International Journal of Quality & Reliability Management

Bank Service Quality (BSQ) Index: An indicator of service performance

Firdaus Abdullah Rosita Suhaimi Gluma Saban Jamil Hamali
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Firdaus Abdullah Rosita Suhaimi Gluma Saban Jamil Hamali, (2011),"Bank Service Quality (BSQ) Index",
International Journal of Quality & Reliability Management, Vol. 28 Iss 5 pp. 542 - 555
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IJQRM
28,5 Bank Service Quality (BSQ) Index
An indicator of service performance
Firdaus Abdullah, Rosita Suhaimi, Gluma Saban and Jamil Hamali
542 Universiti Teknologi Mara (UiTM), Sarawak, Malaysia

Received May 2010

Revised November 2010 Abstract
Accepted November 2010 Purpose – This study aims to design and validate a new measuring instrument of service quality,
and ultimately to establish a national service quality index for the banking sector. The primary
contribution is the insight offered regarding what factors affect service quality and the BSQ Index, a
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national indicator reflecting the level of service quality within the banking sector.
Design/methodology/approach – A total of 3380 questionnaires were distributed to the customers
of 21 commercial and Islamic banks, of which only 1,519 were deemed usable, yielding a response rate
of 44.9 per cent. The proposed 29-item instrument has been empirically tested for unidimensionality,
reliability and validity using both exploratory and confirmatory factor analysis.
Findings – A factorial analysis suggests that service quality has three dimensions namely
“Systemization”, “Reliable Communication” and “Responsiveness”, and subsequent multiple
regression analysis revealed that “Systemization” is the most important service quality dimension
within the banking sector. The overall weighted BSQ Index of 4.00 implies that banking customers are
generally pleased with the quality of services rendered by banking institutions.
Practical implications – The new Bank Service Quality Index (BSQ Index) is expected to be an
important complement to traditional measures of economic performance, providing useful information
to the banking institutions, shareholders, investors, government regulators, and customers. This
composite index shall become an indicator reflecting the level of service quality in the banking
institutions.
Originality/value – The results from the current study are crucial because previous studies have
produced scales that bear a resemblance to SERVQUAL, a generic measure of service quality, which
may not be totally adequate to assess the perceived quality in the banking sector. Thus, the present
study captured customers’ evaluation of service quality in a 29-item questionnaire exclusively adapted
to the unique nature of the banking sector.
Keywords Quality, Indexing, Banking, SERVQUAL, Customer service management, Malaysia
Paper type Research paper

Introduction
The financial services industry is changing rapidly. Technology, government
regulation, and increasing customer sophistication are forcing financial service
institutions to re-evaluate their current business practices. Financial institutions across
the globe are re-examining how they are meeting their customer’s needs today and
developing business plans needed to align them strategically to remain competitive
and profitable in the future. Service quality in banking has recently become a topic of
interest for academicians and researchers alike despite being considered markedly
International Journal of Quality & important over the years. Such interest may be the result of a reduced customer base
Reliability Management and decreased market share affecting a portion of the banking industry (Bowen and
Vol. 28 No. 5, 2011
pp. 542-555 Hedges, 1993). Banks that excel in quality service can have a distinct marketing edge
q Emerald Group Publishing Limited since improved levels of service quality are related to higher revenues, increased
0265-671X
DOI 10.1108/02656711111132571 cross-sell ratios, higher customer retention (Bennett and Higgins, 1988), and expanded
 market share (Bowen and Hedges, 1993). Likewise, provision of high quality services BSQ Index:
enhances customer retention rates, helps attract new customers through word of mouth indicator of
advertising, increases productivity, leads to higher market shares, lowers staff
turnover and operating costs, and improves employee morale, financial performance performance
and profitability ( Julian and Ramaseshan, 1994; Lewis, 1989, 1993). Therefore,
delivering quality service to customers is a must for success and survival in today’s
competitive banking environment (Samli and Frohlich, 1992). 543
A review of literature indicates that there are many areas of disagreement in the
debate over how to measure service quality. Recent research has raised many
questions over the principles on which the instruments are founded. The use of
existing measures, in particular SERVQUAL as a means of measuring service quality
throughout the marketing sectors may have been tested with some degree of success,
but this may not be the case for other service sectors, particularly the banking sector.
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As such, it may not be fruitful to continue pursuing the development of a standard

