NJALA UNIVERSITY (FREETOWN CAMPUS)

THESIS TOPIC: ASSESSING FINANCIAL INTERMEDIATION CHALLENGES IN

SIERRA LEONE FROM CUSTOMER SATISFACTION PERSPECTIVE - A CASE
STUDY OF ECOBANK (S/L).

COURSE: MASTER OF BUSINESS ADMINISTRATION (MBA) - EXECUTIVE

SCHOOL: SOCIAL SCIENCES & LAW

SUBMITTED BY: ABDULAI KAMARA

ID #: 70727

THESIS CHAPTER: TWO

SUPERVISOR: HON. FESTUS M. LANSANA

DATE: DECEMBER, 2022

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 Chapter Two
Literature Review
2.0 Introduction
This chapter reviews relevant works done by previous researchers in the field of financial
intermediation and customer satisfaction. The review generally focuses on both theoretical and
empirical overview of financial intermediation and customer satisfaction survey conducted in
various financial institutions across several African countries. In this chapter, a number of
relevant concepts on financial intermediation and customer satisfaction determinants are
presented. Also considered in this chapter are overview of the Sierra Leone financial system and
major challenges faced with effective financial intermediation in Sierra Leone.

2.1Concept and Nature of Financial Intermediation and Customer

Satisfaction:
2.1.1 Concept of Financial Intermediation
Financial intermediation is an institution that facilitates the channeling of funds between lenders
and borrowers indirectly (Nelson E.R. 1999). That is, savers (lenders) give funds to an
intermediation institution (such as a bank), and in turn institution gives those funds to spenders
(borrowers). Andrew and Osuji (2013) state that financial intermediation involves the
transformation of mobilized deposits liabilities by banks into banks assets or credits such as
loans and overdraft. This means that financial intermediation is the process of taking in money
from depositors and lending same to borrowers for investments which in turn help the economy
to grow. Efficient financial intermediation causes high level of employment generation and
income which invariably enhances the level of economic development, (Conning J. & Kevane
M. (2002).

To ensure that investible funds are made available for economic activities, social and community
services sector inclusive in the urban and rural areas and the quest for overall development of the
economy informed the decision of financial system focusing more financial intermediation,
(Rosengard J.K. 2001). Financial intermediation is typically an institution that facilitates the
channeling of funds between lenders and borrowers indirectly, ( Pill H. & Pradhan M. 1997). That

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is, savers (lenders) give funds to an intermediary institution (such as a bank), and that institution
gives those funds to spenders (borrowers). (Gorton and Winton 2002) define financial
intermediaries as firms that borrow consumers/savers and lend same to companies that need
resources for investment. Financial intermediaries can be classified into institutional investors,
pure intermediaries like investment banks and Deposit Money Banks. Among all the financial
intermediaries, banks are the major financial intermediaries that accept deposits and make loans
directly to the borrowers (Quilym, 2012).

Mahmood and Bilal (2010) opined that the rising magnitude of financial intermediation have
adverse implications on the growth of Sierra Leone economy because in the absence of
developed capital market, the private sector which contributes a greater percentage to economic
growth in Sierra Leone will primarily depend on bank credit as a source of financing their
investments which will lead to economic growth. This means that the constant rise of financial
intermediation discourages potential savings due to low returns on deposits, and ultimately
reduces lending activities and investment potential of investors as a result of high cost of funding
(Ndung'u and Ngugi, 2000; Mahmood and Bilal, 2010). Financial intermediation involves the
transformation of mobilized deposits liabilities by financial intermediaries such as banks into
bank assets or credits such as loan and overdraft. It is simply the process whereby financial
intermediaries take in money from depositors and lend same out to borrowers for investment and
other economic development purposes (Andrew and Osuji, 2013). According to Acha (2011),
financial intermediation is a system of channeling funds from lenders (economic surplus unit) to
borrowers (economic deficit unit) through financial institutions.

2.1.2 Concept of Customer Satisfaction

According to (Kumbhar, 2011), the term “customer” refers to the purchaser/user of a good or
service offers by a business firm, whether it is individual or corporate. (Riscinto-Kozub, 2008)
defines a bank customer as any individual or entity for which the bank agrees to conduct an
account or provides a service. Customer satisfaction is one of the most important factors in
business. When it comes to commercial banks, customer satisfaction level differentiates one
bank from another, thus measuring customer satisfaction is exceedingly important. (Zopounidis,
2012, 37.) This is the reason why banks listen to customer requirements and complaints.

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Profitable business cannot exist without satisfied customers, especially in service-oriented
industries. Traditionally the level of customer satisfaction was determined by the quality of
services, price and purchasing process.

Customer satisfaction is defined as customers’ response to the perceived gap between prior
expectations or experiences and actual performance of products or services consumed (Che-Ha
& Hashim, 2007). Customer satisfaction is an affective state or feeling towards the products or
services. Competition in banking industry becomes more and more intense and financial
institutions place great importance on customers. Customer satisfaction could lead to stronger
customer base which is a competitive advantage to the institutions (Salifu, Decaro, Evans, Hobbs
& Iyer, 2010). Due to the importance of customer satisfaction, it has become academics’ and
practitioners’ interests in service industry. There is a continuous growth in research of customer
satisfaction in retail banking sector (Salifu, Decaro, Evans, Hobbs & Iyer, 2010). However,
Anderson, Fornell and Lehman (1994) provided a better explanation by describing the customer
satisfaction as a kind of purchase behaviour and the experience of using a product. It is much
dependent on buyers’ expectation which determines the consistency of the product performance.
Should there be consistency, the customer will be satisfied; otherwise they will show dissatisfied
results (Ho, 2009).

