Master Thesis

An Empirical Study Of Service Quality Dimensions On Customer Satisfaction

And Customer Loyalty In Nepalese Commercial Banking Sector

Narendra Devkota (6063)

Jay Raj Dahal (6005)

Supervisor
Prof. Otto Andersen

This master’s thesis is carried out as a part of the education at the

University of Agder and is therefore approved as a part of this
education. However, this does not imply that the University answers
for the methods that are used or the conclusions that are drawn.

University of Agder, June 2016

School of Business and Law
Department of Economics and Business Administration
ACKNOWLEDGEMENT

It is a great pleasure for us to prepare this thesis report entitled "An Empirical Study Of Service
Quality Dimensions On Customer Satisfaction And Customer Loyalty In Nepalese
Commercial Banking Sector " as a partial fulfillment of Master’s degree program.
First and foremost, we would like to express our gratitude to thesis supervisor Prof. Otto
Andersen for his cooperation, guidance, motivation and valuable suggestion throughout study
period.
We remain deeply obliged to all the respondents as well as staffs of Global IME, Kumari, Standard
Charter, NABIL as well as other banks of Kathmandu, Nepal for providing necessary information
for this thesis.
We are very grateful to our parents , sisters, brothers, relatives and colleagues for their support,
cooperation and encouragement while preparing this report.
Finally, we would like to acknowledge our teachers, university staffs, above mentioned persons
and whomsoever have helped us directly or indirectly till date.

NARENDRA DEVKOTA & JAY RAJ DAHAL

31st May 2016

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Abstract
The main purpose behind of this study is to find out the major factors that have impact in customer
satisfaction and customer loyalty in case of commercial banks of Nepal. The thesis tries to explore
whether there exists any relationship between service quality dimensions, customer satisfaction
and customer loyalty depending upon various situational factors. Various concepts such as
consumer buying behavior, buyer’s decision process, customer satisfaction, customer loyalty,
service quality, SERVQUAL model have been discussed along with relevant relationship between
them in the literature review and based upon it, a conceptual model had been formulated stating
the five different hypotheses (one of the hypothesis has been divided into two sub-hypothesis).
In order to collect data for analysis, 375 completely filled questionnaires were collected within one
month. The participants were asked to fill up the questionnaire form with face to face interaction.
All these forms were collected from various commercial banks in Kathmandu, Nepal. In order to
analyze the data, Statistical Packages for Social Sciences (SPSS) was used and analytical
techniques like factor analysis, multiple regression analysis, descriptive analysis were used along
with Sobel test for mediation analysis.
After testing the hypotheses using various techniques, it was found that service quality dimensions
such as tangibility, reliability, responsiveness, empathy and assurance had significant positive
impact on customer satisfaction and customer loyalty. Similarly, one of the situational factors
stated as years of relationship had significant positive relationship with customer satisfaction while
another situational factor stated as frequency of visiting bank had a significant negative
relationship with customer satisfaction. In the same way, in case of mediating factor, tangibility
and frequency of visiting bank do not have significant relationship while reliability,
responsiveness, years of relationship and empathy and assurance have significant positive
relationship. However, it should be noted that some of the independent and mediating variable are
overlapped. In case of control variable, only respondent age had positive significant impact on
customer loyalty while other variable like education level, income and gender are not significantly
related with customer loyalty.
This research is useful for commercial banks so that they can improve service quality to the
customers and thus maintain customer satisfaction and loyalty. Similarly, the policy makers can
make future plans in banking sector based upon the information provided by the customers while

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doing this research. In the same way, it can also contribute to other sectors by providing baseline
information regarding service quality in Nepalese banking sector.

Key words: Customer satisfaction, Service quality dimensions, Customer loyalty, SERVQUAL,
Linear regression, Situational factors, Factor analysis, Commercial banks, Buyer’s decision,
Mediating factors, SOBEL test

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Table of Contents
ACKNOWLEDGEMENT ............................................................................................................... i
Abstract ........................................................................................................................................... ii
List of Tables ................................................................................................................................. vi
List of Figures ............................................................................................................................... vii
List of Abbrevirations ................................................................................................................ viii
INTRODUCTION .......................................................................................................................... 1
1.1 Title of the Dissertation ........................................................................................................ 1
1.2 Background of Study ............................................................................................................ 1
1.3 Nepal as Research Location .................................................................................................. 2
1.4 Banking Sector in Nepal ....................................................................................................... 2
1.5 Motivation for the Research and Research Objectives ......................................................... 3
1.6 Problem Statement ................................................................................................................ 4
1.7 Research Objectives .............................................................................................................. 5
1.8 Research Question ................................................................................................................ 5
1.9 Significance of the Study ...................................................................................................... 6
1.10 Organization of the Thesis .................................................................................................. 7
LITERATURE REVIEW AND THEORETICAL FREMEWORK............................................... 8
2.1 Introduction ........................................................................................................................... 8
2.2 Consumer Buying Behavior .................................................................................................. 8
2.3 Buyer Decision Process ........................................................................................................ 9
2.4 Differences Between Manufactured Goods and Services ................................................... 10
2.5 Impact of Customer Satisfaction and Customer Loyalty on Service Sector ....................... 10
2.5.1 Customer Satisfaction .................................................................................................. 11
2.5.2 Customer Satisfaction in Banking Sector .................................................................... 12
2.6 Service Quality.................................................................................................................... 12
2.6.1 SERVQUAL Model (Theoretical Framework) ........................................................... 13
2.6.2 SERVQUAL Dimensions in Banking Sector .............................................................. 13
2.7 Customer Loyalty................................................................................................................ 14
2.8 Relationship Between Service Quality, Customer Satisfaction and Customer Loyalty ..... 15
2.8.1 Product and Service Features ....................................................................................... 16
2.8.2 Price ............................................................................................................................. 17
2.8.3 Situational Factors ....................................................................................................... 17
2.8.4 Personal Factors ........................................................................................................... 17
2.9 Relationship Between Service Quality, Customer Satisfaction and Customer Loyalty in
Banking Sector .......................................................................................................................... 18
2.10 Relationship of Theories with Buyer Decision Making Process ...................................... 18
2.11 General Overview of Previous Studies ............................................................................. 19
2.12 Identification of Independent Variables............................................................................ 23
2.13 Identification of Dependent Variables .............................................................................. 23
CONCEPTUAL FRAMEWORK AND HYPOTHESIS .............................................................. 25
3.1 Introduction ......................................................................................................................... 25
3.2 Control Variables for Regression........................................................................................ 25
3.3 Hypothesis........................................................................................................................... 28
RESEARCH METHODOLOGY.................................................................................................. 29

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 4.1 Introduction ......................................................................................................................... 29
4.2 Data Collection and Empirical Context .............................................................................. 29
4.3 Data Collection Methods and Tools ................................................................................... 30
4.4 Measurement of Variables .................................................................................................. 31
4.5 Reliability Analysis and Factor on Service Quality Dimensions, Customer Loyalty and
Customer Satisfaction ............................................................................................................... 34
4.6 Factor Analysis for Service Quality dimensions, Customer Satisfaction and Customer
Loyalty ...................................................................................................................................... 36
4.7 Service Quality Dimensions (SQD) .................................................................................... 36
4.8 Customer Satisfaction ......................................................................................................... 39
4.9 Customer Loyalty................................................................................................................ 39
4.10 Statistical Methods ............................................................................................................ 39
4.10.1 Correlation ................................................................................................................. 40
4.10.2 Multicollinearity ........................................................................................................ 41
RESULTS ..................................................................................................................................... 42
5.1 Introduction ......................................................................................................................... 42
5.2 Descriptive Statistics ........................................................................................................... 42
5.3 Descriptive Statistics of Service Quality Dimensions, Customer Loyalty and Customer
Satisfaction ................................................................................................................................ 43
5.4 Level of Satisfaction Among the Customers ...................................................................... 44
5.5 Controlling Effect ............................................................................................................... 45
5.7 Mediation Effects ................................................................................................................ 47
5.8 Test of Hypothesis .............................................................................................................. 48
DISCUSSION ............................................................................................................................... 52
6.1 Introduction ......................................................................................................................... 52
CONCLUSION ............................................................................................................................. 57
7.1 Introduction ......................................................................................................................... 57
7.2 Conclusion .......................................................................................................................... 57
7.3 Contribution of the study .................................................................................................... 58
7.4 Implication of the Study...................................................................................................... 58
7.5 Limitation of the Study ....................................................................................................... 59
REFERENCES ............................................................................................................................. 60
Appendices .................................................................................................................................... 65
Appendix 1: Reflective Note ................................................................................................... 65
Appendix 2: Survey Questionnaire .......................................................................................... 67
Appendix 3: Correlation with Customer Satisfaction ............................................................... 71
Appendix 4: Correlation with Customer Loyalty ..................................................................... 72
Appendix 5: Regression Analysis on Service Quality Dimensions and Situational Factors .... 73
Appendix 6: Regression Analysis on Customer Satisfaction and Customer Loyalty with
Control Effect............................................................................................................................ 74
Appendix 7: Regression Analysis on Service Quality Dimensions and Customer Loyalty ..... 76

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List of Tables
Table 1: Summary of Previous Studies ......................................................................................... 20
Table 2 : Variable and References ................................................................................................ 26
Table 3: Variable Measure and Sources ....................................................................................... 32
Table 4: Reliability and Factor Analysis of all Independent and Dependent Variables ............... 35
Table 5: KMO for Service Quality Dimensions, Customer Satisfaction and Customer Loyalty 36
Table 6: Rotated Component Matrixa for Service Quality Dimensions ...................................... 38
Table 7: Rotated Component Matrixa for Customer Satisfaction ............................................... 39
Table 8: Rotated Component Matrix for Customer Loyalty ........................................................ 39
Table 9: Socio Demographic Profile of Respondents .................................................................. 42
Table 10: Situational Factors of Respondents ............................................................................. 43
Table 11: Descriptive Statistics of Service Quality Dimensions, Customer Loyalty and Customer
Satisfaction .................................................................................................................................... 44
Table 12: Regression Analysis on Service Quality Dimensions and Situational Factor .............. 45
Table 13: Regression Analysis on Customer Satisfaction and Customer Loyalty with Control
Effect ............................................................................................................................................. 45
Table 14: Regression Analysis on Service Quality Dimensions and Customer Loyalty .............. 46
Table 15: Sobel Test Result for Mediation Test ........................................................................... 49
Table 16: Model Summary ........................................................................................................... 55

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List of Figures
Figure 1: Buyer Decision Process ................................................................................................... 9
Figure 2: Customer Perceptions of Quality and Customer Satisfaction ....................................... 16
Figure 3 : Conceptual Framework ................................................................................................ 27
Figure 4: Sobel’s Tests of Mediation ............................................................................................ 48
Figure 5: Revised Conceptual Framework ................................................................................... 56

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List of Abbrevirations

AD........................................Anno Domini
AMOS..................................Analysis of a Moment Structures
ANOVA...............................Analysis of Variance
ATM....................................Automatic Teller Machine
FDI.......................................Foreign Direct Investment
GDP.....................................Gross Domestic Product
KMO....................................Kaiser Meyer-Olken
NRB.....................................Nepal Rastra Bank
SD........................................Standard Devation
SERVQUAL........................Service Quality
SPSS....................................Statistical Package for the Social Sciences
SQD.....................................Service Quality Dimensions
VIF.......................................Variance Inflation Factors

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INTRODUCTION

1.1 Title of the Dissertation

An Empirical Study of Service Quality Dimensions on Customer Satisfaction and Customer
Loyalty in Nepalese Commercial Banking Sector

1.2 Background of Study

In the age of globalization, accomplishing the higher level of customer satisfaction is the
challenging task especially in the service sector. In order to face this challenging task, many
organizations have started to improve their service quality. Service quality is one of the serious
components in any service sector because service quality helps to maintain competitive advantages
in the market place. Therefore, service quality is the strategic tool to reinforce competitive
advantages and increase profitability in business (Tam, 2004). So many service sectors are using
this strategic component to attract and retain customers. Hence, service quality is determined
through customer satisfaction and customer satisfaction is determined through customer loyalty.
Similarly, in order to provide superior services to the clients, at first service providers must
understand how clients perceived and evaluated their services. After that, service providers can
assume clients are facilitated by various services provided by service sectors (Zeithaml et al., 2002)
Affinity between both service quality and customer satisfaction is highlighted in empirical research
(Bitner et al., 1990). Therefore, relationship between customer satisfaction and service quality is
very critical in service sector like banking. In case of banking sector, clients are attracted by high
quality services. Moreover, advancement in technology helps banking sector to upgrade their
service quality (example: ATM, Online Banking, Mobile Banking, and Visa card). The point is
that clients are loyal to those products which have a greater value as compared to those of
competitors’. Thus, banks can earn higher profit if they are one step ahead of their competitors in
terms of services provided by them. For this reason, every banking institution should focus on
service quality so as to satisfy customer and retain customer loyalty.
Likewise, empirical studies conducted by Mahamad & Ramayah (2010) in Tehran, Iran found out
that customer expectations are always higher and service offered by banking is low as well as
customer satisfaction can play role of mediator that bridges gap between service quality and
customer loyalty. In Bangladesh, customer satisfactions are positively related to customer loyalty

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in banking sector (Siddiqi, 2011). In Jordan and Hong Kong, service quality dimensions have
positive effect on customer satisfaction while looking at banking sector. Similarly, in Jordan
researchers found that service quality dimension is important instrument to measure quality of
services in banking sector (Al-Azzam, 2015). All in all; service quality, customer satisfaction, and
loyalty have been emphasized by all banking sector all over the world including Nepal.

1.3 Nepal as Research Location

Nepal is a south Asian country especially known by its Geo-religious features and natural beauty
such as; the Mount Everest (the highest peak of the world) and the birthplace of Lord Buddha (the
Light of Asia). Nepal is the landlocked country situated in between India in the south, east and
west and China in the north. With the area of 147,181 square kilometers, Nepal is divided into
three geographical regions i.e. Terai region, Hilly region and Himalayan region (Geographia,
2005). It is predicted that the population of Nepal will reach to 29302938 by 2017 (Countrymeters,
2015) which is one of the fastest growing population in South Asia.
Nepalese is the national language, people also speak different types of language according to their
ethnicity, while English is officially used in almost all business organization. Nepalese economy
is largely dependent on service sector. Service sectors contribute higher percentage in Gross
Domestic Product (GDP).
It is marked that scholars have ignored research in service sector especially in identifying service
quality, customer satisfaction and customer loyalty in Nepal. In this circumstances, study on
service sectors with respect to service quality, customer satisfaction, and customer loyalty will add
value to the country’s economy.

