radio and television” (Owusu-Frimpong, 1999).

Therefore, the word of mouth approach of search of information about financial services is extremely important.

2.2 Service quality

Service quality is a model that has aroused an extensive interest and debate in research literature because of the difficulties in both defining and measuring it (Wisniewski, 2001). The popular definition is the extent to which a service meets customers’ needs or expectations (Asubonteng, 1996; and Wisniewski and Donnelly, 1996). This means that service quality is the difference between customer expectations of service and their perception. “If expectations are greater than performance, then the perceived quality is less than satisfaction and customer dissatisfaction occurs” (Parasuraman et al., 1985). There has being lots of researchers into quality determinants, but the best known determinants originate from Parasuraman and his colleagues from US, who found five dimensions of service quality (SERVQUAL), namely, tangibility, reliability, responsiveness, assurance and empathy (Parasuraman et al., 1988; and Zeithaml et al., 1990). Tangibility is the things which are physically observed by the customers in the bank branch, such as ATM network, personnel, physical facilities, materials and appearance. Able and skilled personnel, the quality of banking products and services, brochures and cards may represent tangibles. Reliability regards to the trust in the company’s ability to perform service in a suitable way, such as acting according to promises and declarations. For example, a reliable service of a banker is the ability of the bank to provide internet connection that is working at desired level throughout the day without significant failures. Responsiveness is the banks willingness to help customers and offer prompt service; this can be calculated by the amount of time needed to deal with customers’ reported problems and the response duration once the customer files a service request. Assurance is associated with the knowledge and courtesy of employees and their ability to inspire trust and confidence. Bankers may provide assurance to customers by behaving courteously and by providing essential knowledge to solve customer’s problems. Empathy refers to the caring, individualized attention the service provider gives to its customers. Customers in the bank may come from different social background so the banker could emphasize on personalized attention to customers and understand the specific needs of individual customers based on their requirements. Chakravarty (2003) found that “there is a meaningful negative relation among service quality dimensions, responsiveness, empathy, and reliability, with customer’s tendency to abandon the bank”. “To elaborate on the two major dimensions of service quality, Parasuraman et al. (1991b) summarized the nature of the core (outcome) and relational (process) constructs: [While] reliability is largely alarmed with the service outcome, tangibles, responsiveness, assurance, and empathy are more concerned with the service process” Levesque et al. (1996). While customers judge the accuracy and dependability of the delivered service, they also judge the other dimensions as the service is being delivered (p. 41).

Two important findings materialize from the moderating role of gender. That is to say, the impacts of empathy and reliability on satisfaction are higher among female customers than male customers. Such findings may be due to the fact that women are relationship oriented and attach more importance to social interactions with customer-contact employees providing them with specific information about bank services and dealing with their needs and problems effectively. For example, female customer in the private banks of Germany lay more emphasis on interpersonal relationships and communication than male customers Yavas et al . (2004).

In addition, the relationship between service providers’ personality and customers’ perceptions of service quality is dependent on customers’ gender. Diverse customer gender may also affect the perception of service quality. Men are basically more aggressive and autonomous than women (Hoffman and Hurst, 1990), they have a propensity to be highly exploratory (Pulkkinen, 1996) hence, if a service provider offers services to a female customer, she might feel uncomfortable, yet, it might not be the case for a male customer. If these inherent gender differences affect human behaviour, it is coherent to assume that female and male customers would probably evaluate their service providers in different ways.

As the number of underlying dimensions has been shown to vary with the service setting, it appears reasonable to propose that the service core and relational immersions will emerge in almost all cases as they form the basis for the service. The study in India’s banks show that the concept of service quality in developing countries is a multi-dimensional structure, and in fact the results clearly show that SERVQUAL model provides more evaluating information in relation with service quality gaps, than SERVPERF scale.