Generally, customer satisfaction is conceptualized as an attitude-like judgment or a pleasurable

level of consumption-related fulfillment resulting from purchases or consumers’ interactions.
Consumers make the judgment based on the experiences attached to suppliers’ products or
services, the sales processes, and the after-sale services (Ho, 2009). On the other hand, customer
satisfaction is viewed as personal experience and mentality linked to personal expectation and
service delivered. It is described as the customers’ experiences associated with the purchase and
usage of a product or service (Salifu, Decaro, Evans, Hobbs & Iyer, 2010). When transacting
with banks, customers always judge the level of services and the priority given by bank and
finally decide about repurchase behaviour. Customer satisfaction level is high when they obtain
maximum usage and profit with minimum price (Afsar, Rehman, Qureshi & Shahjehan, 2010).

On the contrary, dissatisfaction arises when pricing does not accommodate customers’ needs. For
instance, the interest rates on loans, charges on the usage of online services and the processing

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fees are among the factors which determine customer satisfaction (Afsar, Rehman, Qureshi &
Shahjehan, 2010). Satisfaction can both be conceptualized from an affective and cognitive prism.
Customer satisfaction is found to leave an impact directly on cognitive evaluation of consumers
and effective responses. In addition, satisfaction is a kind of cognitive state that solicits feedback
from customer after service or product consumption (Ho, 2009). According to some research,
behavioural responses like repeat purchase, word-of-mouth, and complaint behaviour are the
factors used to evaluate customer satisfaction or experiences regarding products or services.
Researchers introduced the disconfirmation of expectation model to explain the nature and
operationalization of customer satisfaction. The mentioned model identified that customer
satisfaction is a function of causal relationship between expectation and service performance
(Salifu, Decaro, Evans, Hobbs & Iyer, 2010).

In actual fact, confirmation or disconfirmation paradigm is the theoretical model central to

majority of satisfaction studies. With reference to disconfirmation paradigm, expectancy
disconfirmation could be categorized into two processes. The first process is the
acknowledgement of expectations towards the products or services while the second is
comparison of experienced performance of the products or services with prior expectations (Ho,
2009). Customer satisfaction is classified as an outcome or a process. When customer
satisfaction is regarded as an outcome, customer satisfaction refers to a cognitive and affective
state of responses to current consumption experience (Salifu, Decaro, Evans, Hobbs & Iyer,
2010). In the opposite, as a process, customer satisfaction is viewed as a function of the whole
consumption process or a specific element of the consumption process, leading to satisfaction.
As a result, researchers who aligned customer satisfaction towards process, focused on
perceptual, evaluative, and psychological components of processes (Salifu, Decaro, Evans,
Hobbs & Iyer, 2010).

Researchers defined a variety of forms of customer satisfaction. Overall, research on customer

satisfaction could be divided into two perspectives (Ho, 2009). First, traditional models
advocated that customer satisfaction is the result of cognitive process. On the contrary, new
conceptual developments stated that affective process may serve as an indicator to forecast
customer satisfaction and to identify customers’ affection. Second, certain researchers debated

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that customer satisfaction should be viewed as a judgment and cumulative experience towards
products or services, instead of transaction-specific (Ho, 2009).

Theoretical Framework on Financial Intermediation and

2.2
Customer Satisfaction
Financial intermediation theory was first formalized in the works of Goldsmith (1969),
McKinnon (1973), and Shaw (1973) who saw financial markets, both money and capital markets
playing a pivotal role in economic development, attributing the differences in economic growth
across countries to the quantity and quality of services provided by financial institutions.
Corroborating this view is the result of research by Nwaogwugwu (2008) and Dabwor (2009) on
the stock market development and economic growth in Nigeria, the causal linkage. The result
reveals that there is a bi-directional causality between growth in capital market activities and
economic growth in Nigeria. However, this contrasts with Robinson (1952), who argued that
financial markets are essentially hand maidens to domestic industry, and respond passively to
other factors that produce cross-country differences in growth: “there is general tendency for
supply of finance to move with the demand for it. It seems to be the case that where enterprise
leads finance follows. The same impulse within an economy, which set enterprises on foot,
makes owners of wealth, venturesome and when a strong impulse to invest is fettered by lack of
finance, devices are invented to release it and habits and institutions are developed”

The Robinson school of thought therefore believes that economic growth will lead to expansion
of the financial sector. Goldsmith (1969) attributed the positive correlation between financial
development and the level of real per capita GNP to the positive effect that financial
development has on encouraging more efficient use of the capital stock. In addition, the process
of growth has feedback effects on financial markets by creating incentives for further financial
development. McKinnon’s thesis is based on the complementarity hypothesis, which in contrast
to the Neo-classical monetary growth theory, argued that there is a complementarity between
money and physical capital, which is reflected in money demand. According to McKinnon,
complementarity links the demand for money directly and positively with the process of physical
capital accumulation because “the conditions of money supply have a first order impact on
decision to save and invest”. Shaw (1973) proposed a debt intermediation hypothesis, whereby