1.4 Banking Sector in Nepal

Due to lack of historical data, it is very difficult to trace out the history of banking system in Nepal.
The formal banking system started when Nepal Bank Limited was established in 1937. Later on
in 1956 A.D, Nepal Government established Nepal Rastra Bank (NRB) also known as central bank
of Nepal in order to control and regulate all the financial sectors. Similarly, in 1965 A.D., Rastriya
Banijya Bank was established.The financial liberalization policy introduced by the banking sector
in 1984 A.D. made a favorable environment for many commercial, development, financial, and
co-operative banks to establish in this sector with a view to provide quality of services to the clients
(Sharesansar, 2016).

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The banking sector is emerging. Various types of banks such as development banks, commercial
banks, financial banks are established. Centre bank(NRB) always plays a vital role for developing
banks in Nepal. NRB reforms various policies as well as government encourages private sector
and foreigners for the investment in banking sector. Similarly, NRB has classified banking
institutions into four categories “A”, “B”, “C”, “D” based on minimum paid up capital. “A”, “B”,
“C”, “D” refer to commercial banks, development banks, financial institutions and micro finance
development banks respectively. Here, this research focus only on commercial banks in Nepal.
There are all together 30 commercial banks in Nepal offering different banking services to the
country people (Sharesansar, 2016). In past two decades, many banks were established in Nepal
as the government encouraged the foreign banks to start their operation by creating flexible
privatization policy and free economy. So, in recent years, banking sector of Nepal has been
converted in too much agile, competitive and profitable industry. Different foreign banks have
emerged recently which have further increased competition.
Therefore, in order to get competitive edge and to attract more customers, banks are focusing on
providing better services to the customers that will lead to customer satisfaction and loyalty.

1.5 Motivation for the Research and Research Objectives

Service sector has seen noticeable changes in the world in recent years. Service sector contribution
in GDP of any country is higher as compared to other sector. Therefore, many developed countries
such as USA, Germany, Norway, China, Japan in the world have become economic power house.
However, service sector also presents many opportunities in developing countries like Nepal.
Nepal being an developing country represents high opportunities for economic development.
Subsequently, service sector like banking is one of the competitive sectors where entry of foreign
banks creates intense competition among all the banks in Nepal.
Service sector in Nepal is contributing large share in country’s GDP. The major service sectors in
Nepal include financial, tourism, communication, and transportation sector. Financial sector
includes commercial banks, development banks, cooperatives and non-cooperatives, financial
companies which contributes around 11% in the country’s GDP (Chimoriya, 2015).This sector is
one of the major sources of generating employment and activating scattered capital for country’s
economic development. For that reason, service sector plays a vital role in developing country to
uplift their economy. Nevertheless, many scholars argue that service sector in developing countries
still practice traditional methods of doing business and fail to address the problem of service

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quality, customer satisfaction and customer loyalty making these the dominant reasons that they
achieve less competitive advantages in market. Therefore, identifying customer satisfaction
factors, service quality, and creating loyalty is the hardest task in service sector like banking in
Nepal. Only few studies have been conducted to investigate these factors in Nepalese banking
sector. However, questions about the major factors affecting customer satisfaction, level of
customer loyalty, and factors associated with customer loyalty in Nepalese commercial banks
remained unanswered. Furthermore, proposed study will investigate the mediator role of customer
satisfaction on service quality and customer loyalty in Nepalese banking sector, as well as provide
a comprehensive framework for service quality dimension with respect to customer satisfaction
and customer loyalty.
Likewise, it also provides innovative ways to improve service quality to customers and revises the
current services provided by the banks, if necessary. The agencies and planners can get data and
information on customer satisfaction which will help them to improve their services. These
findings may help planners, policy makers and researchers to identify the banking activities and to
know the existing impact of bank in the study area. The study can also help providing benchmark
information to future researchers.

1.6 Problem Statement

Research on service quality, customer satisfaction and loyalty in service sector like banking has
been drawing high attention in this era. In early 90s, service sector has transformed greatly because
of change in marketing environment(Zafar et al., 2011).Additionally, maximum number of the
research has been accompanied in developed countries. Hence, there is a need for more
authentication of customer satisfaction, service quality, and customer loyalty in service sector like
banking particularly for developing countries like Nepal.
Likewise, number of research that has been conducted in past have also identified that customer
expectations are higher and customer perceived service quality is low. So in such situation, testing
mediator role of customer satisfaction might be interesting one in the country like Nepal.
This research is carried out in context of Nepalese banking sector in order to identify the factors
that affect the customer satisfaction because the factors leading to satisfied customers differ from
one geographical region to another. In some places, customers are satisfied with the service
provided by government banks and in some places customer are satisfied towards private banks.

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The basic problems faced by Nepalese banking sector are lack of qualified and well trained human
resources leading to a low quality of bank services as well as traditional structure and outdated
technology creating obstacles while delivering quality services to the customer.
By considering this reasons, nowadays many banks are working hard to resolve these problems.
In this research, study factors including service quality dimensions, customer satisfaction and
loyalty are assumed from past literature.
To encapsulate, this research is attempting to find out whether there exists any relationship
between service quality dimension, customer satisfaction and customer loyalty in case of Nepalese
banking customers. Also, banking sector in developing countries like Nepal is facing the challenge
of creating quality services, satisfying customer and customer loyalty because skilled human
resources are lacking and banking culture lacks structure. Consequently, banking sector in Nepal
requires further research, innovation and development activities so as to satisfy customer and
create loyalty.

1.7 Research Objectives

The general objective of this proposed research is to study the customer satisfaction, quality
services and customer loyalty in banking sector in Nepal. Moreover, the specific objectives are:
 To assess the level of customer satisfaction for quality of service provided by Nepalese
commercial banks among their customers.
 To assess the level of loyalty among Nepalese commercial bank users.
 To identify factors associated with customer loyalty in the Nepalese commercial banks
among their customers.

1.8 Research Question

There are major expectations and criteria of customers on the basis of which they judge whether
the banking services provided to them are satisfactory or not. Also, because of high competition,
improvement in technology and globalization, their expectations are increasing continuously. So,
it is challenge for the banking sector to provide them with the quality services by identifying their
needs, taking continuous feedback. Hence, the major concerns of our study regarding customer
satisfaction are:
 What are the major factors affecting customer satisfaction ?
 What is the level of customer loyalty in Nepalese commercial banks ?

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  What are the factors associated with customer loyalty in Nepalese commercial banks?
This research starts with detail inspection of the literature by developing five hypotheses for
testing. The hypothesis hold the crucial relationship articulated in existing theory, as well as
supporting the research question.

1.9 Significance of the Study

This research will provide a comprehensive framework for service quality dimension with respect
to customer satisfaction and customer loyalty. It also provides innovative ways to improve service
quality to customers and revise the current services provided by the banks, if necessary.
The agencies and planners can get data and information on customer satisfaction which will help
them to improve their services. These findings may help planners, policy makers and researchers
to identify the banks activities and to know the existing impact of bank in the study area. This
present research also guides future researcher by providing baseline data for huge research which
will be more reliable and can be generalized.

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1.10 Organization of the Thesis

The remaining part of this research is organized as follows:

Chapter 2:
This chapter presents literatures which are relevant to this research such as consumer buying
behavior, service quality dimension, customer satisfaction, and customer loyalty and will provide
a theoretical framework as well.
Chapter 3:
This chapter contents conceptual framework and hypothesis along with defining conceptual
framework briefly. And also defining relationship between variables clearly.
Chapter 4:
This chapter includes research methodology in details i.e. research design and data collection
technique as per the objectives of this thesis.
Chapter 5:
This chapter contains data analysis and interpretations of the findings or results on the basis of
descriptive statistics and linear regression model according to nature of variable.
Chapter 6:
This chapter involves discussion of findings or results with previous literature, theories and
compression is done to find similarities between current results.
Chapter 7:
The final chapter presents conclusion, implication of research and limitations of the study.

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LITERATURE REVIEW AND THEORETICAL FREMEWORK

2.1 Introduction
This section presents literatures which are relevant to this research such as consumer buying
behavior, service quality dimension, customer satisfaction, and customer loyalty and will provide
a theoretical framework as well.

2.2 Consumer Buying Behavior

Consumer behavior is the learning process of how consumers process the information and select
the goods and services, consume, and finally dispose of that goods and services. According to their
purchasing power, needs and preferences, consumers buy and consume goods and services. But
several factors such as individual attitude, beliefs, values perception, social and cultural
background play a vital role in buying decision (Khan, 2006). Therefore, consumer buying
behavior is one of the driving factors that have an impact on service sector.
According to Philip Kotler & Gary Armstrong.” Consumer buying behavior refers to the buying
behavior of final consumers- individuals and households that buy goods and services for personal
consumption.”(Kotler & Armstrong, 2012, p. 133). On the top of that, the buying behavior of
consumers is strongly influenced by several factors such as cultural, personal, psychological and
social; and these factors are uncontrollable in nature.
It is worth noting that buying behavior differs significantly for a physical product (such as
toothpaste, an iPhone, laptop and so on.) to financial services (such as services provided by
banking sector). The decision will be more complicated with the increase in participation of
buyers’ opinion. Basically buying behavior can be broadly categorized in four types (Assael,
1995):
1. Complex buying behavior: Under this type, consumers are highly involved while taking
purchase decision as well as there are major perceived dissimilarities among brands.
2. Dissonance-reducing buying behavior: In this type, consumers are highly involved but
perceived differences are few among various brands.
3. Habitual buying behavior: In this type, the consumer behavior is described by low
involvement in purchases with few noteworthy perceived brand differences.

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 4. Variety-seeking buying behavior: In this type, the consumer behavior is described by
low involvement in purchases with noteworthy perceived brand differences (Kotler &
Armstrong, 2012, p. 151)

2.3 Buyer Decision Process

After looking at the factors influencing buyer behavior and types of consumer decision making,
the next step is to identify buyer decision making process. According to Kotler & Armstrong
(2012) buyer decision making process consist of the following five sequential stages:
1. Need Recognition: In this step, core problems are recognized. This step finds out the gap
between actual situation and desired situation. However, the desired situation should be
quite important for the consumer.
2. Information Search: After identifying the needs, the consumer has to search information
from various sources. Consumer can get information from various sources such as family,
friends, acquaintances, advertising salespeople, websites, packaging display,
communication media and so on. However, all these sources are categorized under internal
and external sources and also is dependent upon the complexity of choices.
3. Evaluation of Alternatives: After collecting the required information, the consumers
evaluate the available alternatives and choose the best alternatives. There are several
evaluation process to evaluate alternatives. The consumer uses simple or complex
evaluation process depending upon various factors. Consumer start to rank their produce
on the basis of their evaluation criteria.
4. Purchase Decision: Basically consumer will purchase those products which are ranked
high while evaluating the alternatives.
5. Post Purchase Behavior: On the basis of satisfaction and dissatisfaction, the consumer
will take further action after the product was purchased.

Figure 1: Buyer Decision Process

6.
Need Information Evaluation of Purchase Post purchase
Recognition Search Alternatives Decision Behavior

Adopted from : Kotler & Armstrong (2012)

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2.4 Differences Between Manufactured Goods and Services
Similarly, the buying practice of services are different from manufactured goods because services
are intangible in nature. Therefore, it is very difficult to evaluate services before they are
consumed. But in case of manufactured goods it is possible to evaluate the goods before purchase.
Likewise, while consuming by consumer, processing variable are significantly different in service
as compared to manufactured goods (Shanker, 2002, p. 53). It is also believed that unique quality
of services such as intangibility, inseparability, heterogeneity, and perishability makes consumer
more difficult to evaluate services rather than manufactured goods (Parasuraman et al., 1985).
Basically, four differences between manufactured goods and services are identify by various
studies done on consumer services (Jackson et al., 1995) which are as follows:
 Services are highly intangible in nature which means that service cannot be stored. Pricing
service is also difficult. So, these factor totally differentiate services from manufacturing
goods because manufactured goods are tangible in nature.
 Since services are inseparable in nature, they are consumed at the same time when they
are produced so, it gives straight impact on services provider but in case of manufactured
goods this is not possible (Parasuraman et al., 1985) as customer participation will also
affect the service consumed. However, in case of goods, production and consumption can
done in two different point of time.
 Heterogeneity nature of service quality also differs service from goods since goods are
standardized in nature. But many uncontrollable factors play a vital role in determining
service quality. There are the chances of occurance that whatever were planned and
promoted will not be delivered in case of service delivery.
 Since service cannot be returned or resold and there are difficulties in coordinating demand
and supply. Also, they are perishable in nature. However, goods can be stored, returned,
resold and it is possible to forecast demand and supply based on market situation (Wilson
et al., 2012).

2.5 Impact of Customer Satisfaction and Customer Loyalty on Service Sector

Various scholars proved that overall service quality creates customer satisfaction and customer
satisfaction leads to customer loyalty. And this overall service quality is the combination of
relational and core qualities. What actually delivered is a core quality and how it is delivered is a
relational quality (McDougall & Levesque, 1992). From the view point of service provider,

10
gaining customer satisfaction is very important because it is very important drive to achieve
customer loyalty, increasing goodwill and creating positive word of mouth (Bearden & Teel,
1983). All in all, customer satisfaction has a positive impact on service sector.
Customer loyalty plays a vital role in the success of any service sector because loyal customers are
the true assets of the organization. It is also believed that improvement in service quality will boost
customer loyalty. Wallin Andreassen, (1994) argued that customer loyalty is originated through
reputation and image of service sector. He also advocated that corporate image and corporate
financial performance are linked with each other. Likewise, Loureiro & Kastenholz, (2011)
examined that company image has a positive effect on customer loyalty especially in service
sector. To encapsulate, customer loyalty has a positive influence in service sector.