measurement scale applicable to a wide variety of services. Instead, an instrument that
is exclusively designed for a particular industry is a more viable research strategy to
pursue. It is against this backdrop that a new service quality measurement instrument
is developed and tested empirically, and eventually forms the basis for capturing the
authentic determinants of service quality within the banking sector. In an effort to
promote quality and create a more competitive and market oriented banking sector,
BSQ Index reflecting the level of service quality is proposed. The new index is expected
to be an important complement to traditional measures of economic performance,
providing useful information not only to the banking institutions themselves, but also
to shareholders and investors, government regulators, and customers.

Research background
Many researchers (Parasuraman et al., 1985; Carman, 1990; Bolton and Drew, 1991)
concur that service quality is an elusive concept, and there is considerable debate in
literature about how best to conceptualise this phenomenon. They seem to come to an
agreement that a comprehensive definition of service quality is notoriously difficult to
produce. However, they acknowledge that service quality is a dynamic,
multidimensional concept, incorporating a number of aspects of both past and
present service experience. Nonetheless, there seems to be a broad consensus that
service quality is an attitude of overall judgement about service superiority, although
the exact nature of this attitude is still obscure. It is a well-established argument in the
literature that a person learns about a concept and at the same time forms an attitude
towards the concept.
A substantial number of empirical studies on bank service quality were sighted in
the literature, however most of these studies measured service quality by replicating or
adapting the SERVQUAL model (Kumar et al., 2010; Petridou et al., 2007; Jabnoun and
Al Tamimi, 2003; Blanchard and Galloway, 1994; MacDougall and Levesque, 1994a, b;
Newman and Cowling, 1996; Athanassopoulos, 1997; Lloyd-Walker and Cheung, 1998;
Marshall and Smith, 2000). However, the SERVQUAL model was questioned for its
conceptual suitability by several authors. Carman (1990) and Babakus and Boller
(1992) noted that the five dimensions are not generic, and that they should be
industry-specific. Both authors argued that some dimensions required expansion in
order to capture service quality adequately across different services, and that service
 IJQRM quality is a simple unidimensional construct in some context, but a complex
28,5 multidimensional construct in others. Whereas the reliability and validity of
SERVQUAL’s difference score formulation has been questioned by Babakus and
Boller (1992) and Brown et al. (1993), and that SERVQUAL’s dimensionality has not
proved universal.
Likewise in the banking context, Lam (1995) reported some problems with the
544 dimension of SERVQUAL thus raised a fundamental question of what is SERVQUAL
measuring. The insufficiency of SERVQUAL being a measure of service quality raised
concerns whether SERVQUAL really is a reliable measure of service quality or, indeed
whether it is measuring service quality at all. Seth et al. (2005) recognized that the
outcome and measurement of SERVQUAL were dependent on type of service setting,
situation, time and number of encounter, competitive environment and needs. Perhaps
the most comprehensive study thus far was conducted by Avkiran (1994), who
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developed a utilitarian multi-dimensional instrument, for measuring

customer-perceived quality, of retail branch banking.
Berry et al. (1988) noted that most financial institutions are alike in the services
provided to their customers, and as they grow there is a tendency for service to give
way to volume delivery to enhance profitability. These large banks appear to have
mistakenly concluded that quality service caused profits to erode. It would appear that
service quality could make a difference according to Lewis (1993), who noted that
service quality leads to reduced costs, increased profitability, and other beneficial
elements. Acquiring customers and having them leave is not only disconcerting but it
is counterproductive, and a profit drain on the organization.
In today’s banking environment, banks’ profitability levels have been compressed
due to increased competition and spread reductions. Banks once relied on products to
make their profit margin in a highly regulated industry, and the customers basically
were on the sidelines, but today, banks are driven by customers, who demand service
quality (Stone, 1995). Berry et al. (1988) observed that quality of service is very
important in separating competing businesses in the retail sector as well as in banking.
Banks seeking to maximize profitability have come to realize that good quality helps a
bank obtain and keep customers and poor quality will cause customers to leave a bank.
Lewis (1993) found that service quality was one of the most effective means of
establishing a competitive position and improving profit performance. To establish a
competitive position, it was noted by Hall (1995) that banks must measure and
determine their level of service quality, if they desire to keep their customers and
satisfy their needs. There have been a large number of researchers who identify service
quality as a primary means of providing a competitive advantage to banks, and
according to Soteriou and Stavrinides (1997) the importance of service quality has been
documented in numerous studies.