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expanded financial intermediation between the savers and investors resulting from financial
liberalization (higher real interest rates) and development increase the incentive to save and
invest, stimulates investments due to an increase supply of credit, and raises the average
efficiency of investment. This view stresses the importance of free entry into and competition
within the financial markets as prerequisites for successful financial intermediation. McKinnon
(1973) and Shaw (1973) argued that policies leading to the repression of financial markets
reduce the incentive to save. They described the key elements of financial repression as:
 High reserve requirements on deposits
 Legal ceilings on bank lending and deposit rates
 Directed credit
 Restriction on foreign currency capital transactions
 Restriction on entry into banking activities
Though the McKinnon-Shaw framework informed the design of financial sectors reforms in
many developing countries, countries experiences later showed that while the framework
explains some of the quantitative changes in savings and investment at the aggregate level, it
glosses over the micro-level interactions in the financial markets and among financial institutions
which affects the supply of savings and the demand for credit by economic agents and the
subsequent effect on economic growth.

This shortcoming later formed the spring board for the development of agency theories of
financial intermediation. One of the earliest attempts to interpret the experience of developing
countries within this framework can be found in Stiglitz and Weiss (1981) which stressed the
importance of imperfect information in financial markets and its effect on the overall allocation
of resources and economic growth. They showed that credit rationings for example, may arise
from imperfect information about the quality of potential borrowers.

The structuralism approach emphasizes structural problems such as market inefficiencies as the
principal cause for economic backwardness of developing countries. They criticized the market
clearing assumptions implicit in the financial liberalization school, especially the assumption that
higher interest rates attract more savings into the formal financial sector (Van Wijnbergen, 1982
and 1983). Moreover, Van Wijnbergen argued that it could very well be the case that informal
markets will provide more financial intermediation. Since institutions in this sector are not

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subject to reserve requirements and other regulations that affect financial institution in the formal
sector. He also argued that in the event that informal sector agents substitute their deposits for
that in the formal sector due to high interest rates, the unexpected consequence will be an
adverse effect on financial intermediation and economic growth.

2.3 Financial Intermediation by Banks

Banks are heavily involved in facilitating the modern chain of market-based financial
intermediation. This chain is long and complex: It involves loans originated to be securitized,
special-purpose vehicles that purchase and bundle these loans, investors who buy the securities,
entities that provide credit and liquidity enhancement to guarantee assets and make the
corresponding securities more reliable, asset-backed commercial paper conduits that sell
commercial paper, money market mutual funds that purchase that commercial paper, and the
repo market, where highly rated securities have come to be a form of currency (Gorton and
Metrick 2010). There are also many other steps, players, and processes.

Banks act as intermediaries between savers and persons who are able and willing to borrow
money. This relationship is often described as that between savers and investors, but the
borrower is not obliged to invest, in the sense of obtaining new capital goods (Cameron, 1972:7).
As intermediaries, banks “may vigorously seek out and attract reservoirs of idle funds which will
be allocated to entrepreneurs for investment in projects with a high rate of social return; or they
may listlessly exploit their quasi-monopolistic position and fritter away investment possibilities
with unproductive loans” (Cameron, 1972:7-8). It can probably be assumed that in both cases
financial intermediation might have certain consequences on economic growth. Financial
intermediaries or banks, through the process of financial intermediation mobilize deposits from
depositors/savers and allocate credit facilities to borrowers/investor for investments that will lead
to economic development. Economic development comprises the activities private and public
sector which need bank credit to expand and grow their business. Mahmood and Bilal (2010)
opined that the rising magnitude of financial intermediation costs have adverse implications on
the development of Sierra Leone economy because in the absence of developed capital market,
the private sector which contributes a greater percentage to economic development in Sierra
Leone will primarily depend on bank credit as a source of financing their investments which will

8
lead to economic development. This means that the constant rise of financial intermediation
discourages potential savings due to low returns on deposits.

2.4 Empirical Literature Review on Financial Intermediation and

Customer Satisfaction:
2.4.1 Empirical Review on Financial Intermediation
There have been numerous studies on the effect of financial intermediation on the long run
economic growth. But, there is no consistent evidence for a significant effect of financial
intermediation on economic development in Sierra Leone, looking both positive and negative
direction. Results and evidence about the effect of financial intermediation differ by country,
methodology used and the area covered. Tonye and Andabai (2014) examined the relationship
between financial intermediation and economic growth in Sierra Leone. The methodology used
was vector error correction model. The study found that there is long run relationship between
financial intermediation and economic growth. The study concluded that about 89% of the
variations in economic growth in Sierra Leone are explained by changes in financial
intermediation variables. This study does not consider effects of financial intermediation on
economic development using credit to private sector, lending rate and interest rate margin as
independent variables in the country.

Basher (2013) examined the linkage between open markets, financial sector development and
economic growth to know if markets along with financial sector development affect economic
growth in selected Sub-Sahara African Countries. The study made use of Granger causality test,
Johansen integration test and vector error correction model. It was found that the causation
between open markets, financial sector development and growth in these countries is weak and
insignificant, and such cannot be used to forecast long-term economic growth. This study also
does not consider effects of financial intermediation on economic development using credit to
private sector, lending rate and interest rate margin as independent variables in the country.
Haruna (2012) investigates the determinants of cost of financial intermediation in Ghana's Pre-
consolidated banking sector using 13 banks quoted on the Ghana Stock Exchange. The study
made use of panel data regression models. It was found that operating expense and loan loss
provision accounts for greater variation in commercial banks financial intermediation cost. This

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study does not consider effects of financial intermediation on economic development using credit
to private sector, lending rate and interest rate margin as independent variables in the country.