The argument that service quality should be conceptualized and measured as a gap between expectations and performance is debatable (Brown et al., 1993; Cronin and Taylor, 1994; Smith, 1995; Teas, 1994). Evidence suggests that service quality should be based on performance measures alone” (Brown et al., 1993; Cronin and Taylor, 1994; Teas, 1994). According to Brown and Bond (1995), “The gap model is one of the best received and most heuristically valuable contributions to the services literature”. Gap analyses helps identify the causes of service quality shortfalls in each or all of the dimensions.

Quality is a multi-dimensional phenomenon; hence reaching service quality without distinguishing the important aspects of quality is impracticable. GroÈnroos (2000) in his discussion of service quality refers to three dimensions of output technical quality, service performance quality, and organization’s mental picture. Lehtinen and Lehtinen (cited in Harrison, 2000) referred to dimensions of physical quality, interactive quality, and organizational quality as three dimensions of service quality even though these attempts have had a major role in division of service quality into process quality and output quality, but they lack enough details. Zeithaml et al. (1996) also referred to ten dimensions of service quality in their primary researches. A further research, found a strong correlation among those dimensions. These dimensions were combined and applied as the fivefold dimension of Reliability, Responsiveness, Assurance, Empathy and Tangibles as a basis for making a tool for testing the service quality, known as SERVQUAL. Avkiran (1994) introduced a model consisting of four dimensions i.e. personnel’s contact, reliability, communication, and access to services and seventeen components. Besides, considering the difference between Islamic banking and Usury banking in nature, Othman and Own (2001) offered a model called CARTER which consists of Complaint, Assurance, Reliability, Tangibles, Empathy and Responsiveness which includes 34 components.

Word-of-mouth is frequently investigated as an effect of service quality (Yavas et al., 2004; Swanson and Davis, 2003); they lead to repurchase behaviours being significant element of prepurchase assessment of services (Sweeney et al ., 2008; Dean and Lang, 2008; Murray, 1991). Empirical research projects and theoretical deductions show that due to limitations of SERVQUAL the more efficient measurement of SERVQUAL is only based on the perception of quality (Carman, 1990; Cronin and Taylor Cronin, 1992; McAlexander et al., 1994; Jain and Gupta, 2004; Jayawardhena, 2004). There is a minority opinion that gap measurement is better than exclusively perception measurement (Elliott, 1994) there are also doubts referring to the gap calculation method apart from the doubts concerning quality evaluation by disconfirming it, (Teas, 1993). Items used to measure service quality should reflect the specific service setting under study (Carman, 1990).

According to discussions by academics, perception of service quality appears as interesting from theoretical point of view, but not significant in practical utilisation.

Research conducted by Urban (2009) indicates that empirical investigation in service sector concerning SERVQUAL utilisation is the most discussed method in the literature and appears to be less applicable in management practice. “The gap model seems to be not attractive from business application point of view” (Urban, 2009).

Bloemer, et al. (1998) has offered a model to demonstrate how the mental picture, service quality, and customer satisfaction influence customer loyalty. Service quality influences loyalty both directly and indirectly through satisfaction. “There is sufficient evidence to suggest that customer satisfaction can and should be viewed as an attitude” (Yi, 1990). For instance, in retail banking there is an ongoing relationship between the service provider and the customer. Here, customer satisfaction is centered on an evaluation of multiple interactions. Satisfaction is considered as a composite of overall customer attitudes towards the service provider that incorporates a number of measures. Three frequently used measures in customer service are: overall service quality, meeting expectations and customer satisfaction (Hausknecht, 1990; Heskett et al. 1994; Jones and Sasser, 1995).

Customer satisfaction is a key factor in the formation of customer’s requirements for future purchase (Mittal and Kamakura, 2001). What’s more, the satisfied customers will probably talk to others about their good experiences. “Loyalty is one of the most important structures in service marketing, due to its final effect on customers’ repeated purchases, and in fact, those loyal customers who purchase repeatedly are considered as the base of any business” (Caruana, 2002). Sureshchandar et al. (2002) shows that, there is a two-way relationship between satisfaction and service quality. The relationship between loyalty, service quality and satisfaction has been used so many times in marketing literature, but the relations between these three concepts still remain ambiguous. Cadotte and Turgeon (1988) have introduced one more group of factors known as neutral factors.