2.5.1 Customer Satisfaction

A customer is a stakeholder of an organization who provides payment in exchange for offer
provided by the organization with the aim of fulfilling their needs and to maximize satisfaction.
Therefore, customers want greatest value for their money. So they are working hard to select
greatest products and services. Satisfaction can also be a person’s feelings of pleasure or
disappointment that results from comparing a product’s perceived performance or outcome with
their expectations (Kotler & Keller, 2011).
Customer satisfaction is defined as “the individual’s perception of the performance of the products
or services in relation to his or her expectations”(Schiffman & Kanuk, 2004, p. 14).Customer
Satisfaction helps in measuring whether the products and services supplied by company meet or
further exceed the expectations of customers. Customer satisfaction is an indicator which shows
whether the customers will make repurchase decision or not along with their loyalty
(Boonlertvanich, 2011). It also describes that the feeling of happiness which is gained by achieving
his or her goals can be considered as satisfaction.
Customer satisfaction is a key factor in organization that defines long term involvement of
customer (Oly Ndubisi, 2004). Similarly, Mittal & Kamakura (2001) revealed that customer
satisfaction is crucial element of customer wishes for upcoming purchases. Therefore, those
customers who are satisfied are ready to share their positive thoughts with others (Mittal &
Kamakura, 2001)
Nowadays, banking sector is also considering customer satisfaction as one of the factor for the
smooth functioning of the organization. Therefore, banks are implementing new and advanced tool

11
and technique to satisfy their customer such as e-banking, ATM machine. Hence, competitiveness
and convenience are the two major features which have impact on levels of customer satisfaction
in any banking sector (Parasuraman et al., 1988). Therefore, measuring satisfaction will help to
identify the status of the organization regarding customer satisfaction (Badara et al., 2013). In this
competitive world, customer needs have to be addressed properly by different service sectors. In
such case many service providers are shifting their focus from product to customer. Patterson &
Spreng (1997) stated that satisfaction plays vital role in attracting customer. Customer satisfaction
has a great importance in the service sectors especially in banking field because customer
satisfaction is directly linked with loyalty and goodwill of the organization (Ravichandran et al.,
2010). Also, research performed by Mahamad & Ramayah (2010) and Caruana (2002) revealed
that customer satisfaction can be considered as mediator between service quality and loyalty.

2.5.2 Customer Satisfaction in Banking Sector

In this era of globalization, service sector is growing in a fast pace. Therefore, competition is high,
many service firms are focusing their strategy on creating customer loyalty. Hence all banking
sectors are now focusing their strategy to create customer loyalty by improving service quality.
Parasuraman et al., (1988) in his paper, mentioned that five service quality dimensions are major
factors to create customer satisfaction in banking sector which are tangibility, reliability,
responsiveness, assurance and empathy while some scholar had pointed out that empathy,
reliability and tangibility are important to determine customer satisfaction. But Ahmed et al. (2010)
pointed out that empathy has negative relationship with customer satisfaction. So, several scholars
have identified various factors that determine customer satisfaction in banking sectors. In Nigeria.
when bank staff provide fast and responsive services, then customer will be satisfied Badara et al.
(2013). In Iran customer satisfaction plays vital role in determining customer loyalty (Mahamad
& Ramayah, 2010) This was further supported by Caruana (2002).

2.6 Service Quality

According to Salas & Fogli (2006) service quality can be defined as “a global judgment or attitude
relating to a particular service; the customer’s overall impression of the relative inferiority or
superiority of the organization and its services. Service quality is a cognitive judgment”. With
regards to service quality literature, Grönroos (1984) first introduced the specific two dimensional
model to measure service quality which are as follows:

12
 1. Technical-quality: which measure outcome of service performance
2. Functional-quality: shows subjective perceptions of customer interaction with service
provider.
Grönroos compares two dimension with expectations of customer (Gronroos, 1990). Likewise
Parasuraman et al. (1985) defines service quality as degree of inconsistency among customer’s
normative prospects for services and their opinions of service performed. Similarly meeting the
needs and expectations of the customer defines quality of service (Smith, 1998). Also service
quality is evaluated through ten service quality dimension proposed by Parasuraman et al. (1985)
But later on Parasuraman et al. (1985 ) reduce these ten dimensions into five dimensions so as to
measure perceived value on customer, which is also known as SERVQUAL Model.

2.6.1 SERVQUAL Model (Theoretical Framework)

This model was first introduced in 1985 and it is one of the popular tools used to measure service
quality. SERVQUAL Model measures the gap that exists between customer expectation and actual
service received from the customer. This model consists of five service quality dimensions and
they are:

1. Tangibility: which includes exterior of physical facilities, equipment, written sign and
signal, personnel.
2. Reliability: Focuses on how service promises are delivered.
3. Responsiveness: Focuses on how organization are willing to help customer and offer
prompt services.
4. Assurance: Focuses on inspiring trust and confidence in employee while delivering
services.
5. Empathy: Focuses on providing individual attention, and caring to the customer by
providing customized services, because each and every customer is unique. (Wilson et al.,
2012).

2.6.2 SERVQUAL Dimensions in Banking Sector

SERVQUAL dimensions plays vital role in measuring service quality in banking sector. Tangible
related factor in banking sector relate to adequate staff to provide services, advance and useable
equipment and easy physical layout. So these factors should be properly maintained in the banks
because these factors help to increase customer satisfaction. Reliability focuses on delivering of
13
promised services. Banks with high reputation and dependability will always fulfill the promise
made to customer, as well as banks also ensure level of security.
Responsiveness focuses on helping customer and provide accurate services. Many banks try to
customize their services depending upon the level of customer, as well as they try to personalize
their services, which helps to enhance customer satisfaction. Similarly, customer wants assurance
from bank. So, bank staff must explain each and every product and services to customer in detail
so that customer will feel comfortable with banking services. Finally, to assure empathy, bank
employee should treat each and every customer individually because each and every customer are
unique (Lau et al., 2013).
All in all, organizations should enhance the quality of service, identify the problems quickly
through research and feedback, and should try to assess client satisfaction effectively because
service quality is becoming very significant competition factor in the field of service sector like
banking.

2.7 Customer Loyalty

In early days’ loyalty was viewed as brand royalty of tangible goods. But later on, many studies
were carried out and the field of loyalty was expanded. However, only few studies covered the
area of customer loyalty of services (Oliver Richard, 1997) . Customer loyalty in a general is
somewhat that consumer may reveal to a particular brand and service (Uncles et al., 2003) .Simply,
customer loyalty can be explained as power of relationship between relative and repeated
patronage of an individual. Dick & Basu (1994) highlighted that loyalty is based on customer
attitude as well as behavioral phenomenon. Customer loyalty has two dimension and on the basis
of these two dimensions four types of loyalty were developed and they are:

 True loyalty
 Latent loyalty
 Spurious loyalty
 No loyalty

Later on, Garland & Gendall (2004) experienced the context of Dick & Basu and established their
own codification. Similarly, Rauyruen & Miller (2007) specified that customer loyalty can be
determined on the basis of behavioral, attitudinal and composite factor of the customer.
Repurchasing pattern is represented by behavior loyalty, positive word of mouth represents

14
attitudinal loyalty and composite loyalty represents both loyalties. Therefore, customer loyalty can
be explained as committed customer’s activity of purchasing again and again and patronize again
and again to a preferable product in future. Hence, loyalty improves the financial position of the
organization. Oliver Richard (1997) discovered that customer loyalty helps firm to increase their
profit. Customer loyalty is one of the thriving and valuable sources which helps in future planning
of the organization because loyal customers will create superior value as well as relationship
marketing acts as a key component to create customer loyalty. So many service organizations have
started to implement customer loyalty programs.

2.8 Relationship Between Service Quality, Customer Satisfaction and Customer

Loyalty
Many scholars discussed that service quality has a great impact on customer satisfaction which
leads to customer loyalty. Wilson et al., (2012) established a theoretical model in which service
quality, customer satisfaction and loyalty are correlated in one structure. As stated in the model,
service quality dimensions such as reliability, responsiveness, assurance, empathy and tangibility
create service quality. Situational and personal factors as well as price and product factor have
impact on customer satisfaction. Similarly, Heskett et al., (1997) also created a model popularly
known as “Service Profit Chain” which shows relationships between customer satisfaction,
loyalty, profit and growth, worth of goods and delivered services to customer and organization
employee ability, pleasure, loyalty and productivity. Similarly, Wilson et al. (2012) tried to clarify
the customer perception of quality and satisfaction which leads to loyalty. The model is presented
below in figure.

15
 Figure 2: Customer Perceptions of Quality and Customer Satisfaction

Source : Wilson et al. (2012)

The given figure illustrates the relationship between service quality and customer satisfaction,
which leads to customer loyalty. From the above figure, it is crystal clear that service quality is
determined on the basis of customer’s perception of service quality dimensions such as reliability,
assurance, responsiveness, empathy and tangibility. So service quality is based on evaluation of
these dimension. Whereas, satisfaction is comprehensive in nature and factors such as product
quality, price, service quality and other situational and personal factors have a great impact.
Therefore, service quality and satisfaction are correlated to each other, which leads to customer
loyalty (Wilson et al., 2012).

2.8.1 Product and Service Features

Customer satisfaction is heavily influenced by evaluation of product and services features made
by customer. In case of banking sector, customer may evaluate service features on the basis of
price level, friendliness of personnel and level of customization of services. Especially in service
sector, service is the core product sold by the service provider. However, there are few service
providers which sell service as well as product such as hotels and restaurants. They offer food and
beverages along with services. Therefore, quality of product along with effective service will affect

16
perception of customer. Several scholars also conducted various studies which address the
importance of product along with services (Kandampully & Suhartanto, 2000). Hence, higher the
quality of goods, higher will be the service quality.

2.8.2 Price
Quality of service can be determined on the basis of price of the product and services. Usually
customers believe that higher the prices of product or services, higher will be the service quality
and vice versa. So, customer use price as a basis to judge quality.

2.8.3 Situational Factors

Situational factors are also known as environmental factors which also affect satisfaction while
consuming services. Michael et al. (1999) describes that individual consumption behavior also
depends on the situational or environmental factor. Situation factors are one of the general factors
that influence customer satisfaction because buying behavior always takes place in certain
situational context (Engel et al., 1993). Basically purchase and usage situation have a significant
effect on the behavior of individual buyer. These purchase and usage situation denote the physical
facilities of service provider. Similarly, time is also one of the situational factors which influence
consumption. Moreover, time is viewed in terms of frequency of visit and years of relationship in
banking sector.

2.8.4 Personal Factors

Individual perceptions, values, attitudes and belief also influence in customer level of satisfaction.
Moreover, personal factor plays vital role in individual’s way of consuming goods and services.
So consumer consume those products which they believe can fulfill their own needs. Hence,
personal factor such as age, gender, education level, income level also influences level of
satisfaction (Boundless, 2015).
On the basis of aging, individual buying behavior differs. For instance, demand for services,
recreation, clothes, food habits differ with changes in age. Likewise, in developing countries,
gender is an important personal factor. For example, females prefer to go to banks that gives more
importance to female customers. Similarly, education level also influences consuming behaviors
of individual customers. Customer with high level of education wants quality of services and
customized services rather than customers with low level of education. Moreover, level of income
determines consuming patterns of an individual (Engel et al., 1993). Individual with high income

17
are likely to spend more and vice versa. Kotler et al. (1999) described that personality also
influences an individual buying decision making.

2.9 Relationship Between Service Quality, Customer Satisfaction and Customer

Loyalty in Banking Sector
Many scholars try to find out the relationship between service quality, customer satisfaction and
customer loyalty in banking sector. Scholars discuss that customer loyalty is the outcomes of
service quality and customer satisfaction.Veloutsou et al. (2004) has established the positive
relationship among service quality, customer satisfaction and loyalty in Greece’s banking sector.
Similarly, Caruana (2002) also discuss that customer satisfaction act as meditator that bridge
between service quality and customer loyalty and also explain that these are interrelated to each
other. Further this was supported by various scholars Lau et al. (2013) and Lewis & Soureli
(2006). Likewise, Johnston (1997) worked to identify crucial factors of service quality in service
sector and he identified that responsiveness of the service quality dimension is the crucial factor
for customer satisfaction and loyalty.
All in all, most of the scholars have view that there is a positive relationship between service
quality, customer satisfaction and loyalty. Also, Caruana (2002) viewed that service quality and
loyalty are bridged by customer satisfaction. Hence, this study also focuses on testing this
relationship in the banking sector in Nepal.

2.10 Relationship of Theories with Buyer Decision Making Process

Psychographic variable plays vital role in buyer decision making process, evaluation and
judgmental process because this variable influences the direct relationship between service quality
and customer loyalty. La Roche (2005) mentioned that quality service also stimulates buyer to
make purchase decision quickly especially in a banking sector because several studies have found
that service quality and willingness to buy are positively correlated. The buyer’s decision process
can be influenced by price of the services because majority of customers are price sensitive.
Customer satisfaction and buyer’s decision making process is the chain cycle. Customer’s post
purchase view has a great impact on repurchases decision. Post purchase view can be either
positive or negative. If customer have a positive view, then customer will be satisfied with the
services and will take decision to repurchase again and again. They will also recommend other
customers which will ultimately influence on other buyer’s decision making process. But if the

18
experience was negative, then customers will be dissatisfied with the decision made by them and
will consider switching the services.
While making buying decision, customers focus more on features and benefits of the product and
services. Therefore, these benefits and features are considered to be important determinants of
customer loyalty in banking sectors. It means that service quality leads to customer satisfaction
and satisfied customer tend to be loyal. Thus, customer loyalty influences buyers decision making
process. Likewise, positive outcomes of buyers decision making process will create customer
satisfaction, improved sales, increased goodwill and brand images (Onditi, 2013). Similarly,
loyalty program also influences the buyer decision process because the loyalty program such as
offering various benefits for customers also encourage customers to create long term profitable
relationship with service provider. Hence, customers will regularly visit service provider.

2.11 General Overview of Previous Studies

The table below shows the relationship of service qualities, customer satisfaction and customer
loyalty with respect to banking sector. It is crystal clear that majority of studies were done in
countries such as Iran, Nigeria, United Kingdom, Bangladesh, Pakistan, Jordan, Netherland, India.
But only few studies were done in Nepal regarding service quality, customer satisfaction and
customer loyalty with respect to banking sector.
Moreover, we see that majority of researchers used service quality dimension as an independent
variable and customer satisfaction as a dependent variable in their theoretical framework while
few of them use customer loyalty as dependent variable in their studies. There are several studies
conducted before 2010 but in this research only recent years’ studies were taken into consideration.

19
 Table 1: Summary of Previous Studies

Author Dependent Independent Sample Used/Size Findings Methodology /

Variable Variable Measurement
Zafar et al. Customer Service Quality Out of 500 1.Tangibility. Reliability, SPSS technique used
(2012) Satisfaction and (Tangibility, questionnaire filled competence, and conflict for data analysis and
customer loyalty Reliability, by customers from Handling will positively result findings (descriptive
Competence, various banks of in customer satisfaction statistics was
and Conflict Pakistan, 192 were 2.Customer Satisfaction will performed.
Handling) accepted positively result in Customer AMOS (Regression
loyalty. was run).