Idries (2010) investigated the cost of financial intermediation in Jordan from 2000 to 2008. The
study made use of random effects estimation approach. The study indicates that high and
increasing financial intermediation cost are derived from efficiency level complimented by
capital adequacy ratio and loan to total asset ratio. This study does not consider effects of
financial intermediation on economic development using credit to private sector, lending rate and
interest rate margin as independent variables in the country. Beck and Hesse (2006) investigated
the causes of high financial intermediation cost in Uganda. The study made use of a unique bank
level data set on the Uganda banking system over the period 1999 to 2005. The study found that
bank level characteristics, such as bank size, operating costs and composition of loan portfolio
affects financial intermediation cost. The study also found that financial intermediation costs
have no robust and economic significant relationship with foreign bank ownership, market
structure and bank efficiency in Uganda. This study does not consider effects of financial
intermediation on economic development using credit to private sector, lending rate and interest
rate margin as independent variables in the country.

2.4.2 Empirical Review on Customer Satisfaction

Among the most popular studies on customer satisfaction is the qualitative study performed by
Parasuraman, Zeithaml and Berry (1985). Based on the focus group interviews with consumers
and executives, service quality model was proposed. There were five gaps identified respectively
for each group of respondents in the proposed model. On top of that, criteria in evaluating
service quality were classified into ten service quality determinants which include reliability,
responsiveness, competence, access, courtesy, communication, credibility, security,
understanding, and lastly tangibles. Later, the instrument known as SERVQUAL was developed
to measure service quality and the ten determinants were further consolidated into five
dimensions which consist of tangibles, reliability, responsiveness, assurance, and empathy
(Parasuraman, Zeithaml & Berry, 1985).

Wong (2011) conducted a study to investigate the direct effect of service quality, perceived value
and corporate image on customer satisfaction. On top of that, some researchers also examined

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the indirect effect on customer loyalty in domestic retail banking sector. The research results
indicated that service quality, perceived value and corporate image have direct and positive
relationship with customer satisfaction. Multiple regression tests revealed that the independent
variables collectively explained 65 percent of the variances in dependent variable. Corporate
image was found to be the strongest predictor followed by service quality and perceived value. In
addition, it was also proven that customer satisfaction leaves a positive influence on customer
loyalty in domestic retail banking sector. Lo, Osman, Ramayah & Rahim (2010) adopted the
underlying model of SERVQUAL (Parasuraman, Zeithaml & Berry, 1988) with five dimensions
to assess the impact of service quality on customer loyalty among banks in Penang. The findings
substantiated that service quality influences customer loyalty positively. The service quality
dimensions which played a significant role in the model were identified as reliability, empathy
and assurance.

Toelle (2006) researched on the linkages among service quality, perceived value, customer
satisfaction and customer loyalty in the setting of Indonesian retail banking. The findings showed
that customers assessed value based on service quality attributes, especially employee
performance and reliability. The study also signified that employee performance and reliability
are significantly related to customer satisfaction, mediated by customer value. In addition, the
research also suggested that indirect effect of service quality and customer satisfaction have an
impact on customer loyalty. These results further supported the research done by Cronin, Brady
and Hult (2000).

Bontis, Booker and Serenko (2007) conducted a research to understand the mediating effect of
organizational reputation on customer loyalty. The results indicated that there is a significant
relationship between organizational reputation and customer loyalty. The findings also
substantiated the widely accepted theory which advocated the link between customer satisfaction
and customer loyalty. Many factors of customer satisfaction have been discussed in literature
studied. Price of services, quality of services and image of brand are the main determinants of
customer satisfaction. Many studies emphasized on customer satisfaction and suggested it as a
main contributor for business success and competitiveness. The results found that all
independent variables such as price of service, quality of service, and corporate image have
positive association with the customer satisfaction. The study revealed that the price of service is

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positively related to customer satisfaction. Results showed that the better the relationship
between price of services, the higher the customer satisfaction level which subsequently led to
greater performance. Secondly, the greater level of quality of services determines the greater
customer satisfaction. Thus, it is essential to find that the quality of services has a greater impact
on customer satisfaction. Thirdly, brand image has direct relationship with customer satisfaction
as well. It means that the image leaves an impact on customer satisfaction (Saeed, Niazi, Arif &
Jehan, 2011).

