Journal of Applied Research and

Multidisciplinary Studies (JARMS)

Volume 2 Issue 2, Fall 2021
ISSN(P): 2707-5087 ISSN(E): 2707-5095
Journal DOI: https://doi.org/10.32350/jarms
Issue DOI: https://doi.org/10.32350/jarms.22
Homepage: https://journals.umt.edu.pk/index.php/JARMS

Journal QR
Impact of Service Quality on Customer Satisfaction and
Article:
Customer Loyalty: A Case of Baking Sector of Pakistan

Author(s): Fatima Nawaz

Article QR
Affiliation: Punjab University, Lahore, Pakistan

Article DOI: https://doi.org/10.32350/jarms.22.04

Nawaz, F. (2021). Impact of service quality on customer
Citation:
satisfaction and customer loyalty: A case of baking sector Indexing
of Pakistan. Journal of Applied Research and
Multidisciplinary Studies, 2(2), 63–82.

Copyright
Information: This article is open access and is distributed under the terms of
Creative Commons Attribution 4.0 International License

A publication of the
School of Professional Advancement
University of Management and Technology, Lahore, Pakistan
 Impact of Service Quality on Customer Satisfaction and Customer
Loyalty: A Case of Baking Sector of Pakistan
Fatima Nawaz*
Institute of Administrative Sciences,
Punjab University, Lahore, Pakistan
Abstract
Previous decades embraced very high growth in banking sector of Pakistan.
Resultantly banking sector indulge in heavy competition among the banking and
other financial institutions. Ultimately, the only way to survive and attract
customers is the improvement in service quality to attract the customers and fetch
the revenue for the concerned bank. The study aims to examine the quality of
service being provided by various banks in Pakistan. It was analyzed how customer
satisfaction mediates customer loyalty. Four hypothesis were devised to check the
various angles of relationship with customer loyalty and service quality. Sample
of 200 customers was selected for taking customer satisfaction and customer
loyalty. A structured questionnaire was administered to collect the data from bank
customers. The analysis through Statistical Package for Social Sciences (SPSS)
revealed that there is significant relationship between the customer satisfaction and
customer loyalty. The results of study shows that service quality has positive
impact on customer loyalty as it is evident in regression I and regression II after
inclusion of mediating variable in the model according to Kenny’s
approach. So was concluded that service quality indirectly effects loyalty
through the mediation of satisfaction.
Keywords: banking sector, Pakistan, service quality, customer satisfaction
Introduction
Banking sector of Pakistan has grown considerably in previous two decades
and there is still margin of growth in the segment. The competition in the
industry is raging and banks are trying to retain their customers and attain
news ones. The process requires the banks to build a competitive advantage,
which according to propositions of the study could be sustained by
improving service quality of the banks.
Last two centuries have witnessed many developments in the corporate
context. The notions of commercialization strengthened after industrial

*
Corresponding Author: [email protected]

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revolution in 18th century. The focus of that era was on mass production and
standardization with little or no service. However, in 19th century concepts
related to competitive advantage and total quality management got roots in
the corporate world. Production based ventures started to provide various
after sale services in order to differentiate their brand. As a results
standardization started moving towards customization and production
orientation started blending with service orientation. Soon after that service
orientation took over production orientation and established itself as a
distant form of corporate entity and later in 19th century many service
related businesses emerged and outperformed traditional production related
businesses. This lucrativeness of the market attracted many players
including financial market which is considered one of the most competitive
services industry around the globe; among them financial companies like
banks started dominating services industry and demand for their services
increased not only in corporate segment but also in consumer segment. This
situation intensified the competition and banks have started taking interest
how to build a sustainable advantage in competition with the environment
in the longer run by taking into account strategic implications and quality
considerations.
Now, why understanding service quality is a matter of importance for
service firms. The obvious thing in this regard is development and
sustenance of competitive advantage since, traditional conceptualizations of
the quality fit in the manufacturing context and fail to account for
implications of the quality in service based environment and as
Parasuraman et al. (1985) emphasized, services are distant from goods at
least in three aspects i.e. intangibility, heterogeneity and inseparability and
these three aspects must be taken into account, while understanding quality
in service context. Moreover, service quality has consistently been found to
have a direct impact on organizational performance, customer satisfaction
(Raza, Umer, Qureshi, & Dahri, 2020), customer’s repurchase intention and
positive sense (Cronin & Taylor, 1994; Taylor & Baker, 1994;
Parasuraman, 2002; Caruana, 2002; Zhao, Lu, Zhang & Chau, 2012; Baker,
2013) and such benefits could also be reaped in the banking industry
(Siddiqi, 2011; Sanka, 2012; Naeem, Akram, & Saif, 2011). Moreover,
mediating role of customer satisfaction with respect to customer loyalty is
also evident from existing literature (Slack & Singh, 2020). Since, quality