Badara et al. Customer Service Quality 240 questionnaires 1.Tangibility, Relibility has no AMOS, Descriptive
(2013) Satisfaction and (Tangibility, were distributed significant effect on customer Statistics and
customer loyalty Reliability, among which 209 loyalty and customer composite reliability
Responsiveness, questionnaires is satisfaction in Islamic bank in analysis.
Assurance, convenience and Nigeria.
Empathy, respondents were the 2.Responsiveness has no
compliance) Nigerian students in significant effect on customer
University Utara loyalty but has significant effect
Malaysia. in customer satisfaction.
3.Assurance has significant
effect on customer loyalty but
has no significant effect in
customer satisfaction
4. Empathy, compliance has no
significant effect on customer
loyalty and customer
satisfaction
5. No positive relationship
between customer satisfaction
and customer loyalty in Islamic
bank in Nigeria

20
 Table 1: Summary of Previous Studies (Continued…)

Mahamad & Customer Service Quality 147 questionnaires 1.Perceived service quality is Descriptive statistics,
Ramayah (2010) Satisfaction and (Reliability, were collected and positively associated with Regression analysis,
customer loyalty Responsiveness, analyzed. customer satisfaction and ANOVA Test
Assurance, customer loyalty.
Empathy, 2.Customer satisfaction and
Tangibles) customer loyalty are positively
associated.
3.Customer satisfaction
mediates the relationship
between perceived service
quality and customer loyalty.
M. M. Khan & Customer Service Quality 225 questionnaires 1.Service quality have Descriptive statistics,
Fasih (2014) Satisfaction and (Tangibles, were collected and significant and positive one sample t-test,
customer loyalty Reliability, analyzed relationship with customer correlation and
Assurance, satisfaction and customer regression
Empathy) loyalty.
Siddiqi Customer Service Quality 100 questionnaires 1.Service Quality has positive SPSS technique
(2011) Satisfaction and (Tangibles, were collected and association with customer Descriptive Statistics,
customer loyalty Responsiveness, analyzed in the retail satisfaction. Pearson Correlation
Reliability, banking in 2.Customer satisfaction and
Assurance, Bangladesh. loyalty are positively related.
Empathy)
Al-Azzam Customer Service Quality 400 questionnaires 1.Service Quality is positively SPSS Technique
(2015) Satisfaction (Tangibles, were collected and associated with customer Reliability Analysis,
Responsiveness, analyzed satisfaction. Multiple Regressions,
Reliability, Correlation of
Empathy, Analysis
Security)
Lau et al. (2013) Customer Service Quality 119 questionnaires 1.Customer satisfaction was Descriptive Statistics,
Satisfaction and (Tangibles, were collected and positively influence by service Multiple Regression
customer loyalty Responsiveness, analyzed quality.
Reliability, 2.Customer loyalty has a
Assurance, positive influence on customer
Empathy) satisfaction.

21
 Table 1: Summary of Previous Studies (Continued…)

Kheng et al. Customer Service Quality 238 questionnaires 1.Tangibles, Responsiveness Reliability Coefficient,
(2010) Satisfaction and (Tangibles, were collected and have no significant effect on Mean and Standard
customer loyalty Responsiveness, analyzed customer loyalty and customer Deviation (SD) for the
Reliability, satisfaction. major variables,
Assurance, 2.Reliability and customer Multiple Regressions
Empathy) loyalty are positive effected

3.Reliability have no significant

effect on customer satisfaction.
4.Empathy and Assurance have
positive effect on customer
loyalty and customer
satisfaction.
5.Customer loyalty mediated by
customer satisfaction towards
service quality.
6.High customer satisfaction
higher will be customer loyalty.
Customer Service Quality 400 questionnaires 1.There is a positive correlation Correlation Analysis
Ragavan & satisfaction (Tangibles, were collected and between (tangibles, and Multiple
Mageh (2013) Responsiveness, analyzed responsiveness, reliability, Regression
Reliability, assurance) and customer
Assurance, satisfaction
Empathy) 2.There is a negative correlation
between Empathy and customer
satisfaction in new private
sector banks in Chennai

22
2.12 Identification of Independent Variables
From the above literature review, several variables were taken into consideration in different
conditions. Based on those, service quality dimensions (Tangibility, Reliability, Responsiveness,
Assurance and Empathy) and situational factor are selected for the purpose of this study.

1. Service Quality Dimensions : Service can be considered as an intangibility offer by one

party to another in exchange of money for pleasure. Quality is one of the things that
consumers look for in an offer, which service happens to be one (Michael et al., 1999).
Quality can also be defined as the totality of features and characteristics of a product or
services that bear on its ability to satisfy stated or implied needs (Kotler & Armstrong,
2012). Organizations should enhance the quality of service, identify the problems quickly
through research and feedback, and should try to assess client satisfaction effectively.
Parasuraman et al. (1988) admits that there are five major dimensions of service quality
and they are Tangibility, Reliability, Responsiveness, Assurance and Empathy.
2. Situational Factor: Situational factor such as circumstances and conditions will also affect
the expectation of services that are to be consumed by consumer. Therefore, services which
are user friendly and services which enhance customer ways of living are consumed with
more frequency and involvement. According to Dewan & Mahajan (2014) in banking
sector, two situational factor such as (i) Frequency of visiting and (ii) Years of relationship,
plays vital role in defining level of satisfaction.

2.13 Identification of Dependent Variables

From above literature, two common dependent variables are used for this study purpose. Which
are customer satisfaction and customer loyalty. From above table, seven out of ten studies used
customer loyalty as dependent variable. Out of ten studies eight studies takes customer satisfaction
as dependent variable and the two studies takes customer satisfaction as intermediating variable.
In different environment, different studies looked at different variable and their relations.
Table 2 shows the clear picture of the variable and their references from where different
independent and dependent variables are taken into consideration for this research purpose.

23
1. Customer Loyalty: Several studies have highlighted the impact of customer loyalty in
banking sector. Seven out of ten studies used customer loyalty as a dependent variable.
Customer loyalty can be considered as an attitudinal tendency as well as behavioral
tendency where the customer favors one brand over others. Such favoritism over one brand
is because the performance of it stands as per expectations. So, they have positive attitude
towards the product which turns in to brand loyalty after continuous improvement.
Similarly, Caruana (2002); Siddiqi (2011); Gorondutse & Hilman (2014) also use customer
loyalty as dependent variable in their research.
2. Customer Satisfaction: Customer satisfaction is defined as “the individual’s perception
of the performance of the products or services in relation to his or her expectations”
(Schiffman & Kanuk, 2004, p. 14). Following the examples shown with regards to Nigeria
and Iran in 2.5.2, we can say that all studies focus on customer satisfaction as a key
determinant that influences the service quality and customer loyalty. Similarly, Mahamad
& Ramayah (2010); Gorondutse & Hilman (2014) use customer satisfaction as mediating
variable in their research.

24
CONCEPTUAL FRAMEWORK AND HYPOTHESIS

3.1 Introduction
This section present overall conceptual framework and hypothesis along with defining conceptual
framework briefly. Relationship between independent, control and dependent variable will define
clearly and impact of mediate variables with independent variable will be defined.

A conceptual framework acts as a blue print that shows the relationship among the concepts.
Conceptual framework clarifies the underlying process, which is used to guide this study. On the
basis of nature and scope of this study, conceptual framework was created. As well as it was
developed on the basis of available literature and theoretical issues.
After going through previous available literature, the dependent variable tested by Caruana (2002);
Siddiqi (2011); Gorondutse & Hilman (2014) independent variable tested by Kheng et al. (2010);
Gorondutse & Hilman (2014); Dewan & Mahajan (2014); Mahamad & Ramayah (2010);
Parasuraman et al. (1991) and mediating variable tested by Mahamad & Ramayah (2010) were
taken into consideration in this thesis writing process. This thesis will try to find out which factor
(service quality dimensions) have a positive impact on customer satisfaction (mediating variable)
and customer loyalty (dependent variable) in banking sector of Nepal.

3.2 Control Variables for Regression

After obtaining a set of independent variables, a regression using control variables will be carried
out. The control variable tested by Mahamad & Ramayah (2010) were taken into consideration in
this thesis writing process. Control variable includes the demographic variables such as gender of
the respondents, age, monthly income and their educational qualification which will be constant
and unchanged throughout the course of investigation. The main aim of this step is to measure the
relationship between the dependent variable and the multiple independent variables proposed in
the hypothesis, thus being able to explain the predictive power of the variables in determining
customer satisfaction, and customer loyalty.
The variable used in this theses are presented in table below:

25
 Table 2 : Variable and References

Variables References
Dependent Variable: Customer Loyalty Caruana (2002); Siddiqi (2011); Gorondutse &
Hilman (2014)

Independent Variable: Service Quality Kheng et al., (2010); Gorondutse & Hilman
Dimensions and Situational Factors (2014); Dewan & Mahajan (2014); Mahamad &
Ramayah (2010); Parasuraman et al. (1991)

Mediating Variable: Customer Satisfaction Mahamad & Ramayah (2010); Gorondutse &
Hilman (2014)

Control Variable: Demographic Factors Mahamad & Ramayah (2010)

26
 Conceptual Framework

Figure 3 : Conceptual Framework

Independent Variables Mediating Variable Dependent Variable

Service Quality Dimensions

 Tangibility
 Reliability
 Responsiveness
Customer Satisfaction Customer Loyalty
 Empathy and Assurance

Situational Factors Demographic Factors

 Frequency of visiting  Age
 Years of Relationship  Income
 Gender
 Education
Level
Control Variables

Source :Gorondutse & Hilman (2014);Wilson et al. (2012)

27
3.3 Hypothesis
It is a tentative assumption the validity of which remains to be tested. If the customers agree that
they are satisfied and give the reasons for satisfaction as service quality, service quality dimension
has significant relationship with customer satisfaction. Similarly, conclusions can be drawn for
customer loyalty, satisfaction, service quality dimensions and other situational factors. Based on
framework and objectives of research, the present study seeks to test the following hypothesis:
H1: There is a positive relationship between service quality dimensions and customer
satisfaction in Nepalese commercial Banks.

Service Quality Dimensions Customer Satisfaction

H2: Customer satisfaction mediates the relationship between service quality dimensions,
situational factors and customer loyalty.
Customer Satisfaction

 Service Quality Dimensions Customer Loyalty

 Situational Factors

H3: There is a positive relationship between customer satisfaction and customer loyalty in
the Nepalese commercial banks.

Customer Satisfaction Customer Loyalty

H4: Service Quality Dimension has a positive effect on customer loyalty.

Service Quality Dimensions Customer Loyalty

H5a: Situational factor (Frequency of visiting) has a positive impact on customer satisfaction.
H5b: Situational factor (Years of Relationship) has a positive impact on customer
satisfaction.

 Frequency of visiting
Customer Satisfaction
 Years of relationship

28
RESEARCH METHODOLOGY

4.1 Introduction
This section discusses about research methodology and includes detail discussion about research
procedure, design and data collection methods which we selected for this research.

4.2 Data Collection and Empirical Context

Thesis writing process is the certain plan of action which starts with the definition of research
questions, selection of different variables, several methods of collecting data and analyzing the
data to generate accurate results.
The descriptive research was carried out to assess the service quality, customer satisfaction and
customer loyalty in the commercial banks of Nepal. Therefore, researchers started by searching
former knowledge of the area. These past knowledges are used to recognize different dependent
and independent variables. After identifying these variables, specific research questions are
developed. On the basis of these questions hypothesis and conceptual framework were developed.
Finally, data were analyzed to identify relationship between dependent and independent variables.
When research plan was selected, the researchers had to select types of data they needed to answer
the research question. Data are of two types: 1) Primary data and 2) Secondary data. This study is
based on primary data where data are collected and analyzed by researchers. These data are also
called first hand data.
Study Area
Commercial banks of Kathmandu, Nepal.
Population
Population refers to specific group of the units such as individuals, households, organization and
similar that are targeted for definite study. For this thesis, 375 customers of commercial banks of
Kathmandu, Nepal were identified.

29
Sampling Frame
After defining the population, the next step is to identify the sample frame. Sampling frame is the
process of listing the elements so as to draw actual sample. For this thesis, list of commercial banks
in Nepal was obtained.
Sampling Procedure
Non- Probability sampling methods was used for data collection. Under this sampling procedure,
convenience sampling procedure is appropriate for this research. Convenience sampling method
depends on the data collected from the population who are willing to participate in the study. In
this sampling method primary data that are available first are used without any modification. This
approach of sampling focus on getting participant wherever you find them and wherever is
convenient. In order to get initial primary data concerning specific issues such as customer in
relation to service quality, this approach is used. In exploration stages of the research, this sampling
technique is effective and in order to collect the basically data structural questionnaires are
developed.
Sampling Size
Several factors such as money, time, statistical methods, population size and so on depends upon
the question of sample size. For this thesis, as per the research convenience, 375 sample were
taken.
Nature of Instruments
Structural questionnaires were developed. The questionnaire consists of four parts.
 First part consists of demographic factor and situational factor
 Second part consists of service quality dimensions
 Third part consists of customer loyalty.
 Final part consists of customer satisfaction.

4.3 Data Collection Methods and Tools

This questionnaire survey was carried out in Kathmandu, Nepal from March 4th to April 3rd ,2016.
At the beginning of interview verbal consent was taken from respondents and those who refused
were excluded from the study. Responses were collected on the basis of interview and face to face
interaction with the customers of commercial banks in Nepal. For this research, structural
questionnaire was used. Survey questionnaire was presented in English. However, for few
respondents, researchers explained the same in native Nepali language for better understanding

30
The questioners were distributed and collected during office working days. Among 375, 325
questioners were filled and collected in the banks and remaining 50 were distributed to the
employees of the different who were working in Customer service department and this employee
give questionaries’ to the customers directly.

4.4 Measurement of Variables

After completing the data collection, questionnaires were checked for completeness. By using
SPSS software, at first variables were developed and data were entered accordingly. For this
research multivariate statistical analysis was used. Likert scale was used for rating responses. Each
testimonial is measured by 5- point Likert scale: 1= Strongly disagree; 2=Disagree; 3=Neutral; 4=
Agree; 5=Strongly agree. Similarly, dependent and independent variables were measured by
focusing on Cronbach’s alpha (must be above 60%). In this research we are going to use
multivariate statistical analysis as well as dependence techniques are used because hypothesis that
are presented in this research distinguish independent and dependent variable.
The most significant study of the literature comes out to be Badara et al. (2013); Kheng et al. (
2010). This literature also studies the about service quality dimensions along with customer
satisfaction as a mediator that mediates the relationship between service quality dimensions and
cutomer loyalty respectively. Therefore, this literature provides base line information to look at
various depandent and indepandent variables respectively.