2.5 Major Determinants of Customer Satisfaction:

2.5.1 Price of Services
Banking services charge or price of services is termed as the amount of payment that requested
by the seller of services such as financial institutions or banks. Term of service charge as well as
price is determined by few factors such as willingness of the buyer to pay, willingness of the
seller to accept, intensity of competition price, substitute products etc (Uddin & Akhter, 2012).
Furthermore, price fluctuation in all service industries results in price-performance and the
degree of price-performance stability moderates the relationship between performance potential
and successive performance and satisfaction judgments (Voss, 1998). Price represents an attempt
to establish the potential buyers’ willingness to purchase as a function of various prices set by the
seller. The level of acceptance of price can be defined as the maximum price which a buyer is
ready or decide to pay for the products and services (Saeed, Niazi, Arif & Jehan, 2011).
However, consumer price of acceptance represented an individual utility profiles (Kohli, 1991).
The essential role of price as a purchasing determinant as well as so called post-purchasing
process is well recognized (Matzler, Wurtele & Renzl, 2006). According to Keaveney (1995),
qualitative study of customer switching behaviour in services sector, half of the customer
switched services because of poor price perception compared to other competitors (Keaveney,
1995). Furthermore, price perception directly influences customer satisfaction, with the
likelihood of switching and also the likelihood of recommendation to others in banking industry
(Varki & Colgate, 2001). Price satisfaction consists of a most complex construct consisting of
few dimensions, for example price fairness, price transparency, price reliability and more. These
essential dimensions constitute the determinants of price satisfaction and consequently customer
satisfaction (Matzler, Wurtele & Renzl, 2006).

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2.5.2 Brand Reputation
Marketing literature including NCSI and ACSI examined positive link between customer
satisfaction and brand reputation. Wafa etal (2009) mentioned that, the nature and amount of a
consumer's experience with an evoked set of brands. Perceived brand reputation has significant
impacts on customer satisfaction and a consumer's beliefs about brand are derived from personal
use experience, word-of-mouth endorsements/criticisms, and/or the marketing efforts of
companies, (Woodruff et. al., 1983). A brand perception is also one of the important aspects of
the banking sector. Perceived brand reputation in banking sector refers to the banks reputation
and expiating place of bank in the banking industry (Che-Ha and Hashim, 2007; Reynolds,
2007). It measures experience of the customer how he/she fill with this brand and their services.
A perceived overall brand performance is determined by some combination of beliefs about the
brand's various performance dimensions (Woodruff et al., 1983; Che-Ha and Hashim, 2007). A
brand perception is important factor to service provides because, satisfied customer with brand
will recommends that service to others.

2.5.3 Perceived Value

Value is recognized as an abstract concept and it is hard to define. Economists, social scientists
and engineers who come from different industries comprehend value in their own context. The
definition was proposed as trade-off of total benefits received to total sacrifices from customers’
perspectives. It is also the most common definition in marketing literature (Ismail & Khatibi,
2004). Perceived value is defined as compression between price paid by customers for products
or services and utility derived by perception (Kumbhar, 2011). In other words, customers make
assessment on benefits they gain relative to the total costs (Bontis, Booker & Serenko, 2007).
Nevertheless, constituents of value are very personal and subjective and vary between customers
(Ismail & Khatibi, 2004). Expressions of value could be classified into four categories: (i) value
is low price, (ii) value is whatever the customer wants in a product, (iii) value is the quality
customer gets for the price he/she pays, and (iv) value is what the customer gets in exchange for
what he/she gives out (Wong, 2011). The notion of relative perceived value leads to three
distinct value positions: (i) offering medium quality at a reasonable price, (ii) offering superior
quality at a premium price, or (iii) offering inferior quality at a low price (Wong, 2011). An

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integrative configuration of perceived value comprises three models: (i) customer value in
exchange (which is a benefits costs model), (ii) customer value built up (which focus on the
benefits side of the value equation), and (iii) customer value dynamics (which reflect the
dynamics of how customers evaluate the supplier’s total offering) (Wong, 2011). There are two
critical ideas associated with customer perceived value. Firstly, customer perceived value is a
result from the consumers’ pre-purchase perception which is known as expectation, evaluation
during the transaction and post-purchase assessment (expectation versus benefits received).
Secondly, customer perceived value is equated as difference between benefits received and
sacrifices given (Wong, 2011).

2.5.4 Relationship Marketing

With the highly competitive banking industry nowadays, many financial service providers such
as banks or financial institutions tend to retain its customer base while build strong relationships
with their customers. It has become a marketing strategy tool to differentiate themselves and
banking products and services, in order to keep customer satisfaction, retention and loyalty
(Evans, 2002). Relationship marketing is considered as a strategy to establish, maintain and
increase customer relationships (Berry, 1983). Relationship marketing could also be defined as
creating value for target customers depending on their respective preferences, needs and wants
and delivering products or services tailored to the customers (Berry, 1995). Main characteristics
of relationship marketing include individual customer is treated as a unique person or unit,
company activities are directed towards existing customers through continuous interactions and
effective dialogues (Blomqvist, Dahl & Haeger, 1993). Relationship marketing is realized via a
mutual symbiosis and fulfillment of promises (Ndubisi, 2003). The ultimate goal of relationship
marketing is building and maintaining lasting relationships between the organizations and
customers which benefit both parties (Rapp & Collins, 1990).

The current business trend shows the shift from short-term transaction oriented to long-term
relationship focus (Webster, 1992). It was stated that the sustainable business growth strategy is
to understand customers’ needs clearer and to create superior value (Ndubisi, 2003). According
to Calonius (1988), promise concept is an integral part in the relationship marketing. Marketing
is not restricted only to giving promises and persuading customers, but also include fulfilling

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promises. Fulfilling promises is believed to be crucial in achieving customer satisfaction,
retaining customer base and achieving long-term profitability (Reichheld & Sasser, 1990).