The function of experiences as service quality predicator is not exhaustively explained, there is an obvious lack of research of customers’ experiences in this context. Edvardsson (2005) mentions that customers’ experiences will have a strong impact on customers’ quality perceptions. Customer perceptions and preferences of service quality have a significant impact on a bank’s success (Mouawad and Kleiner, 1996). More to the point, Liljander and Strandvik (1993) asserts that “experience is not needed for evaluating service quality, and service can be evaluated on the basis of the knowledge about service provider, while satisfaction is an inner view, resulted from customer’s own experience from the service”. Where measures of service quality are used only from the perspective of service user or deliverer, problems identified are unlikely to reflect full dyadic nature of service encounter (Svensson, 2001). The person who undertakes the inquiry may have filtered and added his or her own understanding to the language used and emphasis placed by respondents, instead of it being understood and interpreted as planned (Foddy, 1994). Traditional approaches to quality don’t require respondents to indicate the relative importance of quality constructs (Pitt et al. 1995) analysis of this nature involves the person undertaking the inquiry judging what is important, with the main focus on areas he or she believes are of critical concern (Foddy, 1994, Krueger, 1994) thus his or her judgment about which characteristics are key to the quality of service forms the bed rock for analysis and future development.

Measurement of service quality leads to improvement; hence data collected must be useful. Usefulness of data can be viewed in three interrelated perspectives. The first is about the suitability of the constructs used to capture perceptions of reality with focus on its importance by each party involved in the specific service (Chi Cui et al. 2003) i.e. constructive validity. The second relates to implications of the sufficiency of detail with regards to a clear understanding of the particular service situation (Killmann, 1986:131). This defines problem causes than mere symptoms. The third relates to extent to which data enable meanings to be understood and explored with quality improvement agendas derived. The second order interpretation (Yin, 2003) problems arise when data collected using measures of service quality are subject to third parties interpretation like consultants and managers. These changes the meaning ascribed to the data by the interpreter and that given by service users or deliverers which leads to inconsistency in interpretation. In addition, measurement of service quality allows for comparison before and after changes, for the location of quality-related problems and for the organisation of clear standards of service delivery.

What is more, the knowledge of service quality also helps banks to allocate their resources in such a way that maximum improvement in service quality is achieved, thus lead to competitive advantage, which will help the bank retain their customers and increase their profitability (Bennett and Higgins, 1988). The worst result of the bank's work and activity is dissatisfied client, quality services of a bank is measured by significant indicators such as the time clients wait for the provision of the service desired and the number of clients who give up to enter the bank due to the long waiting for the provision of desired service as well as the number of clients who give up to enter the bank due to the long waiting queues. Through professionalism and communication of personnel with whom the clients come in contact, a great effort is made to improve the quality of services of banks. This gives clear, punctual information and short waiting period of standing in the queues. Existing literature hypothesised that there is positive relationship between service quality and bank performance. “Services are different from goods because they are intangible as they cannot be seen, touched or felt; perishable as we are unable to store them; inseparable because they are attached with a service provider, and insubstantial due to heterogeneity “(Parasuraman et al. 1985; Hoffman and Bateson, 2002).

2.3 Interest rate

Interest rate is a rate charged or paid for the use of money. An interest rate is mostly expressed as an annual percentage of the principal. It is calculated by dividing the amount of interest by the amount of principal. Interest rates can change due to inflation and Federal Reserve Board policies. There is an inverse relationship between interest rate (i) and inflation rate (I). However, an increase in interest rate faces a propensity of increase in inflation, thus in considering interest rate, it is best to consider the real interest rate. Interest rate is expressed as annual percentage yield (APY) savings account or a certificate of deposit. As soon as the interest is paid the interest rate is expressed as annual percentage rate (APR). Tobin (1965) asserts that savings rate depends on the net real rate of return earned by savers.