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considerations have always been important with regard to establishment and

sustenance of competitive advantage, therefore contemporary context on
the quality endorses the notions of service quality. Hence, banks in Pakistan
need to build a competitive advantage with respect to provoking their
customer’s satisfaction and ensure their loyalty in the long run. Thus, the
study tries to explain customer loyalty and customer satisfaction with the
help of service quality, considering the banking sector of Pakistan.
Research Objectives
To examine the impact of the quality of service on customer loyalty and
service quality of banking sector of Pakistan.
To assess as to whether customer satisfaction mediates the relation of
customer loyalty and service quality for banking sector of Pakistan.
Literature Review
Competition is a common characteristic of the contemporary market and
wide variety of options are available to the customers to choose from in
almost every segment of product and service. Thus, each firm tries to attract
customers by offering products and services with value, quality and
convenience, which are major determinants of customer loyalty and
satisfaction (Cronin et al., 2000). Considering service sector, services
rendered as intangibles of heterogeneous nature, which are produced and
consumed in a simultaneous manner and cannot be stocked. This distant
nature of the services is provided by Grönroos (2004), who provides that
services are a continuous process containing intangible elements and are
rendered by a continuous interaction by consumers and staff and/or various
systems and/or physical resources of the service provider and their ability
to satisfy customer rests on their performance as a superior solution to the
issues of the consumer. Thus, this ability of the service to satisfy customer
according to its need or expectation also leads towards repurchase intention
and loyalty from buyer side.
Service Quality and Customer Satisfaction
After introduction of SERVQUAL from Zeithaml et al. (1998), the
studies on service quality have increased exponentially. SERVQUAL is a
multidimensional scale which especially was created to evaluate the view
of clients with subject to the quality of services in service associations. The

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correlation of consumer loyalty and service quality has been examined and
it was found that service quality has important implications for the customer
satisfaction (Doney & Cannon, 1997).
In banks, quality of service would be a basic part of a client’s encounter
experience. Cronin et al., (2000) in this regard explained that quality of
service significantly determines the intentions of customer satisfaction and
repurchase as well. Sureshchandar et al. (2002) also indicated towards a
significantly positive impact of service quality on client’s satisfaction in the
long run. Levesque and McDougall (1996) with this regard provided that
service quality of financial institutions is more relevant to a satisfied and
loyal customer base, which improves overall performance of the bank.
Another research revealed positive impact of empathy on customer
satisfaction, and also customer satisfaction is evidently affecting customer
loyalty (Slack, Singh, & Sharma, 2020). Customer satisfaction has also been
referred as major antecedent of customer loyalty (Santouridis & Trivellas,
2010). Further, service quality also has implications for the repurchase
intentions of the clients and but ultimately customer satisfaction and service
quality paradigm remains on the top in explaining the long term success and
sustainability of the organization and these two factors together build
customer loyalty (Bloemer, & Ruyter, 1998; Athanassopoulos et al., 2001).
Moreover, recent researches also provide empirical evidence that service
quality has a significant effect on customer satisfaction and customer
loyalty. In addition customer satisfaction partially mediates association
between service quality and customer (Slack & Singh, 2020).
Cronin and Taylor (1992) has emphasized much on the implications of
service quality for customer satisfaction. Further, existing evidence in
financial and banking sector also relate that service quality and its scopes
will have positive impact for the satisfaction of the customer and help to
establish a long lasting relationship with customers (Levesque, &
McDougall, 1966; Jamal, & Naser, 2003). Same notion was found in other
studies, including research on banking sector of UAE, whereby it was
observed that top financial institutions of UAE have better quality services
and their customers have a high repurchase intentions as well (Jamal, &
Naser, 2003); another study supported link of customer satisfaction and
service quality (Parasuraman et al., 1985). Recently, mediating effect of