A few elements were proposed in the relationship marketing literature and the main elements
comprise (i) trust (Ndubisi, 2004), (ii) commitment (Ndubisi, 2004) and (iii) communication
(Morgan & Hunt, 1994). Morgan and Hunt (1994) argued that trust is a significant element in
relationship marketing. Effective relationship marketing relies heavily on the management of
trust since a service must be bought by customer before experiencing it. Trust referred to the
willingness to rely on an exchange partner in whom one has confidence. The breakdown of trust
caused customer dissatisfaction (Moorman, Deshpande & Zaltman, 1993). Resources of sellers
such as personnel, technology and systems must be able to create trust in customers (Gronroos,
1990). In addition, trust was also defined as the belief that a partner’s word is trustworthy and
individuals will fulfill obligations in the relationship (Schurr & Ozanne, 1985). Wilson (1995)
stated that commitment is the most common dependent variable adopted in buyer-seller
relationship studies. In marketing field, commitment was described as an enduring desire to
maintain a valued relationship and this demanded a higher level of obligation (Moorman,
Zaltman & Deshpande, 1992). On the other hand, psychologists stated that commitment is
decision or cognition which binds a person to a behavioral disposition (Kiesler, 1971). When an
individual believes that he or she receives more value from a relationship, he or she is highly
likely to be more committed. As a result, committed customers would reciprocate effort due to
past benefits received and committed companies would enjoy the advantages contributed by such
reciprocity (Mowday, Porter & Steers, 1982).

Communication could be defined as the ability to furnish timely, reliable and trustworthy
information (Anderson & Narus, 1990). Specifically, communication comprises three
components in relationship marketing. The three components include providing information
which could be trusted, providing information when delivery issues happen and providing
information on quality problems and fulfilling promises. Communication should involve
interactive dialogue between the organization and its customers during pre-selling, selling,
consuming and post-consuming stages (Anderson & Narus, 1990). Communicator has the
responsibility to build awareness, build customer preference by promoting quality, value,

15
performance and encourage prospective buyers to make a purchase decision (Nelson & Chan,
2005).

2.5.5 Customer Loyalty

Loyalty is defined as an attitude and observed behaviour in service context. It is a desire to
maintain relationship with an organization (Bontis, Booker & Serenko, 2007). Loyalty is defined
as a deeply held commitment to repurchase a preferred products or services consistently in
future. It results in repetitive patronage of same brand despite situational influences and
marketing efforts to influence behaviours (Che-Ha & Hashim, 2007). The behavioural
perspective suggested loyalty as repeated patronage although it did not probe to the motive
behind it. However, mere intention may not be a good representation of behaviours since it does
not necessarily result in actions. Sometimes behaviours are triggered by habit, third party’s
influence, convenience or random chance (Bontis, Booker & Serenko, 2007). Bank loyalty is
defined as the biased behavioural response displayed by consumers with respect to a bank. It is a
function of psychological processes, such as decision making and evaluation process which
result in brand commitment (Bloemer, Ruyter & Peeters, 1998).

The degree of loyalty in banking industry could be measured by tracking customers’ accounts
and observing the degree of continuity in purchase over a specific time frame (Bloemer, Ruyter
& Peeters, 1998). Apart from this, loyalty could also be measured as the likelihood of switching
in the absence of switching costs (Bontis, Booker & Serenko, 2007). Nonetheless, some
researchers criticized that behavioural measures like repeated patronage or visit frequency are
lack of a conceptual basis. Moreover, behavioural measures have a narrow view on a dynamic
process (Bloemer, Ruyter & Peeters, 1998). For example, a low frequency of purchases of a
particular product or service may be attributed to situational factors which consist of non-
availability, variety seeking and lack of provider preference. As a result, the behavioural
approach is not a good indicator of the reasons lead to loyalty. But, it is a consumer's disposition
in terms of preferences which in turn determine loyalty. There are circumstances where repeated
purchasing behaviour does not base on a preferential disposition, rather due to a number of
switching barriers (Bloemer, Ruyter & Peeters, 1998).

16
Getting a new customer always costs higher than retaining a new customer. According to a
study, cost of attracting a new customer is five times higher than keeping an existing customer
satisfied and loyal (Lo, Osman, Ramayah & Rahim, 2010). Customers are considered as retained
when they repeatedly purchase products and services and the purchase quantity increases. The
study done by Srinivasan et.al (2007) segregated loyal customers into two distinct categories
which are satisfied and dissatisfied customers. Surprisingly, Srinivasan et.al (2007) revealed that
satisfied customers do not necessarily loyal to a particular products or services. This means that
satisfaction is not a compulsory requirement for loyalty to exist. In certain circumstances,
customers are loyal due to attachment and commitment to the supplier. Likewise, a satisfied
customer could easily switch to better suppliers with higher quality of products or services if
trust, commitment and attachment do not exist. Switching barrier is a factor which makes it hard
or costly for customers to change suppliers. Furthermore, switching costs are referred to as the
technical, financial or psychological factors which make it cumbersome or costly for a customer
to change supplier for products or services (Afsar, Rehman, Qureshi & Shahjehan, 2010).