Research design and methodology

This study aims to design and validate a new measuring instrument of service quality,
and ultimately to develop a national service quality index for the banking sector in
Malaysia. The stages involved are shown by means of the flow chart in Figure 1. The
draft questionnaire consisted of four sections namely A, B, C and D. Section A
contained ten questions pertaining to respondent profile. Whereas section B contained
31 items related to different aspects of bank’s service offering, and the items were
 BSQ Index:
indicator of
performance

545
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Figure 1.
Developing Bank Service
Quality (BSQ) Index
 IJQRM presented randomly as statements on the questionnaire, with the same rating scale
28,5 used throughout. The items will be measured on five-point Likert-type scales that vary
from 1 ¼ strongly disagree to 5 ¼ strongly agree.
Multistage sampling procedure was used for the study. A total of 3,380 customers
from 21 banking institutions were selected, from whom 1,519 corrected and completed
questionnaires from 14 banks had been obtained, yielding a response rate of 44.9 per
546 cent. The high response rate was due to the “personal contact” approach used followed
by frequent follow-ups with the “contact persons”.

Factor analysis
Both exploratory and confirmatory factor analyses were used to assess the
dimensionality of the service quality measure. One critical assumption underlying
the appropriateness of factor analysis is to ensure that the data matrix has sufficient
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correlations to justify its application. A first step is visual examination of the

correlations, identifying those that are statistically significant. All correlations are
above 0.30, which is considered substantial for factor analysis (Hair et al., 1995).
Furthermore, an inspection of the correlation matrix reveals that practically all
correlations are significant at p , 0:01, and this certainly provides an excellent basis
for factor analysis.
The next step involves assessing the overall significance of the correlation matrix
with Bartlett test of sphericity, which provides the statistical probability that the
correlation matrix has significant correlations among at least some of the variables.
The results were significant at p , 0:01, x 2 ð31; N ¼ 1519Þ, which further confirmed
that the data were suitable for factor analysis. Finally, Kaiser-Meyer-Olkin (KMO)
measure of sampling adequacy was computed to quantify the degree of
intercorrelations among the variables, and the results indicate an index of 0.98, a
“marvelous” sign of adequacy for factor analysis (Kaiser, 1970). As for the adequacy of
the sample size, there is a 49-to-1 ratio of observations to variables in this study.
According to Nunnally (1978), the ratio for adequate sample size should be at least 10:1,
which, in this case falls well within the acceptable limits.

Exploratory factor analysis

All the 31 items from Section B of the questionnaire were subjected to factor analysis,
utilizing the maximum likelihood procedure, which was followed by a varimax
rotation. The decision to include a variable in a factor was based on factor loadings
greater than ^0:5 (Hair et al., 1995), and all factors whose eigenvalues was greater than
1.0 were retained in the factor solution (Tabachnick and Fidell, 1989).
The next step was to assess the communality of each variable in order to decide
which item loadings are worth considering in interpreting the factors. The variable’s
communality, which represents the amount of variance accounted for by the factor
solution for each variable was assessed to ensure acceptable levels of explanation. The
results show that communalities in five variables were below 0.50, “[. . .] too low for
having sufficient explanation” (Hair et al., 1995, p. 387). Subsequently, corrected
item-total correlation analysis was performed to determine which of the five items with
low communalities to be eliminated. In a reliable scale all the items should correlate
with the total, thus items with low correlations or less than 0.30 (Field, 2005) may have
to be dropped. Results showed that the corrected item-total correlation values of two
 variables were 0.13 and 0.30 respectively, unacceptable due to low correlations with the BSQ Index:
overall score from the scale. Therefore, two variables were dropped from the scale indicator of
leaving only 29 items in the final questionnaire.
Table I shows the results of the factor analysis in terms of factor name, the variables performance
loading on each factor and the variance explained by each factor:

Factor 1: Systemization of service delivery 547

This factor relates to systematic and orderly arrangement of banks’ service delivery
vis-à-vis their customers through effective, standardized and simplified procedures and
processes.