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customer satisfaction is evident between service quality in e-banking and

purchase intentions of customers (Khatoon, Zhengliang, & Hussain, 2020).
Thus, it could reasonably be argued, superior quality of service makes a
service provider able to cater requirements and needs of the clients and thus,
their satisfaction with the service provider is increased (Spreng, & Mackoy,
1996; Parasuraman, et al., 1988; Jamal, & Naseer, 2003).
Service Quality and Customer Loyalty
Financial segment of the country has gone through various structural
changes in the past two decades, whereby in 1990’s it was deregulated and
in 2000’s it grew at an exponential speed. This situation enhanced
competition within the industry and it is getting harder and harder to retain
market share in the industry. Nowadays, focus of the banking firms in on
building a loyal customer base through effectively channelizing its quality
of services. Thus, in the modern competitive era service quality is
considered one of the most important element of building a loyal workforce.
There have been indications that customer’s trusts and their perceptions on
the quality of the services provided are quite effective in building customer
loyalty (Parsuraman et al., 1988; Aydin & Ozer, 2005), which in turn could
be used as a strategic advantage. Another study used SERVQUAL model
and its outcomes presented that service quality has a significantly positive
impact on customer satisfaction. Moreover, the customer satisfaction
significantly and positively have an impact on customer loyalty (Raza,
Umer, Qureshi, & Dahri, 2020).
Organizations now have to provide consistent value to their clients,
whereby Griffin (1995) related that loyal customers have tendency to
purchase goods and services over and over again and across all the product
or service offerings of the company. Service quality is that link which could
ensure that value is delivered to the customers in a consistent manner and
this clients may remain loyal to the service provider (Hallowell, 1996).
There has been consistent evidence of a positive impact of service quality
on customer loyalty (Heskett et al., 1997; Oliva et al. 1992; Ruyter &
Bloemer, 1999; Anderson & Mittal, 2000). So, service quality is an
important antecedent of the loyalty of the customer (Ruyter & Bloemer,
1999) and particularly in the event that the satisfaction of clients is good, it
is thought to be an imperative element concerning client devotion.

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Considering determinants of the service loyalty, service quality was the

most significantly determining factor of service quality (Ruyter & Blomer,
1999). The study also analyzed the effect of service quality, state of mind
and esteem accomplishment and observed that service quality and esteem
achievement strangely affected client’s loyalty.
Primary objective of a services business is to earn profits, Oliver (1997)
in this regard stated that, “customer loyalty is a strong and deeply held
commitment of customers to repurchase particular products or services in a
consistent manner in future, irrespective of the market conditions or
influences”. So, superior service quality acts an enabler of the customer
loyalty, which is critical for boosting profitability and growth of the
organization in recent era of competition and hostilities. Cronin et al. (2000)
related that service quality is most important determinant of customer
loyalty and satisfaction as well, whereby it effects long run prospects of the
firm. Subsequently, other studies have also indicated towards a positive
correlation of customer loyaltyand service quality (Spreng & Mackoy,
1996; Bitner, 1990; Oliver, 1997; Sureshchandar, et al., 2002).
Theoretical Framework and Hypotheses
H1: there is a significant relationship between customer satisfaction and customer
loyalty.
H2: there is a significant relationship between service quality and customer
satisfaction.
H3: there is a significant relationship between service quality and customer loyalty.
H4: customer satisfaction mediates the relationship between service quality and
customer loyalty.
Research Framework
Service Quality Customer
Satisfaction
Tangibles
Customer
Reliability

Responsiveness

Assurance
Empathy

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Research Methodology
This research essentially is an explanatory study, whereby quantitative data
is used to test interrelationships between the variables and data is collected
from the customers of banks of Pakistan through self-administered survey.
A total 20 questionnaires were got filled from the braches of each selected
bank, making the sample size of 200 respondents. The data on the
questionnaire was collected on five point likert scale, while data relating to
the demographical information was collected on nominal or ratio scale.
SPSS 20 was used to analyze the data. First of all, descriptive analysis of
the demographical information of the respondents was analyzed.
Subsequently, correlation matric is presented in the analysis to explore the
initial relationships between the variables of the study. After that regression
analysis is conducted, whereby direct impact of service quality on client
satisfaction and customer loyalty is sought and moreoverm, mediating
impact of client satisfaction or relation of customer loyalty and service
quality is sought. For testing of mediation, Kenny’s approach as entailed in
Wu and Zumbo (2008) was utilized.
Analysis & Discussion
Table1
Demographics of the Study

Category Frequency Percent Cumulative percent

Gender
Male 156 82.1 82.1
Female 34 17.9 100
Qualification
Metric or Less 20 10.5 10.5
Intermediate 28 14.7 25.3
Graduation or above 142 74.7 100.0
Type of bank
Islamic Bank 35 18.4 18.4
Conventional Bank 155 81.6 100.0