31
 Table 3: Variable Measure and Sources

Variables (Items) Sources

Service Quality dimensions (Tangibility, Reliability, Responsiveness, Assurance and Kheng et al., (2010); Gorondutse & Hilman (2014);
Empathy) Dewan & Mahajan (2014); Mahamad & Ramayah
(1= Strongly disagree to 5=Strongly agree) (2010); Parasuraman et al. (1991)

1. Bank have up to date equipment which is sufficient and obvious for customers’
usage.
2. Customers feel comfortable while using bank physical facilities
3. Sufficient Employee are committed to provide customers banking services.
4. Bank’s physical facilities and material associated with service are visually
pleasing
5. The bank can deliver the service as promised to the customers with in a given
time.
6. The bank can provide secure and accurate service to customers
7. The bank can honor their promises.
8. When customer are facing problem, bank show genuine interest in handling
customer problems
9. Bank employees will provide customers precise personal services.
10. Bank employees will provide prompt service to customer
11. Bank employees are willing to help customers.
12. Bank employees are never too busy to respond customer request
13. Customers will feels safe during the transaction process.
14. Bank employees behavior will increase customer’s confident and trust in quality
services.
15. Bank employees will be regularly courteous with customer queries.
16. Bank employees have a knowledge to answer your questions
17. Bank employees will provide customized services to their customers.
18. Bank employees have the enthusiasm to understand the customer specific needs.
19. Bank employees consider customer needs in the first place.
20. Bank opening hours is appropriate to the customers

32
 Table 3: Variable Measure and Sources (Continued…)

Situational Factors Dewan & Mahajan (2014);

1. Frequency of Visisting Banks 2. Year of relationship

Customer Satisfaction (1= Strongly disagree to 5=Strongly agree) (Mols, 1998) Mahamad & Ramayah (2010);
Gorondutse & Hilman (2014)
1. I am very satisfied with the services offered by this bank.
2. Bank comes up to my beliefs of a good bank.
3. Overall, I have a good and positive impression towards this bank.
4. Employee are highly motivated to solve customer problems
Customer Loyalty (1= Strongly disagree to 5=Strongly agree) (Mols, 1998) Caruana (2002); Siddiqi (2011);
Gorondutse & Hilman (2014)
1. I speak Positive things about my bank to other people.
2. I would suggested my bank to those who search for my advice about such
matter.
3. I will continue to use this bank services
4. I only pay my attention to this bank

Control Mahamad & Ramayah (2010)

Gender
1.Male 2. Female
Education Level
1. Primary 2. Secondary 3. Higher Secondary 4. Undergraduate 5. Graduate 6. Post
graduate
2. Doctorate
Age
1. Less than 20 years 2. 20-29years 3. 30-39years 4. 40-49 years 5. 50years and
Above
Income Per Months in Nepalese Rupees (Rs)
1. Less than Rs.10000 2. Rs.10000-19999 3. Rs.20000-29999 4. Rs. 30000-39999
5. Rs. 40000-49999 6. Rs.50000 and Above

33
4.5 Reliability Analysis and Factor on Service Quality Dimensions, Customer Loyalty
and Customer Satisfaction
Reliability simply refers to the capability of the questionnaire to constantly measure the data across
different population and at different time period. Cronbach’s alpha is one of the most popular
methods of testing reliability. The value of Cronbach’s alpha ranges from 0 to 1. Where 0 refers
to completely unreliable test and 1 refers to reliable test.
Factor Analysis is the set of statistical measures that analyze the correlations between variables by
setting common dimension known as factors. So as to reduce number of dimensions of independent
variables and to identify definite, factor analysis is used in this thesis. Basically, exploratory or
confirmatory perspective are chosen to achieve factor analysis purpose. Similarly, KMO (Kaiser
Meyer-Olken) measure is used while doing Factor analysis. KMO evaluates and examines the
suitability of the samples and creates relevance factor. KMO values between 0.5 to 0.7 are
considered to be moderate, 0.7 to 0.8 are considered to be good, 0.8 to 0.9 are considered to be
excellent and the values less than 0.5 indicate that more data are required for the accurate
prediction. The following table shows the test result of reliability, KMO and factor loading for
independent and dependent variables.

34
 Table 4: Reliability and Factor Analysis of all Independent and Dependent Variables

CONSTRUCTS ITEMS KMO FACTOR

LOADING
Independent Variables
Tangibility(alpha=0.786) 1.Bank have up to date equipment which is sufficient and obvious for customers’ usage. 0.774
2.Customers feel comfortable while using bank physical facilities 0.771 0.810
3.Sufficient Employee are committed to provide customers banking services. 0.759
4.Bank’s physical facilities and material associated with service are visually pleasing 0.782
Reliability(alpha=0.807) 5.The bank can deliver the service as promised to the customers with in a given time. 0.818
6.The bank can provide secure and accurate service to customers 0.791 0.823
7.The bank can honor their promises. 0.827
9. Bank employees will provide customers precise personal services. 0.719
Responsiveness (alpha=0.626) 8.When customer are facing problem, bank show genuine interest in handling customer 0.827
problems 0.50
12.Bank employees are never too busy to respond customer request 0.827
Empathy and Assurance (alpha=0.839) 13.Customers will feels safe during their transaction process. 0.692
14.Bank employee’s behavior will increase customers confidents and trust in quality 0.669
services
15.Bank employees will be regularly courteous with customer queries. 0.877 0.733
16.Bank employees have a knowledge to answer your question 0.695
17.Bank employees will provide customized services to their customers 0.738
18.Bank employees will have the enthusiasm to understand the customer specific needs 0.744
19.Bank employees consider customer needs in the first place 0.720
Dependent Variable
CustomerLoyalty(alpha=0.74) 1.I speak Positive things about my bank to other people. 0.813
2.I would suggest my bank to those who search for my advice about such matter 0.724 0.782
3.I will continue to use this bank services 0.867
4.I only pay my attention to this bank 0.521
CustomerSatisfaction(alpha=0.796) 1.I would suggest my bank to those who search for my advice about such matter 0.791
2.I will continue to use this bank services 0.780 0.834
3.I speak positive things about my bank to other people 0.800
4.I only pay my attention to this bank 0.723

35
The table 4 explains about factor analysis and reliability test for all service quality dimensions as
well as customer loyalty and customer satisfaction. For tangible variable, the KMO value is 0.771,
reliability KMO is 0.791, responsiveness KMO is 0.50, assurance and empathy KMO is 0.877
whereas customer loyalty KMO is 0.724, and customer satisfaction KMO is 0.780 respectively.
Generally, KMO value should be greater than 0.5, higher value than 0.5 is better.

4.6 Factor Analysis for Service Quality dimensions, Customer Satisfaction and
Customer Loyalty
Reliability Cronbach’s alpha was used to check internal consistency of the measurement tools.
Reliability test for all variable was performed so as to check the reliability of the variables. The
variable value higher than 0.5 are considered for further analysis.

Table 5: KMO for Service Quality Dimensions, Customer Satisfaction and Customer
Loyalty

Kaiser-Meyer-Olkin (KMO) Significance Value

Service Quality Dimensions 0.929 0.000
Customer Satisfaction 0.78 0.000
Customer Loyalty 0.724 0.000

4.7 Service Quality Dimensions (SQD)

KMO measure for the SQD is 0.929 which is above o.6 and the Sig. value is also 0.000. Therefore,
factor analysis is appropriate. In the beginning, 20 multi-items concepts were taken into
considerations so as to measure Five service quality dimensions. By using Principle Component
Analysis as extraction method seventeen multi-items were extracted under four factors below
table. The remaining items such as “Bank employees will provide customer precise personal
services”, “Bank employees are willing to help customers”, “Bank opening hours is appropriate to
the customers” are removed from the list and deleted from the final analysis because their factor
loading is less than 0.5.
In this research, four service quality dimension were created by combining assurance and empathy
in one, tangibility, reliability, responsiveness respectively. More precisely, all the items within the
dimension “assurance and empathy” describe the way in which customers are treated by employees
during the time of service delivery. Initially, there were four items in responsiveness “Bank
employees will provide customer precise personal services”, Bank employees will provide prompt

36
services”, “ Bank employees are willing to help customers”, “ Bank employees are never too busy
to respond customer request”. After the factor analysis, one item “Bank employees will provide
customer precise personal services” was extracted under reliability dimension. This leaves
responsiveness with three items. Originally there were four items in reliability: “The bank can
deliver the services as promised to the customer with in a given time”, The bank can provide secure
and accurate services to the customer”, “The bank can honor their promises “, “When customers
are facing problem, bank show genuine interest in handling customer problems”. After the factor
analysis, one item “When customer are facing problem, bank show genuine interest in handling
customer problems” was extracted under responsiveness. All the items in tangibility dimension are
the same as the original items. Initially there were four items in each assurance and empathy. After
the factor analysis one item form empathy was removed “Bank opening hours is appropriate to the
customer” and seven items all turned up under one component hence we combined assurance and
empathy due to that overlap. This kind of situation (overlapping factors) was found in some
previous studies conducted by Činjarević et al. (2010)in banking sector of of Bosnia and
Herzegovina. Some of the items overlapped and the three dimension of service quality
responsiveness, assurance and empathy were combined and create new dimensions known as
Customer orientation. Likewise, in previous research conducted by Dhar & Kushwah, (2009)
regarding private and public bank in India, they have also combined the two dimension of service
quality( assurance and empathy) into one due to overlap. Similarly, in the prior article conducted
by Huseyin et al. (2005) in Greek Cypriot bank, it is concluded that responsiveness and empathy
items were loaded in the same and four dimensions were formed. This types of similar situation
were found in our thesis too.Varimax with Kaiser Normalization rotation method was used to
illustrate this interpretation.

37
 Table 6: Rotated Component Matrixa for Service Quality Dimensions

Factor 1 Factor2 Factor 3 Factor 4

Assurance and Empathy Reliability Tangibility Responsiveness
1.Bank have up to date equipment which is sufficient and obvious for
0.752
customers’ usage
2.Customers feel comfortable while using bank physical facilities 0.717
3.Sufficient Employee are committed to provide customers banking
0.571
services
4.Bank’s physical facilities and material associated with service are
0.737
visually pleasing
5.The bank can deliver the service as promised to the customers with
0.728
in a given time
6.The bank can provide secure and accurate service to customers 0.743
7.The bank can honor their promises 0.756
9.Bank employees will provide customers precise personal services 0.590
8.When customer are facing problem, bank show genuine interest in 0.672
handling customer problems
12.Bank employees are never too busy to respond customer request 0.676
13.Customers will feels safe during the transaction process 0.572
14.Bank employees behavior will increase customer’s confident and
0.593
trust in quality services
15.Bank employees will be regularly courteous with customer queries 0.674
16.Bank employees have a knowledge to answer your questions 0.557
17.Bank employees will provide customized services to their
0.713
customers
18.Bank employees have the enthusiasm to understand the customer
0.653
specific needs
19.Bank employees consider customer needs in the first place 0.621
Extraction Methods: Principal Component Analysis
Rotation Methods: Varimax with Kaiser Normalization

38
4.8 Customer Satisfaction
For customer satisfaction the KMO measure of sampling adequacy is 0.78 which also falls into the
ranges of moderate, which means that data are accurate to perform factor analysis. While running
factor analysis, all the multi- item concept for customer satisfaction are extracted in one factor.
Here all the items extracted in factor one truly defines customer satisfaction.

Table 7: Rotated Component Matrixa for Customer Satisfaction

Factor 1
1.I would suggest my bank to those who search for my advice about such matter 0.791
2.I will continue to use this bank services 0.834
3.I speak positive things about my bank to other people 0.800
4.I only pay my attention to this bank 0.723
Extraction Methods: Principal Component Analysis
Rotation Methods: Varimax with Kaiser Normalization

4.9 Customer Loyalty

For customer loyalty, the KMO measure of sampling adequacy is 0.724 which is in moderate
range. Hence, data are considered to be accurate to perform factor analysis. While performing the
factor analysis by selecting principle component analysis, all the multi- items that are selected to
define customer loyalty are extracted under one factor. The multi- items that are selected for
customer loyalty in fact defines the loyalty.

Table 8: Rotated Component Matrix for Customer Loyalty

Factor 1
1.I speak Positive things about my bank to other people. 0.813
2.I would suggest my bank to those who search for my advice about such matter 0.782
3.I will continue to use this bank services 0.867
4.I only pay my attention to this bank 0.521
Extraction Methods: Principal Component Analysis
Rotation Methods: Varimax with Kaiser Normalization

4.10 Statistical Methods

In this research correlation and linear regression, analysis was done with the help of SPSS software
in order to analyze the relationship between several variables that influence customer satisfaction

39
and loyalty in Nepalese commercial bank. Here, customer satisfaction acts as a mediating variables
and customer loyalty is considered to be dependent variable.

4.10.1 Correlation
Correlation is the basic step in regression analysis. Based on multi-item concepts, correlation also
calculates and confirms relationship. It also confirms the direct relationship and validation. The
Correlation coefficient, R shows the degree of relationship between two different types of
variables. It ranges from -1 to +1, where -1 indicates a perfect negative relationship which means
the decreasing linear relationship that is when one variable increases the another variable will
decrease and 1 indicate a perfect positive correlation which means that increase in one variable
will result from increase in another variable respectively.

Customer Satisfaction : In the appendix 3, the correlations of service quality dimensions

(tangibility, reliability, responsive, empathy and assurance), situational factors (frequency of
visiting banks, years of relationship), and customer satisfaction are presented. The relationship
between mediator variable customer satisfaction with all independent variables are investigated by
Pearson correlation coefficient.
Firstly, the table shows that one of the situational factor frequency of visiting the bank has a lower
negative relation to one of the service quality dimensions (responsiveness) with r= -0.130*.
Secondly, the next situational factor years of relationship has a positive correlation to customer
satisfaction with r= 0.151** at the level of P- value= 0.003. This indicates that one situational factor
has a negative relation with service quality and next one is positively correlated with customer
satisfaction.
Thirdly, customer satisfaction is positively correlated with various service quality dimensions with
r=0.363**for tangibility, r=0.394**for reliability, r=0.278**for responsiveness, r=0.465** for
empathy and assurance respectively.
Finally, on the basis of Pearson Correlation it can be concluded that service quality dimensions are
positively correlated with customer satisfaction whereas in case of situational factor, only one
factor is correlated with customer satisfaction.