Many bank market structure studies use average interest rate on time and savings deposits, calculated as total annual interest paid on time and savings deposits divided by time and saving deposits as a measure of the performance. Graddy et al. (1979) argue that “the influence of market structure on the interest rates banks pay on deposits and charge on loans should be modelled as a system of equations, with the average interest rate paid on deposits and market concentration as determinants of the average interest rate charged on loans, and with the average interest rate charged on loans and market concentration as determinants of the average interest rate paid on deposits”. Few studies (Edwards 1964, Meyer 1967, and Fraser and Rose 1971) find that the effect of market concentration on interest rates banks charge on loans is smaller in years when market interest rates are higher. This suggests that banks determine the average interest rate they charge on loans as a mark up over the average interest rate they pay on deposits. The size of the gap between the average interest rates on loans and deposits is modelled as a function of market concentration, although this is still a mark up theory. This mark up theory is not reliable with the assumption that banks maximize profits. For banks that maximize profits, it is the marginal interest rate on deposits that determines the interest rates banks charge on loans but not the average interest rate paid on deposits.

2.3.1 Interest rate on savings

Average interest rate paid on time and savings deposits is a measure of bank performance. A major problem with use of the average interest rate paid on time and savings deposits as a measure of bank performance is the effect of Regulation Q. Regulation Q is a Federal Reserve Board regulation that prohibits against the payment of interest on demand deposit as well as limits the interest rate banks can pay on savings deposits of customers. Market concentration does not have a major influence on interest rates paid on time and saving deposits in several studies. Authors of some studies mention the influence of Regulation Q ceiling rates as a possible explanation (Fraser and Rose 1971, Klein and Murphy 1971, and Ware 1972), but other authors do not (Fraser and Rose 1972, Fraser and Alvis 1975, Rose and Fraser 1976, and Rhoades 1979). The number of relatively large banks that could establish branches in a market area, but have not yet done so, helps explain the interest rates paid on savings deposits by commercial banks (Hannan, 1979b). Savage and Rhoades (1979) as well as Rhoades and Heggestad (in press) include “the ratio of time deposits to time and savings deposits as an independent variable in equations with the average interest rate paid on time and savings deposits as the dependent variable”. Banks in less concentrated markets which pay relatively high interest rates on time and savings deposits would have relatively high ratios of time deposits to time and savings deposits, as savings deposits were subject to fixed ceiling rates. Klein and Murphy (1971) estimate “the average interest rate banks pay on time deposits and the average service charge per account as functions of market concentration and other independent variables”. Only a few of the bank market structure studies reveal that the level of market interest rates relative to these ceiling interest rates on deposits and loans as a criterion for choosing the timing of observations, and many of the studies do not mention the effects of regulations in interpreting the results. Interest rate has long being recognised by classical, contemporary and neoclassical economists as one of the factors that determine the level of savings in the economy. It is a generally accepted opinion that interest rate has a positive relationship with savings. Customers are guided by the profit maximization theory. Apart from security of savings, one of the primary aims customers save money in banks is for interest on savings. Most surveys regarding customers and interest rate suggest that the choice of a customer’s banking services may be influenced by ceiling interest rates on deposits. Following deposit interest rate ceilings removal, surveys of where customers hold their deposits are likely to indicate larger market areas.