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Table 2
Variable Description
Std,
Variable/dimension N Minimum Maximum Mean
Deviation
Relationship Tenure 190 1.00 5.00 2.5789 1.12761
Service Quality 190 2.20 3.96 3.0261 .42586
Tangibles 190 1.50 5.00 3.6289 .85206
Reliability 190 2.40 4.40 3.1737 .46683
Responsiveness 190 2.00 4.50 2.9395 .59285
Assurance 190 1.75 4.00 2.6158 .51346
Empathy 190 1.60 5.00 2.7726 .83577
Customer
190 1.33 5.00 2.7355 .87903
Satisfaction
Customer Loyalty 190 1.75 5.00 2.7618 .86842

Table 3
Reliability Analysis

Correlation
This part provides correlation analysis for the study, which indicates
that there is a strong relation between service quality and customer
satisfaction (r = .756), which is significant at 1% level of significance, while
the relationship between service quality and customer loyalty is moderate (r
= .508) and also significant at 1% level of significance. Lastly, correlation
between customer satisfaction and customer loyalty is also moderate (r =
.572), which is also significant. Thus, a direct and significant correlation
was found between all three variables of the study i.e. service quality,
customer satisfaction and customer loyalty.

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Table 4
Service Quality
Service Customer Customer
Quality Satisfaction Loyalty
Co-efficient 1 .756** .508**
Service
Sig. .000 .000
Quality
N 190 190 190
Co-efficient .756** 1 .572**
Customer
Sig. .000 .000
Satisfaction
N 190 190 190
Co-efficient .508** .572** 1
Customer
Sig. .000 .000
Loyalty
N 190 190 190
**. Sig. at 1% level.
Correlation Matrix
Model Estimation
This part of the analysis provides estimation of the results of the study,
a total of three regressions were run, and where by first regression estimates
the impact of service quality on customer loyalty, second regression
estimates the impact of the service quality on the customer satisfaction.
Lastly, combined impact of service quality and customer satisfaction is
assessed for the customer loyalty.
Regression I: Impact of Service Quality on Customer Loyalty
Table below provides model summary indicating explanatory power of
model by means of the value of R Square. R Square value of .258 indicates
that more than 25% of the variation in the customer loyalty is explained by
service quality.
Table 5
Impact of Service Quality on Customer Loyalty

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Regression I: Model Summary

Table 5 on the other hand provides ANOVA, which provides F-
statistics, which is 65.28 indicating that estimated model is good fit.
Table 6
Model Summary

Regression II: ANOVA

Table 6 provides regression coefficients, whereby service quality
yielded beta estimate of 1.035 and a t-statistic of 8.08, showing that
relationship of service quality and customer loyalty is positive and
significant.
Table 7
ANOVA Table for Customer Loyalty

Regression III: Coefficients

Thus, overall this study put forwards an indication of a direct
relationship of service quality with customer satisfaction. So, after
establishment of a direct impact between independent and dependent
variables, mediation impact could be proceeded.
Regression II: Impact of Service Quality on Customer Satisfaction
Second step while testing the mediation is to establish a relationship
between independent variable and meditating variable, which are service
quality and customer satisfaction respectively.

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Table 7 in this regard provides model summary of this estimation,

whereby explanatory power of the model is established by means of R
Square. A value of .572 of R Square indicates that more than 50% of the
variation in the customer satisfaction is accounted for by service quality in
banking sector of Pakistan.
Table 8
Predictors of Service Quality

Regression II: Model Summary

Table 8 on the other had provides F-statistics of 251.53 ensuring that
the estimated model is good fit.
Table 9
Variables of Service Quality

Regression II: ANOVA

Table 4.13 shows estimate coefficient for second model. The
relationship between service quality and customer satisfaction is provided
by the beta value of 1.561 and t-statistics of 15.86, which shows that
relationship is direct and significant.
Table 10
Dependent Variables of Service Quality

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Regression II: Coefficients

Thus, the study established a positive and significant impact of the
service quality on customer satisfaction, which is the indication that final
mediation step could be proceeded.
Regression III: Impact of Service Quality and Customer Satisfaction
on Customer Loyalty
Lastly, a combined impact of customer satisfaction and service quality
was sought on customer loyalty in order to check the mediation of customer
satisfaction for the relationship of service quality and customer loyalty.
Table 11 in this regard provides the model summary of the estimation,
whereby value of R-square entails about the goodness of fit of the model.
R-square of .341 provides that more than 34% of the variation in the
customer loyalty is caused by both service quality and customer
satisfaction.
Table 11
Regression Model Summary

Regression III: Model Summary

Table 12 provides F-statistics as an indicator of goodness of fit of the
model, F-statistic of 48.282 ensures that model is a good fit.
Table 12
Regression III: ANOVA

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Lastly, table 13 provides estimation coefficients of the estimated model.