40
Customer Loyalty : In appendix 4, the correlation of eleven variables which are age, gender,
education level, income, frequency of visiting banks, years of relationship, tangibility, reliability,
responsiveness, empathy and assurance, customer satisfaction are summarized. The relationships
between dependent variable customer loyalty with all independent variables are investigated by
Pearson correlation coefficient.
First of all, the table represents four control variables among which respondent age with r=0.102*
has a positive low correlation with customer satisfaction where as other are not correlated with the
dependent variable customer loyalty.
Secondly, the table shows the two situational factors among which years of relationship is
positively correlated with r=0.112*.
Thirdly, the variable related to the service quality dimensions such as empathy and assurance,
reliability, tangibility and responsiveness shows the high positive relationship with customer
loyalty with r=0.491**,r=0.400**,r=0.340**and, r=0.150** respectively.
In addition, customer satisfaction is highly and positively correlated with customer loyalty with
r=0.739**. This indicates that higher the customer satisfactions higher will be the service quality.
Finally, on the basis of Pearson correlation, it can be concluded that respondent’s age, years of
relationship, empathy and assurance, reliability, tangibility, responsiveness, and customer
satisfaction have significant positive relation to customer loyalty.

4.10.2 Multicollinearity
Collinearity is occurred in such situation where two or more predictor variables has a higher
correlation. So, the problem may be faced while drawing conclusion because of high correlation.
In SPSS, test between variables are done by using tolerance values and variance inflation factors.
It means that variance inflation factor(VIF) values below 5 are acceptable. Similarly, tolerance
value should be higher than 0.1 It is crystal clear that multicollinearity problem does not exist in
this research because the value of tolerance is higher than 0.3 and variance inflation factors value
is also less than 5. So it is possible for us to perform regression analysis.

41
RESULTS

5.1 Introduction
This chapter presents finding of the study which were obtained from the analysis of the data. Data
were analyzed by using SPSS software. The total respondents were 375 customers of commercial
banks of Kathmandu, Nepal. Data were presented in tables according to nature of variables as
follows.

5.2 Descriptive Statistics

Descriptive statistics defines the basic character of the data in a study. Descriptive statistics were
used in this study to present summaries about sample and measures. Descriptive statistics helps to
identify the nature of data. It helps to simplify large number of data. In this thesis, a sample size
of 375 respondents were selected. The summary of socio demographic profile of respondents
selected for the study are presented below in Table 9.

Table 9: Socio Demographic Profile of Respondents

Variable Description Frequency Percentage

Gender Male 224 59.7
Female 151 40.3
Age <20 Years 20 5.3
20-29 Years 177 47.2
30-39 Years 99 26.4
40-49 Years 51 13.6
>50 Years 28 7.5
Income < Rs. 10000 58 15.5
Rs. 10000-19999 68 18.1
Rs. 20000-29999 88 23.5
Rs. 30000-39999 73 19.5
Rs. 40000-49999 43 11.5
>Rs.50000 45 12.0
Education Level Primary 2 0.5
Secondary 7 1.9
Higher Secondary 32 8.5
Undergraduate 97 25.9
Graduate 130 34.7
Post Graduate 99 26.4
Doctorate 8 2.1
Total 375 100
Source: Survey, 2016

42
Out of the 375 respondents, 59.7%(224) were male and 40.3%(151) were female respectively. This
shows that male customers are higher than female customers in commercial banks in Nepal.
Likewise, following table demonstrates that majority of respondents belongs to age group 20-29
years i.e 47.2 %( 177) and minority i.e 5.3 %( 20) belongs to age group less than 20 years.
Similarly, the table below reflects the income of respondents per month in Nepalese currency i.e
NRs. Among 375 respondents, the highest monthly income ranges from Rs 20000-29999 and
lowest monthly income was found less than Rs 10000.
In the same way, given table states the educational level of respondents, out of 375 respondents,
34.7% (130) were graduated and 0.5 %( 2) had passed primary level.

Table 10: Situational Factors of Respondents

Variable Description Frequency Percentage

Frequency of visiting bank 3-5 times a week 33 8.8
Once a week 68 18.1
Once in every two weeks 60 16.0
Monthly 150 40.0
More seldom than once a monthly 64 17.1
Years of relationship with banks < 1 Years 24 6.4
1-2 Years 71 18.9
2-5 Years 147 39.2
> 5 Years 133 35.5
Total 375 100.0
Source: Survey, 2016

The above table represent the situational factor of respondents selected for the study. From above
table it can be concluded that highest proportion of respondents visiting bank was found monthly
i.e 40.4% (150) and 8.8% (33) respondents visited bank 3-5 times a week.
Similarly, the table 10 also illustrates, years of relationship between respondents and banks.
Among 375 respondents, 39.2 % (147) respondents have been using bank services form 2-5 years
and 6.4% (24) respondents have been using banking services less than 1 year respectively

5.3 Descriptive Statistics of Service Quality Dimensions, Customer Loyalty and

Customer Satisfaction
The Table 11 reflects the descriptive statistics of Service Quality Dimensions, Customer Loyalty
and Customer Satisfaction. Number of observation are 375 in each cases.

43
Table 11: Descriptive Statistics of Service Quality Dimensions, Customer Loyalty and
Customer Satisfaction

Number N Minimum Maximum Mean Std.

of Items Deviation
Tangibility 4 375 1.00 5.00 3.4367 .75122
Reliability 4 375 1.00 5.00 3.4460 .76144
Responsiveness 2 375 1.00 5.00 3.2947 .83488
Empathy and Assurance 7 375 1.71 4.86 3.4697 .66240
Customer Loyalty 4 375 1.00 5.00 3.4673 .72075
Customer Satisfaction 4 375 1.25 5.00 3.4500 .71580
Source: Survey, 2016

Here the mean value of all variable ranges between 3.3947 to 3.4673 respectively and standard
deviation ranges from 0.66240 to 0.83488 respectively. Service quality empathy and assurance has
a highest mean value of 3.4697 along with standard deviation 0.66240 in given table.

5.4 Level of Satisfaction Among the Customers

In order to identify level of satisfaction among the customers, regression analysis was run for
service quality dimensions and situational factors. These two variables are the key variables that
help to determine level of satisfaction among the customer as well as these are the factors that
determine the customer satisfaction. From the regression analysis, it is determined that service
quality dimensions (tangibility with β= 0.352 & p> 0.05, reliability with β=0.384 & p> 0.05,
responsiveness β=0.279& p> 0.05, empathy and assurance β=0.469 & p> 0.05) is significantly and
positively correlated with customer satisfaction. This result indicates that higher the service
quality, higher will be the level of customer satisfaction. Secondly, the situational factor years of
relationship is also significantly and positively correlated with the customer satisfaction with
β=0.122 & p> 0.05. This indicates that those customers who have a long relationship with bank,
have a higher level of satisfaction. However, situational factor frequency of visiting bank is
statically insignificant with negative correlation with customer satisfaction. Therefore, it is
concluded that frequency of visiting bank does not determine the level of satisfaction among
customer.

44
 Table 12: Regression Analysis on Service Quality Dimensions and Situational Factor

Independent Variable Customer Satisfaction

Coefficient (t-Value)
Frequency of visiting bank -0.011 (-.387)
Years of relationship 0.122 (3.260) ***
Empathy and assurance 0.469 (14.084) ***
Reliability 0.384 (11.486) ***
Tangibility 0.352 (10.471) ***
Responsiveness 0.279 (8.310) ***
Constant -0.335 (-2.205)
R2 0.592
Adjusted R2 0.586
F statistic 89.115
Maximum VIF 1.028
a. Dependent Variable: Customer satisfaction
b. Note: For significance P-value: less than0.01

5.5 Controlling Effect

The controlling variable used in this research are Gender, Age, Education level, and Income level.
Hence, the effect of the control variables is assessed on customer satisfaction and customer loyalty.

Table 13: Regression Analysis on Customer Satisfaction and Customer Loyalty with
Control Effect

Independent Variable Customer Loyalty

Model 1 Model 2
Coefficient (t-Value) Coefficient (t-Value)
Education level of the respondents 0.038(0.637) 0.093(2.42) ***
Respondents Age 0.115(2.004) *** 0.008(0.193)
Income Per Months in NRs -0.035(-0.846) -0.058(-2.069) ***
Gender of the respondents -0.076(-0.716) -0.017(-0.233)
Customer Satisfaction 0.745(21.160) ***
Constant -0.273(-0.940) -0.253(-1.291)
R2 0.014 0.555
Adjusted R2 0.003 0.598
F statistic 1.328 447.730
Maximum VIF 1.588 1.591
a. Dependent Variable: Customer loyalty
b. Note: For significance P-value: less than0.01
It is seen that in model 1, control variables are taken as an independent variable and it is clear that
in model 1, only one control variable respondent age is significant at P -value = 0.046. this means
that only age has a controlling effect on customer loyalty. But in case of Model 2, we take customer

45
satisfaction and control variable as an independent variable. Here model 2 education level, income
and customer satisfaction are significant at P – value 0.016, 0.039 and 0.00 respectively.

Table 14: Regression Analysis on Service Quality Dimensions and Customer Loyalty

Independent Variable Customer Loyalty

Model 1 Model 2
Coefficient (t-Value) Coefficient (t-Value)
Education level of the
0.038(0.673) 0.019(0.482)
respondents
Respondents Age 0.115(2.004) *** 0.049(1.238)
Income Per Months in NRs -0.035(-0.846) -0.051(-1.785)
Gender of the respondents -0.076(-0.716) -0.045(-.627)
Empathy and assurance 0.490(13.839) ***
Reliability 0.404(11.387) ***
Tangibility 0.335(9.361) ***
Responsiveness 0.152(4.284) ***
Constant -0.273(-0.940) 0.008(.039)
R2 0.014 0.544
Adjusted R2 0.003 0.534
F statistic 1.328 106.366
Maximum VIF 1.588 1.610
a. Dependent Variable: Customer loyalty
b. Note: For significance P-value: less than0.01
The table 14 illustrates the regression analysis with service quality dimensions and customer
loyalty along with controlling variable. Above table consists of two model. Model 1 is with control
variable and Model 2 is with control variable along with service quality dimensions.
The controlling variable used in this research are Gender, Age, Education level, and Income level.
Hence, the effect of the control variables is assessed on service quality dimensions and customer
loyalty. In Model 1 only one control variable respondent age is significant at P -value = 0.046.
This means that only age has a controlling effect on customer loyalty. In case of model 2, all the
service quality dimensions are statistically significant with P -value= 0.000 at 95% level of
confidence interval.

46
5.7 Mediation Effects
Variable (M) acts as a mediator when it influences the independent variable (x) for any given
dependent variable (Y). Framework for mediator variable can be shown as follows:

M
a b
c’
X Y
In the above framework c represents the total effect of X on Y, c’ is known as a direct effect.
Furthermore, effect of X on M is a, but the effect of M on Y is b.
If c’ is zero in that case, there will be complete mediation which means that X has no longer effect
on Y when controlling for M. And in the case where c’<c, then partial mediation takes place but
c’is still non zero.
Baron & Kenny (1986) and Judd & Kenny (1981) used common procedure to establish mediation
effect which is discussed in four steps as follows
Step 1: A simple least square regression analysis was conducted with X predicting Y to test for
path c alone
Step 2: A simple least square regression analysis was conducted with X predicting M to test for
path a,
Step 3: A simple least square regression analysis was conducted with M predicting Y to test the
significance of path b alone,
Step 4: Conducting a multiple regression analysis with X and M predicting Y. Here effect of X
controlling for M should be zero. Same equation was used to estimate effect in both step 3 and 4.
All in all, if c’ =0 there will be complete mediation; if not there is a partial mediation.
To examine the effect of mediating customer satisfaction on a given relationship between
dependent and independent variables, customer loyalty and service quality dimensions situational
factor; we follow the Sobel’s test of mediation.

47
Sobel’s test of mediation was developed by Sobel (1982). It is use to test the direct significance of
a b against the normal Z distribution, with Sa and Sb as standard error (Wu & Zumbo, 2007). This
means that result of indirect effect, ab is divided by standard error. Mathematically, Sobel test can
be expressed as

where a= raw regression coefficient, association between independent variable and mediator. Sa =
standard error of a, b= raw coefficient, association between mediator and dependent variable, Sb=
standard error of b. In order to get the values of these firstly, we have to perform regression
analysis with the independent variable predicting the mediator which gives the value of a and Sa
(Soper, 2006 ). Secondly, we have to perform regression analysis with the independent variable
and mediating variable predicting the dependent variable which gives the value of b and Sb. Also,
the value of Sa and Sb should not be negative.

Figure 4: Sobel’s Tests of Mediation

In order to get the value, we use Sobel test calculator that is available online in this website:
http://quantpsy.org/sobel/sobel.htm in this research.

5.8 Test of Hypothesis

H1: There is a positive relationship between service quality dimensions and customer
satisfaction in Nepalese commercial banks.
To investigate the influence of service quality dimensions as independent variables on customer
satisfaction as the dependent variable the regression analysis is used to test the hypothesis in table
12 it is illustrated that service quality dimensions (Empathy and assurance with β =0.469, t=14.084
& p<0.01, Reliability with β =0.384, t=11.486 & p<0.01, Tangibility with β =0.352, t=10.471 &

48
p<0.01, Responsiveness with β =0.279, t=8.310 & p<0.01,) is positively significantly associated
with customer satisfaction. This means that service quality plays vital role in creating customer
satisfaction in service sector. Hence, given hypothesis is supported.

H2: Customer satisfaction mediates the relationship between service quality dimensions,
situational factors and customer loyalty.
In order to examine the effect of mediation in relationship between independent and dependent
variable. Here raw regression coefficient a for Tangibility, Reliability, Responsiveness, Empathy
and Assurance, Frequency of visiting bank and Years of relationship are (a=0.340, a=0.400,
a=0.150, a=0.491, a= -0.005 and a=0.125) and the standard error of a is defined as Sa with values
of 0.49 for Tangibility, 0.047 for Reliability, 0.051 for Responsiveness, 0.045 for Empathy and
Assurance, 0.43 for frequency of visiting banks and 0.058 for Years of relationship respectively.
Similarly, raw coefficient association between mediator and dependent variable b are
0.709,0.688,0.755,0.651,0.739,and 0.739 for each variables. likewise, standard error of b is
defined as Sb and the value for each items for Sb are 0.037, 0.037, 0.036,0.038,0.035 and 0.035.
We use Sobel’s test calculator. On the basic of Sobel’s test, following result are drawn:

Table 15: Sobel Test Result for Mediation Test

Tangibility Reliability Responsiveness Empathy Frequency Years of

and of visiting relationship
Assurance bank
Test 1.84707687 7.73859146 0.150 9.2030457 -1.2767292 2.1440324
statistic
Std. Error 0.34763769 0.03556201 0.03888181 0.03473204 0.0318525 0.0430847
P-value 0.48804408 0.000 0.0035 0.000 0.20169784 0.03203029

From the above table, it is concluded that P-value of Tangibility and Frequency of visiting banks
are not statistically significant because their P-values are higher than 0.01. If p<.05 then it is a
mediator. But in our case it is higher than 0.05. So it fails to reject the null hypothesis. Hence it is
concluded that customer satisfaction does not mediate between tangibility and customer loyalty as
well as between Frequency of visiting banks and customer loyalty. However, the other variables
are statistically significant with P- value less than 0.05 which means that it rejects null hypothesis
and supports our hypothesis. Hence, the given hypothesis is partially supported since customer

49
satisfaction does not mediate between one variable of service quality dimensions and situational
factor with customer loyalty.