Each type of deposits available at the conventional banks accrued a different rate of interest or yield to the depositor. Basically, the longer the maturity of a deposit, the greater the yield that must be offered to depositors, in part because of the value of money. This results in the frequent upward slope of the yield curve. Likewise, savings or thrift deposits are designed to attract funds from customers who wish to set aside monies in anticipation of future expenditures or financial emergencies. Thrift or savings deposits pay significantly higher interest rates to customers than transaction deposits, especially for those deposits, the customer agrees to hold with the bank for several months or years. Deposit pricing are essential to shape the kind of customer base each bank can best serve. Deposit pricing is best used to protect and increase bank profitability, rather than to simply add more customers and to take market share away from competitors Rose (1991). Depositors are motivated by returns, it is important for banks’ management to understand the extent that rates of return on deposits affects customers’ decision to deposit. Rate of interest has always been featured as one of the major considerations in explaining the saving behaviour of individual. Juster and Taylor (1975) asserts that “an inverse relationship between interest rate and consumption”. According to Modigliani (1977) “the rate of interest effects on demand, including the consumption component, are pervasive and substantial”. High rate of interest makes consumers forgo consumption and thus more money will be saved by consumers. On the basis of utility maximization, the rate of interest is also at the center of modern theories of consumer behaviour, given the present value of lifetime resources. “For a net saver, an increase in the rate of interest will have an overall effect composed of two partial effects: an income effect leading to an increase in current consumption and a substitution effect leading to a reduction in current consumption” (Hadjimatheou, 1987). Keynes (1936) believes “that in the long run substantial changes in the rate of interest could modify social habits considerably, including the subjective propensity to save”. Friedman (1957) in his neoclassical analysis of the consumption function suggested that “the main variables determining the average propensity to consume are “the rate of interest, the relative dispersion of transitory components of income and of consumption, the ratio of wealth to income, and the age and composition of consumer units”.

2.4 Image and reputation of banks

Researches in marketing have acknowledged the critical roles of corporate image and corporate reputation in customer's buying behaviour (Barich and Kotler, 1991; Zeithaml, 1981). Both corporate image and corporate reputation are essential in developing and maintaining a customer loyalty (Dick and Basu, 1994; Porter, 1985; Raj, 1985; Reynolds et al., 1974). On the other hand, the two constructs can be considered to be distinct and strongly related. Image and reputation are two socially constructed entities and are derived essentially from the customer’s perception of a firm, hence the relationship between image and reputation are intuitively appealing. The majority of studies have analysed corporate image and corporate reputation independently. “At a most guarded level, some authors have expressed a potential link between the two concepts” (Porter, 1985; Schmitt et al., 1995). To maintain or modify customer behaviour, the concept of corporate image and corporate reputation are beneficial. Reputation is closely linked with image in that it affects customer expectations with regard to the quality of the service offering (Yoon et al. 1993).

Furthermore, since corporate image and corporate reputation are measured “as the global outcomes of the process of legitimating or credentialing mechanism” (Rao, 1994), their level of generalization may be high; as a result, they are complex to conceptualize and difficult to measure. Analysing these concepts is therefore a challenging task; especially in the context of service firms (Banks) whose products are essentially intangible. The relationship between image and reputation is essentially based on extrinsic cues and that both constructs are the results of an aggregation process by which customers describe their perceptions of the firm and the hypothesis that corporate reputation has an impact on corporate image appears consistent with the meaning of these constructs.

Additionally, the estimation of a firm's reputation may be generally more personal and more reliable regarding the past experiences of customers with the firm. In this context, the formation of the idea of corporate image may require more time in its formation and may be more difficult to measure than the concept of corporate reputation.

2.4.1 Image of banks

Corporate image is described “as the overall impression made on the minds of the public about a firm” (Barich and Kotler, 1991; Dichter, 1985; Finn, 1961; Kotler, 1982). Corporate image relates to the various physical and behavioural attributes of the firm, such as business name, architecture, variety of products or services, tradition, ideology, and to the impression of quality communicated by each person interacting with the firm's clients. This divides corporate image into two prime components: the functional and the emotional (Kennedy, 1977). The functional component is associated with tangible characteristics which can be easily measured, while the emotional component is related with psychological dimensions which are manifested by feelings and attitudes towards a firm. The feelings are derived from individual experiences with a firm and from the processing of information on the attributes that constitute functional indicators of image. Corporate image is, hence, the product of an aggregate process by which the public compares and contrasts the various attributes of firms.

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