Service quality yielded a beta of .357 and a t-statistics of 1.93, showing that
the relationship between service quality and customer loyalty is still positive
but has become insignificant, whereby customer satisfaction yielded a
positive and significant (t- statistics = 4.845) beta of .435.
Table 13
Regression III: Coefficients

Thus, a full mediation is supported by the analysis, whereby

significance of service quality has declined in the third regression.
Identification of Mediation
Table 14 following provides combined results of all of three regression
conducted to establish mediation impact of customer satisfaction for the
relationship between service quality and customer loyalty.
Table 14
Identification of Mediation

Summary of results
Impact of service quality was positive and significant in regression I,
which became insignificant in regression II after inclusion of the mediating

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variable in the model, which according to Kenny’s approach is an indication

of full mediation. So, it could be established that service quality does not
directly affects customer loyalty, but it affects customer satisfaction, which
in turn affect customer loyalty in banks of Pakistan.
Discussion and Conclusion
Financial industry of country has seen intense development in the past few
years. The market has become saturated and there is intense competition
between the players in the market. In this era of competition, banks have to
devise some means to build a competitive advantage and ensure long term
survival. Service quality can be used as a distinctive factor, which may be
used effectively as a viable mean of competitive advantage. This study
tested these notions and found that service quality has a positive and
significant impact on both customer satisfaction and customer loyalty and
the impact of service quality on customer loyalty is also mediated by the
customer satisfaction. Thus, all proposed hypotheses of present research are
supported.
These findings are in line with the existing evidence on the topic,
whereby service quality has consistency been found to predict customer
satisfaction and customer loyalty (Bitner et al., 1990; Wang, Lo & Yang,
2004; Ojo, 2010; Segoro, 2013; Arokiasamy & Abdullah, 2013; Zhao et al.,
2012), while mediating role of customer satisfaction is also established in
this regard (Caruana, 2002; Mahamad & Ramayah, 2010; Santouridis &
Trivellas, 2010; Deng et al., 2010). Thus, banks in Pakistan should focus on
service quality. Descriptive analysis of the study showed that only
dimension of tangibles of bank’s service quality was good, while all other
dimensions of service quality i.e. reliability, assurance, responsiveness and
empathy yielded lower scores, whereby assurance and empathy yielded the
lowest scores among all other dimensions of service quality of banks. This
implies that banks must consider service quality seriously and apart from
the physical aspect of service quality i.e. tangibles other intangible aspects
of service quality like assurance and empathy must also be considered to
make customers satisfied and loyal.
Moreover, it is also recommended that banks should consider service
quality as a whole and more focus should be given to improve empathy and

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assurance aspects of the service quality of the banks in Pakistan. Issues

relating to empathy and assurance can be resolved by training employees of
the banks as to how they could better interact with the customer and instill
confidence in them by building a more professional and empathetic stance.
Focus of customer relationship management should be the service delivery
of banks, whereby a long term relationship with the customer should be
built by stressing the notions of mutual benefits. Further, banks may also
clarify the role expectations of the employees and their role performance
should be judged on some common objective criteria. Employees having
ability to impart service in a more professional and empathetic manner must
be rewarded, while employees who are short of their role expectations
should be trained to improve their abilities. Values of trust, openness and
courtesy must be promoted among the employees, which could encourage
them to be more trustful, open and courteous to the customers of the banks
and service quality of the banks can be improved.
Overall, the focus of the banks should be on the improvement of their
human resource capabilities in order to ensure the service quality of the
banks. Further, fostering motivation and employee commitment could also
add value to the phenomenon. Banks should bring meaningfulness in the
work of their employees and employees could translate this meaningfulness
into the notions of service quality, customer satisfaction and customer
loyalty.
In addition, subsequent studies may be conducted to compare the client
satisfaction, customer loyalty and service quality prospects of the
conventional and Islamic banks of country to draw sectoral implications.
An impact assessment could also be conducted to see, whether training of
the employees could improve service quality of the banks or not. Lastly, an
economic cost and benefit analysis could also be conducted to see, whether
benefits of improving service quality exceed costs of building service
quality or not. This will ensure that service quality is a value orientated
initiative and both short run and long run profitability dynamics could be
investigated in this regard.
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