Factor 2: Responsiveness
This factor describes the desire, willingness and readiness to assist customers and
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deliver prompt service. It suggests the importance of employees exhibiting a pleasant,

courteous and friendly behavior in service delivery so as to instill confidence among
customers.

Factor 3: Reliable communication

This factor emphasizes the necessity to communicate and perform the services in a
dependable, reliable and understanding manner. It is also concerned with the ability to
ensure customers’ confidentiality in banking transactions, and service personnel
exhibiting professionalism, sympathy and reassurance when dealing with customers.

Confirmatory factor analysis

Table II shows the fit indices using Chi-square test, GFI, AGFI, CFI, NNFI, IFI and
RMSEA.
The Goodness-of-Fit statistic (GFI) was generally considered as the most reliable
measure of absolute fit in most circumstances (Diamantopoulos and Siguaw, 2000). A
GFI and AGFI value range between 0 and 1 and values of . 0:90 are usually taken as
reflecting acceptable fit. In this model, the GFI ¼ 0.92 and the AGFI ¼ 0.90 indicating
an evidence of unidimensionality for the scales. Next are Non-Normed Fit Index (NNFI)
and the Comparative Fit Index (CFI). Bentler and Hu (1999) have suggested NNFI value
$ 0:95 as threshold. In the present model, the NNFI value is 0.99, an indication of a
good fit. The next fit measure is the Comparative Fit Index (CFI), a revised form of the
NFI, which takes into account sample size (Tabachnick and Fidell, 2007). Bentler and
Hu (1999) have also suggested that a CFI value of $ 0:95 is considered as indicative of
good fit and in the present model, the CFI value is 0.99, which implies that there is a
strong evidence of unidimensionality for the factors (Sureshchandar et al., 2001). The
next measure to consider is the Root Mean Square Error of Approximation (RMSEA).
As reported in Table II, the RMSEA value for the three-factor model was 0.06, an
evidence of reasonable fit to the data. Therefore, it was concluded that the three-factor
service quality model fits reasonably well and represents a close approximation in the
population.

Reliability analysis
In this study, two internal consistency estimates of reliability namely coefficient alpha
and split-half coefficient expressed as Spearman-Brown corrected correlation were
 IJQRM Factor 1: Systemization of Factor 2: Factor 3: Reliable
28,5 Variables Service Delivery Responsiveness Communication
1 Availability of financial products
and services at branches
2 Convenient operating hours and
days
548 3 Provides services at time it
promised to do so
0.541