There is a direct relationship between switching costs and customer loyalty. The higher the
switching cost, the higher chances customer remains loyal. In this context, switching cost is
viewed as a cost that hinders customers from patronizing rivals’ business since risk or expense
involved in switching and accompanying decrease in the appeal of other alternatives (Afsar,
Rehman, Qureshi & Shahjehan, 2010). Customer loyalty is essential to long-term profitability
and success. With the presence of brand loyalty, customers would repeatedly buy the products or
services and also make recommendation to friends and families (Che-Ha & Hashim, 2007).
Although customer loyalty is important to businesses, they often fail to invest adequately to
retain loyal customers for their products and services. Various findings have alarmed the urgency
for business leaders and executives to adopt new innovative strategies to shape loyal customers
towards their products and services, and even further increase the loyal customer base (Afsar,
Rehman, Qureshi & Shahjehan, 2010).

It is more probable for customers to be loyal if a customer-oriented climate is provided. This

climate exists only when companies attempt to understand genuine customers’ needs and design
products to accommodate the needs (Ehigie, 2006). Customer satisfaction has been identified as
a fundamental role for getting customer loyalty. Higher customer satisfaction reduces a bank’s
17
cost in providing services due to lesser complaints to deal with. Customers would opt for other
banks if their current service providers are unable to satisfy their needs. Banks must always
remember that valued customers require truly personalized services (Ehigie, 2006). Since
customers seldom express their needs explicitly to the banks, it would be too late until customers
decide to leave for competitors. As a result, researchers ought to study bank customers’ minds by
comparing what should be offered and what is actually offered (Ehigie, 2006).

2.6 Overview of Financial System and Intermediation in Sierra

Leone
2.6.1 Financial System of Sierra Leone
Wright G.A.N. (1999) defines financial system as a system that allows the exchange of funds
between lenders, investors, and borrowers. The financial system is critical for countries
economic development as it pools and allocates resources to promote productivity and economic
growth. Financial systems operate at national, global, and firm-specific levels. They consist of
complex, closely related services, markets, and institutions intended to provide an efficient and
regular linkage between investors and depositors (Yaron J. & Benjamin M. 1997). Money, credit,
and finance are used as medium of exchange in financial systems. They serve as a medium of
known value for which goods and services can be exchanged as an alternative to bartering (Pill
H. & Pradhan M. 1997). A modern financial system may include banks (public sector or private
sector), financial markets, financial instruments, and financial services. Financial systems allow
funds to be allocated, invested, or moved between economic sectors. They enable individuals and
companies to share the associated risks.

Sierra Leone’s financial system is dominated by an oligopolistic banking system comprising the
Bank of Sierra Leone (BSL), and 14 licensed commercial banks. Amongst the three local
commercial banks only two, the Sierra Leone Commercial Bank and Rokel Commercial Bank
are solely and partly owned by the government. The other, Union Trust Bank, is entirely owned
by Sierra Leoneans and 11 are foreign owned banks. These foreign owned banks control 75% of
financial sector assets. Other financial institutions include the Finance and Trust Corporation,
discount houses, community banks, non-deposit taking finance companies, insurance companies,

18
foreign exchange bureaus, and micro-finance Institutions, none of which take deposits. The
banking sector is stable, safe and sound. There have been significant improvements in key financial
soundness indicators like capital adequacy, liquidity pos ition, asset quality, corporate governance
and earnings performance (BSL 2017 report). The microfinance industry has expanded rapidly and
this component of the financial system is becoming an important pr ovider of financial services to
micro, small and medium-sized enterprises and lower income segments of the population.

Notwithstanding these developments, there are inherent structural factors that impede efforts to
deepen the financial system for achieving strong and inclusive growth. The outreach of financial
services in the rural areas remains limited, despite the growth in the number of community
banks, financial services associations, and commercial banks’ branches. The bulk of financial
institutions and services are concentrated in Freetown and districts headquarter towns, thereby
restricting financial inclusion to mainly the urban population. This limits the size of savings
mobilized to stimulate growth and develop the economy. Banking products and services are still
largely limited to accepting deposits, granting of loans and advances, and foreign exchange
dealings. The main source of income for the entire banking industry is investment in
Government Treasury Bills. However, the growing competition among financial institutions has
forced banks to move towards providing relatively sophisticated products including internet and
mobile phone banking, point of sales and the use of Automated Teller Machines (ATMs).

2.7 Financial Intermediation Challenges in Sierra Leone

2.7.1 ICT Gap in Operational Services
The banking sector of Sierra Leone is dominated by small assets-based banks that are not
internationally competitive. William N. Massaquoi (2010), noted that in repositioning the Sierra
Leone banking sector for competitiveness and effective financial intermediation will involve the
deployment of information technology to play dominant catalytic role in growing the sector.
Thus in the face of the keen competition in the sector, market players must devise new survival
strategies. Banking institutions world-wide are compelled by the emergence of information
technology to fast-forward to more radical transformation of business systems and models. It is
in the same spirit that Bill Gates (2001) noted that: “the successful companies of the next
decades will be the ones that use digital tools to re-invent the way they work. These companies

19
will make decisions quickly, act efficiently and directly touch their customers in positive ways.
Going digital will put on the leading edge of the shock wave of change. That will shatter the old
ways of doing business”.

The world is now in a new era of technological revolution. Countries are beginning to compete
and fight over control of information rather than natural resources. The vogue today is E-
platform which implies offering financial services through electronic media to various customers
irrespective of place, time and distance. A customer friendly environment with high quality
service delivers needs to be created in order to enhance high patronage. To this end,
improvement in banking technology and institutional arrangements for transmission mechanism
as well as other operational areas of banking operations to ensure operational efficiency has
become a compelling necessity. This encompasses electronic money, internet banking,
telephone/mobile banking, reduction of cash transaction, smart card, ATM transactions and
capacity to process high volume of transactions among others.