H3: There is a positive relationship between customer satisfaction and customer loyalty in
the Nepalese commercial banks.
To examine the relationship between customer satisfaction and customer loyalty, a regression
analysis is carried out with customer satisfaction as independent variable whereas customer loyalty
as dependent variable. The result of regression between customer satisfaction and loyalty is
displayed above in table 13 which shows the significant positive relationship between the two
variables. Here the beta is 0.745, t-value is 21.61 with P<0.01 which is statistically significant of
test results. Therefore, above hypothesis was supported.

H4: Service quality dimensions has a positive effect on customer loyalty.

To examine the relationship between service quality dimensions and customer loyalty, a regression
analysis is carried out with service quality dimensions as an independent variable and customer
loyalty as a dependent variable. From above table 14, service quality dimensions (Empathy and
assurance with β=0.490, t=13.839& p<0.01, Reliability with β=0.404, t=11.387& p<0.01,
Tangibility with β=0.335, t=9.361& p<0.01, Responsiveness with β=0.152, t=4.284& p<0.01) are
drawn.The results show that all the service quality dimensions have significant positive
relationship with customer loyalty and have P<0.01(99% level significant). Hence given
hypothesis was supported

H5a: Situational factor (Frequency of visiting) has a positive impact on customer satisfaction.
The regression analysis is used to test the relation between situational factor with two variables:
frequency of year visits and years of relationship and customer satisfaction respectively.
From the table 12, we conclude that the situational factor frequency of visit has negative relation
with customer satisfaction with β= -0.011 t= -0.387 &p>0.01. whereas another situational factor
years of relationship has significantly positively relationship with customer satisfaction in the
meantime its P value is 0.001 which is statistically significant of test results as well as β=0.122
t=3.260. Hence, H5a is not accepted.

50
H5b: Situational factor (Years of relationship) has a positive impact on customer satisfaction.
Similarly, in table 12, it is shown that situational factor years of relationship has significantly
positively relationship with customer satisfaction. In the meantime its P value is 0.001 which is
statistically significant of test results as well as β=0.122 t=3.260. Therefore, the given hypothesis
H5b is supported.

51
DISCUSSION

6.1 Introduction
In this chapter, research result will be discussed with respect to previous literature and theories
and compression will be made to find similarities between current results.

The statistical results of questionnaire and hypothesis testing show that independent variables such
as service quality dimensions have an impact on dependent variable customer loyalty and
mediating variable customer satisfaction. Moreover, we discuss service quality dimensions and
situational factors as independent variables and its impact on customer satisfaction, the mediating
variable and customer loyalty as a dependent variable. All the service quality dimensions such as
reliability, tangibility, responsiveness, assurance and empathy had significant positive impact on
customer loyalty. In case of situational factor, only one variable (years of relationship) has
significant positive relationship with customer satisfaction out of two variables. Similarly,
customer satisfaction mediates the relationship between independent variable service quality
dimensions, situational factors and customer loyalty. The main aim of this research is to explore
the level of satisfaction for quality of service provided by Nepalese commercial banks among their
customers, level of loyalty among Nepalese commercial bank users and factors associated with
customer loyalty and satisfaction in the Nepalese commercial banks among their customers.

H1: There is a positive relationship between service quality dimensions and customer
satisfaction in Nepalese commercial banks.
Service quality dimension such as tangibility, reliability, responsiveness, assurance and empathy
have a significant relationship with customer satisfaction. This indicates that higher the service
quality, greater the customer satisfaction. Usually in service sector, customer satisfaction is
determined with the help of service quality dimensions. This finding was supported by previous
literatures of Mahamad & Ramayah (2010); Siddiqi (2011); Al-Azzam (2015); Lau et al. (2013).
Furthermore, earlier studies conducted by M.M. Khan & Fasih (2014) also support these findings.
However, the research conducted by Kheng et al. (2010) stated that only two dimensions of service
quality (Empathy and Assurance) are positively related with customer satisfaction. Therefore, for

52
this research, the results with respect to Nepalese commercial banks supported that service quality
dimensions were the vital factors for customer satisfaction.

H2: There is a positive relationship between customer satisfaction and customer loyalty in
Nepalese commercial banks.
The second hypothesis states that customer satisfaction acts as a vital variable to create loyalty in
service sector like banks in Nepal. The research result concluded that customer satisfaction had a
significant positive relationship with customer loyalty. This finding was also supported by earlier
studies of Zafar et al. (2012); Lau et al. (2013); M.M. Khan & Fasih (2014). Similarly, the research
conducted by Siddiqi (2011) in retail banking in Bangladesh also support this result. It stated that
customer satisfaction and customer loyalty are positively related with each other. This means that
higher the customer satisfaction, greater will be loyalty. However, prior study by (Badara et al.,
2013) stated that there is no positive significant relationship between customer satisfaction and
customer loyalty in Nigerian Islamic banks. Nevertheless, it is concluded that satisfied customers
are loyal with the services they received from commercial banks in Nepal.

H3: Customer satisfaction mediates the relationship between service quality dimensions,
situational factors and customer loyalty.
The third hypothesis explains the mediating relationship between service quality dimensions and
customer loyalty. The results supported that customer satisfaction mediated the relationship
between services quality dimensions and customer loyalty. Prior study by Mahamad &Ramayah
(2010) also mentioned that customer satisfaction mediated the relationship between perceived
services quality and customer loyalty. Similarly, another prior research by Kheng et al. (2010) also
supported the above mentioned hypothesis. The research findings also concluded that in Nepalese
commercial banks customer satisfaction mediated between service quality dimensions, situational
factors and customer loyalty respectively.

53
H4: Service Quality Dimensions has a positive effect on customer loyalty.
The hypothesis four clarifies the relationship between various service quality dimensions and
customer loyalty. The results indicate that all the service quality dimensions have positive
significant relationship with customer satisfaction. This finding was supported by previous
research done by M.M. Khan & Fasih (2014); Mahamad &Ramayah (2010). On the other hand,
prior research conducted by Kheng et al. (2010) stated that out of five service quality dimensions,
only two dimensions: assurance and empathy, have a positive effect on customer loyalty
respectively. All in all, in Nepalese commercial banking sector, service quality dimensions such
as tangibility, reliability, responsiveness, assurance and empathy played vital role in creating
customer loyalty. Therefore, many commercial banks in Nepal put their effort to improve service
quality dimension so as to attract more customer and create loyalty.

H5a: Situational factor (Frequency of visiting) has a positive impact on customer satisfaction.
H5b: Situational factor (Years of Relationship) has a positive impact on customer
satisfaction.
The fifth hypothesis describes the impact of situational factor on customer satisfaction. The result
in this research concluded that out of two situational factors, one factor has a positive impact on
customer satisfaction where as another factor has a negative relationship with customer
satisfaction.
This means that in case of H5a, the situational factor frequency of visit has a negative relationship
with customer satisfaction. But in case of H5b, situational factor years of relationship has positive
relationship with customer satisfaction which indicated that those customers who had a long
relationship with bank were satisfied with the services provided by banks in Nepal. However, prior
research conducted by Dewan & Mahajan (2014) in public sector banks in India concluded that
years of relationship with banks has no positive effect on customer satisfaction whereas frequency
of visiting has a moderating effect on customer satisfaction. On the contrary, only satisfied
customers are willing to keep long term relationship with commercial banks in Nepal.

54
 Table 16: Model Summary

Independent Variables Direct Effect on Direct Effect on Mediation Effect

Customer Customer Loyalty testing
satisfaction
Service Quality Dimensions
Tangibility Supported Supported Not Supported
Reliability Supported Supported Supported
Responsiveness Supported Supported Supported
Empathy and Assurance Supported Supported Supported
Situational Factors
Frequency of Visiting Banks Not Supported - Not Supported
Years of Relationship Supported - Supported

55
 Figure 5: Revised Conceptual Framework

Independent Variables Mediating Variable Dependent Variable

Service Quality Dimensions

 Tangibility
 Reliability
 Responsiveness Customer Satisfaction Customer Loyalty
 Assurance and Empathy

Situational Factor Demographic Factor

 Years of Relationship  Age

Control Variable

56
CONCLUSION

7.1 Introduction
This chapter presents the research findings and conclusion, implication of research and limitation
of the study.

7.2 Conclusion
The main purpose of conducting this research was to identify the important factors of customer
satisfaction and customer loyalty in the context of Nepalese commercial banks. Many similar
researches have been conducted in different setting like European, America, African countries and
in few Asian countries, but only few data are available for Nepal. Furthermore, banking sector in
Nepal is emerging. It plays vital role in the economic development of the country.
This research observed prior literature and established a base for examining customer loyalty and
customer satisfaction. The hypotheses presented in this research are tested and findings are
presented. The presented findings revealed that service quality dimensions such as tangibility,
reliability, responsiveness, empathy and assurance have a significant impact on customer loyalty
and customer satisfaction. Additionally, study also indicate that situational factors have also
impact on customer satisfaction. Likewise, customer satisfaction mediates the relationship
between service quality dimensions, situational factors and customer loyalty. Finally, it also
examines control variables such as gender, age, income, and education level. Here, gender and
education level and income has insignificant effect on the given factor customer loyalty. Similarly,
age has a partial significant effect on the given factor.
All in all, the objective of this research was to identify the major factors that have an impact in
customer satisfactions and customer loyalty. In this regard, finding exhibit that service quality
dimensions such as tangibility, reliability, responsiveness, empathy and assurance are the most
important factors that have an impact on customer satisfaction and customer loyalty respectively.

57
7.3 Contribution of the study
For Commercial Banks: This research is new as the combined research with regards to customer
satisfaction, service quality and customer loyalty is not found in context of Nepal. It focuses on
customer satisfaction and customer loyalty in commercial banks of Nepal. This research also
suggests innovative ways to improve service quality to customers and revise the current services
provided by the banks, if necessary.
For Policymakers : It also provides agencies and planners information on customer satisfaction
and loyalty which helps them to make future plans and policy in banking sector in Nepal as well
as in various services sector as per need.
For Society and Others: It also contributed to other service sector in context of Nepal and other
similar countries like Nepal. The research will helps for new researcher by providing base line
information regarding service quality of Nepalese banking sector.
Finally, the findings of this research contribute to the understanding of customer satisfaction and
customer loyalty with respect to service quality dimensions in the context of Nepalese commercial
banks.

7.4 Implication of the Study

This research is useful in the field of service marketing and understanding customer satisfaction
and customer loyalty in Nepalese context. It also provides clear insight to commercial banks
manager to understand customer needs and wants in changing environments. It also facilities the
higher level employees to take decision that helps to improve their business by managing service
quality.
Furthermore, findings reveal that service quality dimension is vital to create customer satisfaction
and customer loyalty. So in order to exist in a sustainable manner, commercial banks in Nepal
need to upgrade their service quality and review their business strategy. Finally, managerial
implication of this research will help managers to evaluate their business strategies and upgrade
their strategy to face new competition by attracting more customers.

58
7.5 Limitation of the Study
This research has some limitations which can be addressed in future research. First of all, it focuses
on commercial banking sector only; so limitation from generalization takes places. In future , the
research should focus on other financial sector as well as service sector such as tourism, retail,
hotels, transportation and many more. Secondly, this research is based on quantitative methods, so
in future, researcher can use qualitative methods to understand customer satisfaction and loyalty
in Nepalese commercial banks. During data collection the questionnaires should be developed in
both English as well as in native language in understandable and simple words. Similarly, only
SERVQUAL dimension are used in this research but in future it would be interesting if others
dimensions are also added. Likewise, it would be interesting if different situational and control
variables are used in future research. Also, the researcher focused upon the customers of
Kathmandu as here are the most customers of banks. In the future when customers are more evenly
dispersed, then it would be better to collect data from various places.

59
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Appendices

Appendix 1: Reflective Note

The economic liberalization introduced by Nepal Rastra Bank (NRB), the central bank of Nepal
in 1980s opened the door for not even private only, but even for foreign sector to enter into the
banking sector of Nepal. Before that, banking activities were shrunk into a handful of two
commercial and two development banks. The liberalization led to new entries and thus competition
among the banking sector. Now, the Nepalese banking sector consists of 30 commercial banks
(recent mergers activities are making the changes in number of commercial banks). Government,
private as well as foreign banks have their strong presence in the Nepalese market toiling hard to
maintain and increase customers. Being a service sector, the banks require the satisfaction and
loyalty from the side of the customers in order to sustain in the market. With these things in mind,
the main objective of this research is to determine the service quality dimensions affecting
customer satisfaction and customer loyalty in Nepalese commercial banking sector. By taking
previous literatures of Customer Satisfaction and Customer Loyalty as a basis, various service
quality dimensions (Tangibility, Reliability, Responsiveness, Assurance and Empathy) and
situational factor such as (Frequency of Visiting Banks and Years of Relationship) were taken into
consideration as well as control variables like education, age, gender, income. From the research,
it was found that service quality dimensions Tangibility, Reliability, Responsiveness, Assurance
and Empathy have positive relationship with customer satisfaction and customer loyalty
respectively. Similarly, situational factor years of relationship have positive relationship on
customer satisfaction and customer satisfaction mediates the relationship between service quality
dimensions, situational factors and customer loyalty. Also, it examines that control variables such
as age has a significant impact on given all factors. The outcomes of this research serves to a great
regard to how customers feel with regards to the banks whom they interact with for various
purposes with regards to the services provided by them.
In the present era of globalization, customer satisfaction and customer loyalty are not just the
terms, but something larger: the critical success factors of the banks. With customers becoming
more aware of their rights, creating customer satisfaction and loyalty is both a challenge and
opportunity for Nepalese commercial banks. With the introduction of private and foreign parties,
Nepalese commercial banks are now both directly and indirectly affected by international

65
environmental factors. All the technological factors such as introduction of ATM machines,
electronic cards, internet banking by Nepalese banks are the contribution from international
scenario. Not only this, being the member of World Trade Organization as well as South Asian
Association for Regional Cooperation, the banking sector is now prone to various international
factors.
Innovation is not a new term in service sector as the banks try to remain near to their customers by
introducing various innovative ideas. This research suggest that customer satisfaction and loyalty
can be increased by providing innovative service to the customers. Finding market gap is one of
the important activities with regards to innovation. In case of commercial banks in Nepal, the
market is saturated, so the banks need to innovate by exploiting existing market gaps. This can be
done by understanding the nature of existing market, the grievances of the customers which defines
in what ways they could not get quality services so that the banks can find ways that would address
their needs promptly. Also, they can find the unique attributes that helps to drive the core value
proposition. For instance; launching different saving accounts to address the necessity of
customers from any walk of life, lowering the interest rate in borrowing and making paper work
easier, so that people can perform banking transaction with less hassle; can be some innovative
ideas for Nepalese commercial banks.
With regards to the responsibility, the commercial banks in Nepal can apply corporate social
responsibility (CSR) as a tool of commutative advantage in order to influence the customer
satisfaction as well as the customer loyalty. One way to do this can be finding out where the
existing customers are more in number in certain area and performing socio- economically
beneficial activities (for example: sponsoring the health camping) so that it stimulates the
satisfaction level and customer loyalty indirectly but effectively. However, this may also lead to
the one big ethical dilemma; should CSR activities be carried out where necessary or should it be
carried out where the number of the customer is high. Also, majority of banks are concentrated in
major cities only, leaving the customers from rural areas to be fully or partially cut off from
enjoying complete banking services. It is the responsibility of the banks to attract the potential
customers from rural areas also. Similarly, with Nepalese adult literacy rate being 65.7 percent,
there are many customers who are illiterate. There is a big challenge as well as responsibility for
the banks to provide user friendly service to these customers and ensure satisfaction and loyalty
from them.