4 Provides services right the first 0.560

time
5 Prompt service 0.692
6 Willingness to help and readiness 0.753
to respond to request
7 Values and uses customer’s 0.524
feedback to improve service
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delivery
8 Instill confidence through 0.605
behavior
9 Pleasant, courteous and friendly 0.643
employees
10 Knowledge and competency to 0.530
answer specific queries and
request
11 Effective customer complaint 0.627
procedures and processes
12 Provides caring and individual 0.533
attention
13 Highly standardized and 0.605
simplified delivery process
14 Technological capability and 0.536
innovation
15 Atmosphere gives positive
impression
16 Physical layout allows
comfortable interaction
17 Artifacts are visually appealing
and useful
18 Employees have neat and 0.591
professional appearance
19 Good service at reasonable cost
while maintaining quality
20 Allows customers to realize 0.573
unexpressed needs
21 Branch locations in most 0.537
convenient places
22 Promotes ethical conduct and CSR 0.545
23 Ensure confidentiality 0.600
24 Knows customers need and how to 0.508
satisfy them
25 Sympathetic and reassuring 0.575
26 Keeps accurate records 0.518
27 Efficient e-banking, phone
banking and ATM facilities
28 Communicate in an 0.686
understandable way
29 Services are dependable and 0.610
reliable
Table I. Eigenvalues 15.146 1.241 1.107
Results of factor analysis % of variance 52.227 4.278 3.817
(factor loadings) Cumulative % 52.227 56.504 60.322
 computed for the three service quality constructs. An alpha value of 0.70 and above is BSQ Index:
considered to be the criteria for demonstrating internal consistency of new scales and indicator of
established scales respectively (Nunnally, 1978). The values for both the coefficient
alpha and split-half coefficient for all the service quality constructs are shown in performance
Table III. All the values meet the required prerequisite of 0.70, thereby demonstrating
that all the three constructs are internally consistent and have satisfactory reliability
values in their original form (see Figure 2). 549
Validity test
Given that the questionnaire had been appropriately designed through a
comprehensive review of relevant literature then fined-tuned based on the
suggestions from various experts, both the face and content validity of the
instrument were ensured (Bohrnstedt, 1983; Kaplan and Sacuzzo, 1993). Table IV
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displays the correlations among the three dimensions of service quality. The
correlation coefficient values range from 0.77 to 0.80 and this indicate a moderate
positive relationship between the three dimensions of service quality indicating
evidence of convergent validity. In addition to that, multicollinearity was not a threat
since the correlation value is less than 0.8 (Kline, 1998).
A Chi-square difference test was employed to test the scale for discriminant validity.
In this test, all the discriminant validity checks on the three service quality constructs
have been conducted. All the tests were statistically significant at the p ¼ 0:01 level
thus indicating that all the three factors are distinct constructs, a strong indicator of
discriminant validity. While criterion-related validity was established by correlating
the constructs scores with three criteria namely service quality level, satisfaction level
and loyalty. Table V indicates that all the constructs have a significant positive
correlations with the overall service quality, satisfaction level and loyalty. Hence,
criterion-related validity is established for all the three factors.

Dimension Fit indices

2
Chi-square (x ) 1,313.23
(p ¼ 0:01)
Degree of freedom ðdf Þ ¼ 206
Goodness-of-fit index (GFI) 0.92
Adjusted goodness-of-fit index (AGFI) 0.90
Comparative fit index (CFI) 0.99
Non-normed fit index (NNFI) 0.99 Table II.
Incremental fit index (IFI) 0.99 Unidimensionality for
Root mean squared error of approximation (RMSEA) 0.06 service quality constructs

Dimension Cronbach alpha (a) Split-half coefficient (r)

Systemization 0.90 0.86 Table III.

Responsiveness 0.91 0.90 Reliability for service
Reliable communication 0.90 0.87 quality constructs
 IJQRM
28,5

550
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Figure 2.
Path diagram of the three
constructs of service
quality
 Multiple regression analysis BSQ Index:
The regression model considered the service quality level as a dependent variable and indicator of
the service quality scores for the individual dimensions as the independent variables. A
multiple regression analysis was subsequently conducted to evaluate how well the performance
three dimensions predicted service quality level. The linear combination of the three
dimensions was significantly related to the service quality level, R 2 ¼ 0:52, adjusted
R 2 ¼ 0:51, Fð3; 1350Þ ¼ 477:02, p ¼ 0:01. The sample multiple correlation coefficient 551
was 0.72, indicating that approximately 52.8 per cent of the variance of service quality
level in the sample can be accounted for by the linear combination of the three
dimensions.
Table VI shows the results of the regression analysis where the dependent variable
was service quality level measured on a scale ranging from 1 ¼ very poor to
5 ¼ excellent. The resultant output had an adjusted R 2 of 0.51 (p ¼ 0:01) and yielded
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three dimensions contributing significantly towards explaining the variance in the

overall service quality level. All the bivariate correlations between the three
dimensions and the service quality level were positive, and all the dimensions were
statistically significant (p , 0:01). Systemization is found to be the most important
dimension of service quality in the banking sector, accounting for 10.7 per cent of the
variance of service quality level followed by Reliable Communication and
Responsiveness with 6.4 and 2.3 per cent respectively.

BSQ index
The weighted Banking Service Quality Index (BSQ Index) is calculated as:
mj
!
Xn X
BSQ Index ¼ wj X ij
j¼1 i¼1

where,
Wj ¼ Standardized regression weight for dimension j
Xij ¼ Perception of performance for item i in dimension j

Dimension SYS RES REL

Table IV.
Systemization (SYS) 1.00 0.77 0.80 Correlation matrix of
Responsiveness (RES) 0.77 1.00 0.77 service quality
Reliable communication (REL) 0.80 0.77 1.00 dimensions

Dimension Satisfaction level Service quality level Loyalty

Systemization 0.64 0.59 0.61

Responsiveness 0.58 0.56 0.57 Table V.
Reliable communication 0.63 0.60 0.60 Correlations between the
three factors and the
Note: All correlations are statistically significant at 0.01 level criteria
 IJQRM Mj ¼ Number of items in dimension j
28,5 N ¼ Number of dimensions in BSQ scale
The dimensional weights are standardized coefficients b derived from multiple
regression analysis. The weight reflects the relative influence of individual service
quality dimensions based on customer perception (Parasuraman et al., 1988, 1991). The
552 overall weighted score shall be within the range of 1 to 5 as per the five-point Likert
scale used in the instrument, where 1 ¼ very poor, 2 ¼ fair, 3 ¼ average, 4 ¼ good,
and 5 ¼ excellent. The results of BSQ Index computation are shown in Table VII.
The overall weighted BSQ Index is 4.00, and this implies that banking customers in
Malaysia are generally pleased with the quality of services rendered.
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Conclusions
The primary contribution of this study is the insight offered regarding what factors
affect service quality and the BSQ Index, a national indicator reflecting the level of
service quality within the banking sector. This paper has also sought to contribute
further to the fast growing literature on service quality by advancing a new 29-item
measuring instrument, specifically tailored for the banking sector. Such valid and
reliable measuring scale would be a tool that banking institutions could use to improve
service performance in the light of increased competition and uncertainty in the global
financial markets. The results from the current study are crucial because previous
studies have produced scales that bear a resemblance to SERVQUAL, a generic
measure of service quality, which may not be totally adequate to assess the perceived
quality in the banking sector. Thus, the present study captured customers’ evaluation
of service quality in a 29-item questionnaire exclusively adapted to the unique nature
of the banking sector.
The results confirmed that the three dimensions namely systemization, reliable
communication and responsiveness were distinct and conceptually clear. Therefore,
banking institutions should be able to assess all the dimensions of service quality to

Dimension Standarized coefficients (b) Rank

Systemization 0.33 * 1
Reliable communication 0.29 * 2
Responsiveness 0.15 * 3
Table VI.
Relative importance Note: * Significant at 0.01 level

Dimension Mean score Standarized coefficients b Weight Weighted score

Systemization 3.91 0.33 0.42 1.64

Reliable communication 4.05 0.29 0.38 1.54
Table VII. Responsiveness 4.10 0.15 0.20 0.82
Weighted BSQ Index Weighted BSQ Index 4.00
 ascertain the level of services provided, and to determine which dimensions need BSQ Index:
improvement. Evaluating service quality level and understanding how various indicator of
dimensions impact overall service quality would ultimately enable the banking
institutions to efficiently design the service delivery process. While many service performance
quality attributes may influence a customer’s perception to a certain extent, the results
indicate that one attribute has a greater impact on the overall perception of service
quality. Systemization which relates to such aspects as systematic and orderly 553
arrangement of banks’ service delivery has significantly influenced the overall service
quality perception. In other words, customers perceived systemization of service
delivery to be more important than other dimensions in determining the quality of the
service that they received.
However, findings suggest that banking institutions should also put emphasis on
other service quality dimensions such as reliable communication and responsiveness.
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It is important for these institutions to provide adequate service on all dimensions, and
then possibly to ascertain which dimensions may require greater attention. Results of
the study reveal that reliable communication and responsiveness have a direct bearing
on perceptions of quality. In terms of reliable communication, banks should be able to
communicate and perform their services in a dependable, reliable and understanding
manner to ensure customer’s confidentiality, and service personnel exhibiting
professionalism, sympathy and reassurance when dealing with customers. As for
responsiveness, banks’ employees must have the desire, willingness and readiness to
assist customers and deliver prompt service. The overall weighted BSQ Index, which
stood at 4.00 implies that customers are generally pleased with the quality of services
rendered by banking institutions in Malaysia. This new national indicator shall
provide a comparative baseline for determining whether the customers are more or less
pleased with the quality of services provided by the banking institutions over time.

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Further reading
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Corresponding author
Firdaus Abdullah can be contacted at: [email protected]

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