66
Appendix 2: Survey Questionnaire
Note: Given information will be used for research purpose only and will not be disclosed to
anybody.
Part 1
Tick (√) mark the appropriate option
Demographic or Personal factor (Mahamad &Ramayah, 2010)
1. Gender: 1. Male 2. Female
2. Education Level
1. Primary 2.Secondary 3.Higher Secondary 4.Undergraduate 5.Graduate
6. Post Graduate 7.Doctorate
3. Name of your bank: ……...…………...…………
4. Age
1. Less than 20 years
2. 20-29years
3. 30-39years
4. 40-49 years
5. 50years and Above

5.Income Per Months. (Nepalese Rupees (Rs))

1. Less than Rs.10000
2. Rs.10000-19999
3. Rs.20000-29999
4. Rs. 30000-39999
5. Rs. 40000-49999
6. Rs.50000 and Above

67
 Part 2
Situational Factors (Dewan & Mahajan, 2014)
1. Frequency of visiting a bank
1. 3-5 times a week.
2. Once a week
3. Once in every two week
4. Monthly
5. More seldom than once a monthly.
2. How long have you been customer of this bank? (Years of relationship with banks).
1. Less than 1 years
2. 1-2 years
3. 2-5 years
4. More than 5 years

Part 3
Please read each question carefully and select your level of agreement for the following statement.
And tick (√) mark the appropriate number from 1 to 5. Each testimonial is measured by 5- point
Likert scale: 1= Strongly disagree; 2=Disagree; 3=Neutral; 4= Agree; 5=Strongly agree
A. Service Quality Dimension(SERVQUAL) LEVEL OF
AGREEMENT

Tangibility 1 2 3 4 5
1. Bank have up to date equipment which is sufficient and obvious for
customers’ usage.
2. Customers feel comfortable while using bank physical facilities
3. Sufficient Employee are committed to provide customers banking
services.
4. Bank’s physical facilities and material associated with service are
visually pleasing

68
 Reliability
5. The bank can deliver the service as promised to the customers with in a
given time.
6. The bank can provide secure and accurate service to customers

7. The bank can honor their promises.

8. When customer are facing problem, bank show genuine interest in
handling customer problems
Responsiveness

9. Bank employees will provide customers precise personal services.

10. Bank employees will provide prompt service to customer
11. Bank employees are willing to help customers.
12. Bank employees are never too busy to respond customer request
Assurance
13. Customers will feels safe during the transaction process.
14. Bank employees behavior will increase customer’s confident and trust
in quality services.
15. Bank employees will be regularly courteous with customer queries.
16. Bank employees have a knowledge to answer your questions
Empathy
17. Bank employees will provide customized services to their customers.
18. Bank employees have the enthusiasm to understand the customer
specific needs.
19. Bank employees consider customer needs in the first place.
20. Bank opening hours is appropriate to the customers
Adapted from: (Parasuraman et al., 1991)

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 Part 4
Please read each question carefully and select your level of agreement for the following statement.
And Tick (√) mark the appropriate number from 1 to 5. Each testimonial is measured by 5- point
Likert scale: 1= Strongly disagree; 2=Disagree; 3=Neutral; 4= Agree; 5=Strongly agree
B. Customer Loyalty LEVEL OF
AGREEMENT
1 2 3 4 5
1. I speak Positive things about my bank to other people.
2. I would suggested my bank to those who search for my advice about such
matter.
3. I will continue to use this bank services
4. I only pay my attention to this bank
Adapted from: (Mols,1998)

Part 5
Please read each question carefully and select your level of agreement for the following statement.
And Tick (√) mark the appropriate number from 1 to 5. Each testimonial is measured by 5- point
Likert scale: 1= Strongly disagree; 2=Disagree; 3=Neutral; 4= Agree; 5=Strongly agree
Adapted from: (Mols, 1998)

C. Customer Satisfaction LEVEL OF

AGREEMENT
1 2 3 4 5

1. I am very satisfied with the services offered by this bank.

2. Bank comes up to my beliefs of a good bank.

3. Overall, I have a good and positive impression towards this bank.

4. Employee are highly motivated to solve customer problems
Adapted from: (Mols,1998)

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Appendix 3: Correlation with Customer Satisfaction

Empathy and Frequency of Years of Customer

Tangibility Reliability Responsiveness assurance visiting bank relationship Satisfaction
Tangibility
1
Reliability
.000 1
Responsiveness .000 .000 1
Empathy and assurance
.000 .000 .000 1

Frequency of visiting
bank -.089 -.042 -.130* .024 1

Years of relationship .097 .085 -.024 -.040 -.018 1

Customer Satisfaction
.363** .394** .278** .465** -.088 .151** 1

**. Correlation is significant at the 0.01 level (2-tailed).

*. Correlation is significant at the 0.05 level (2-tailed).

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Appendix 4: Correlation with Customer Loyalty
Education Incom
Gender of level of e Per Frequenc Empath
the the Month y of Years of y and Customer Custom
responden responden Responden s in visiting relationshi assuranc Reliabilit TangibilityResponsivene Satisfactio er
ts ts ts Age NRs bank p e y e ss n Loyalty
Gender of the
respondents 1
Education
level of the -.044 1
respondents
Respondents
.087 .321** 1
Age
Income Per
Months in .013 .533** .450** 1
NRs
Frequency of
visiting bank .000 -.011 .087 -.104* 1

Years of
relationship .057 .204** .405** .332** -.018 1
Empathy and
assurance -.035 .061 .017 .021 .024 -.040 1
Reliability -.026 .040 .036 .095 -.042 .085 .000 1
Tangibility .047 .065 .160** .039 -.089 .097 .000 .000 1
Responsivene
.014 -.076 .046 .029 -.130* -.024 .000 .000 .000 1
ss
Customer
Satisfaction -.022 -.005 .140** .071 -.088 .151** .465** .394** .363** .278** 1
Customer
-.030 .051 .102* .019 -.067 .112* .491** .400** .340** .150** .739** 1
Loyalty
**. Correlation is significant at the 0.01 level (2-tailed).
*. Correlation is significant at the 0.05 level (2-tailed).

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Appendix 5: Regression Analysis on Service Quality Dimensions and Situational Factors
Model Summary
Adjusted R Std. Error of the Change Statistics
Model R R Square Square Estimate R Square Change F Change df1 df2 Sig. F Change
a
1 .770 .592 .586 .64367558 .592 89.115 6 368 .000
a. Predictors: (Constant), Responsiveness, Tangibility, Reliability, Empathy and assurance, Years of relationship, Frequency of visiting bank

ANOVAa
Model Sum of Squares df Mean Square F Sig.
1 Regression 221.531 6 36.922 89.115 .000b
Residual 152.469 368 .414
Total 374.000 374
a. Dependent Variable: Customer Satisfaction
b. Predictors: (Constant), Responsiveness, Tangibility, Reliability, Empathy and assurance, Years of relationship, Frequency of visiting bank

Coefficientsa
Unstandardized Standardized 95.0% Confidence Interval for Collinearity
Coefficients Coefficients B Statistics
Model B Std. Error Beta t Sig. Lower Bound Upper Bound Tolerance VIF
1(Constant) -.335 .152 -2.205 .028-.635 -.036
Frequency of visiting
-.011 .028 -.013 -.387 .699-.065 .044 .973 1.028
bank
Years of relationship .122 .038 .110 3.260 .001.049 .196 .981 1.019
Empathy and assurance .469 .033 .469 14.084.000.404 .535 .998 1.002
Reliability .384 .033 .384 11.486.000.318 .450 .991 1.009
Tangibility .352 .034 .352 10.471.000.286 .418 .983 1.018
Responsiveness .279 .034 .279 8.310 .000.213 .345 .982 1.018
a. Dependent Variable: Customer Satisfaction

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Appendix 6: Regression Analysis on Customer Satisfaction and Customer Loyalty with Control Effect
Model Summary
Change Statistics
Model R R Square Adjusted R Square Std. Error of the Estimate R Square Change F Change df1 df2 Sig. F Change
1 .119a .014 .003 .99825225 .014 1.328 4 370 .259
2 b
.745 .555 .549 .67189563 .540 447.730 1 369 .000
a. Predictors: (Constant), Gender of the respondents, Income Per Months in NRs, Respondents Age, Education level of the respondents
b. Predictors: (Constant), Gender of the respondents, Income Per Months in NRs, Respondents Age, Education level of the respondents, Customer
Satisfaction

ANOVAa

Model Sum of Squares df Mean Square F Sig.

1 Regression 5.292 4 1.323 1.328 .259b
Residual 368.708 370 .997
Total 374.000 374
2 Regression 207.417 5 41.483 91.891 .000c
Residual 166.583 369 .451
Total 374.000 374
a. Dependent Variable: Customer Loyalty
b. Predictors: (Constant), Gender of the respondents, Income Per Months in NRs, Respondents Age, Education level of the respondents

c. Predictors: (Constant), Gender of the respondents, Income Per Months in NRs, Respondents Age, Education level of the respondents, Customer
Satisfactio

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 Coefficientsa

Unstandardized Standardized 95.0% Confidence Interval

Coefficients Coefficients for B Collinearity Statistics
Model B Std. Error Beta t Sig. Lower Bound Upper Bound Tolerance VIF
1 (Constant) -.273 .291 -.940 .348 -.845 .299
Education level of the
respondents .038 .057 .041 .673 .501 -.074 .150 .704 1.420

Respondents Age .115 .057 .117 2.004 .046 .002 .228 .781 1.281
Income Per Months in NRs -.035 .042 -.055 -.846 .398 -.117 .047 .630 1.588
Gender of the respondents -.076 .106 -.037 -.716 .475 -.284 .132 .987 1.014
2 (Constant) -.253 .196 -1.291 .197 -.638 .132
Education level of the
respondents .093 .038 .100 2.420 .016 .017 .169 .701 1.426

Respondents Age .008 .039 .008 .193 .847 -.069 .084 .768 1.303
Income Per Months in NRs -.058 .028 -.091 -2.069 .039 -.113 -.003 .629 1.591
Gender of the respondents -.017 .071 -.008 -.233 .816 -.157 .124 .985 1.015
Customer Satisfactio .745 .035 .745 21.160 .000 .675 .814 .975 1.026
a. Dependent Variable: Customer Loyalty

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Appendix 7: Regression Analysis on Service Quality Dimensions and Customer Loyalty
Model Summary
Change Statistics
Model R R Square Adjusted R Square Std. Error of the Estimate R Square Change F Change df1 df2 Sig. F Change
1 .119a .014 .003 .99825225 .014 1.328 4 370 .259
2 b
.738 .544 .534 .68253653 .530 106.366 4 366 .000
a. Predictors: (Constant), Gender of the respondents , Income Per Months in NRs, Respondents Age , Education level of the respondents
b. Predictors: (Constant), Gender of the respondents , Income Per Months in NRs, Respondents Age , Education level of the respondents , Empathy
and assurance , Reliability, Responsiveness, Tangibility

ANOVAa
Model Sum of Squares df Mean Square F Sig.
1 Regression 5.292 4 1.323 1.328 .259b
Residual 368.708 370 .997
Total 374.000 374
2 Regression 203.497 8 25.437 54.603 .000c
Residual 170.503 366 .466
Total 374.000 374
a. Dependent Variable: Customer Loyalty
b. Predictors: (Constant), Gender of the respondents , Income Per Months in NRs, Respondents Age , Education level of the respondents
c. Predictors: (Constant), Gender of the respondents , Income Per Months in NRs, Respondents Age , Education level of the respondents ,
Empathy and assurance , Reliability, Responsiveness, Tangibility

76
 Coefficientsa
Unstandardized Coefficients Standardized Coefficients 95.0% Confidence Interval for B
Model B Std. Error Beta t Sig. Lower Bound Upper Bound
1 (Constant) -.273 .291 -.940 .348 -.845 .299
Education level of the respondents .038 .057 .041 .673 .501 -.074 .150
Respondents Age .115 .057 .117 2.004 .046 .002 .228
Income Per Months in NRs -.035 .042 -.055 -.846 .398 -.117 .047
Gender of the respondents -.076 .106 -.037 -.716 .475 -.284 .132
2 (Constant) .008 .201 .039 .969 -.386 .402
Education level of the respondents .019 .039 .020 .482 .630 -.058 .096
Respondents Age .049 .040 .050 1.238 .216 -.029 .127
Income Per Months in NRs -.051 .029 -.080 -1.785 .075 -.107 .005
Gender of the respondents -.045 .072 -.022 -.627 .531 -.188 .097
Empathy and assurance .490 .035 .490 13.839 .000 .420 .559
Reliability .404 .035 .404 11.387 .000 .334 .474
Tangibility .335 .036 .335 9.361 .000 .265 .406
Responsiveness .152 .036 .152 4.284 .000 .082 .222
a. Dependent Variable: Customer Loyalty

77