2.7.2 Weak Human Resources Management

The centrality of the human resource in enterprise management is a generally accepted dictum. It
is in this light that management needs to make adequate investment in human factor. It should be
noted that there is no competitive weapon more potent and effective in a financial market than
the quality of its human resources. As remarked by Sanusi (1995) machines and advanced
technology can provide informational and transactional convenience but only manpower can
provide the credibility, creativity and care that can build long-term customer and client
relationships. In other words, there is need for capacity building in the banking sector of Sierra
Leone in order to enable it cope with the wind of technological development. Besides, no matter
how accurate or competent a computer is, it cannot feed itself with input and it can neither offer
a welcoming smile nor a warm handshake (Ochejele, 2000). Banking (and indeed the entire
sectors in the financial markets) is people-related and the quality of personnel will make the vital
distinction between what constitutes a good bank and a bad one. Consequently, of all the
challenges facing the Sierra Leone financial market, human capital development is the most
daunting.

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2.7.3 Ineffective Fraud Prevention and Monitoring Mechanism
Another major challenge facing the banking sector and consequently, financial intermediation is
the need to minimize the high rate of frauds and other malpractices in the system. It is imperative
that bank managers and other market players give greater attention to the subject of maintaining
the highest ethical and professional standards in all their transactions and dealings with their
customers. This entails having adequate knowledge of Code of Conduct and Banking Practice
jointly designed by the Chartered Institute of Bankers (CIB), Central Bank of Sierra Leone
(BSL) and the Bankers Committee (General Assembly of Bank Chief Executives). Issues of
business integrity, respect for legitimate laws and regulations, concern for the society in which a
bank operates will become as much important as profit consideration in the 21 st century.
Currently, Sierra Leone has unenviable reputation as one of the most corrupt nations in the world
(Dabwor, 2008). Just like the money market, capital market suffers from a number of
malpractices perpetuated by the operators in the market, although the level of malpractices is not
as pronounced as in the banking sector. Some major malpractices in the capital market as
identify by Usman (2002) include “insider dealings, market manipulations, false trading; market
rigging and false representations”.

2.7.4 Weak Liquidity Management

While it is expected that there will be more external resource inflow to fund growth of the
economy in Sierra Leoen country, financial institutions must recognize their primary role in
internal resource mobilization. It is assumed that the economy is awashed with liquidity and
substantial portion of this liquidity is held as idle cash balances outside the banking system. The
business of resource mobilization should therefore be seen as a major challenge facing the
industry. In addition to internal mobilization of funds, market operators must also ensure
effective channeling of these resources to productive segments of our economy. The
responsibility of promoting the economy’s growth should be seen as a major challenge by all
firms in the industry. Fund mobilization and allocation should therefore form a major plank of
management policies in this century.

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2.7.5 Less Autonomy of BSL
The turnaround of the banking sector and indeed the economy would be difficult without an
institutional and operational autonomy of the BSL (Ekundayo, 1996). The current situation
where the apex financial institution in the country is only given nominal autonomy which it
cannot exercise effectively is not very healthy for the banking sector. The BSL should be given a
leverage to establish its authority over its traditional area of jurisdiction. It is only with such
authority that the apex financial institution will be able to formulate viable monetary policies and
offer advisory services to the Central Government on financial matters. To this, may be added
the need for internationalization of the Sierra Leone capital market in spite of the malpractices in
the market.

2.7.6 Technological Innovation

Innovation is another challenge facing the financial markets in the country. Innovation implies
new way of doing things. A likely situation that may characterize some organizations is the
possibility of complacency. Experiences have shown that once some organizations have attained
certain regulatory provisions, there would be no further incentive for improvement. It should be
pointed out that there is “no bliss point” as far as any system’s operation is concerned. This
forms the basis of the current literature in management christened. Total Quality Management
(TQM), management needs to develop ways that have never been tried before and ways that will
give the organization a real edge over its competitors (Simon Millet 2013). These calls for the
establishment of research department that will monitor development in the markets, the economy
and the world at large so as to timely advise management accordingly. Innovation can be
achieved through rigorous analysis of current processes, expectations, market, innate experience
and common sense with a view to working out a new way of doing things (Jacob Jusu Saffa
2015). This challenge also entails strategic business management which allows an organization
to be proactive rather than being reactive in shaping its own future. Strategic management allows
an organization to formulate and implement better decisions through the use of systematic,
logical and rational approach to strategic choice. One of the benefits of this approach is the
empowerment of an individual and the strengthening of its decision-making capacity.

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2.8 The Existence of Financial Intermediaries
The most basic question with regard to financial intermediaries is: why do they exist? This
question is related to the theory of the firm because a financial intermediary is a firm, perhaps a
special kind of firm, but nevertheless a firm. Organization of economic activity within a firm
occurs when that organizational form dominates trade in a market (Rosengard J.K. 2001 ). In the
case of the savings-investment process, households with resources to invest could go to capital
markets and buy securities issued directly by firms, in which case there is no intermediation. To
say the same thing a different way, nonfinancial firms need not borrow from banks; they can
approach investors directly in capital markets. Nevertheless, as mentioned in the Introduction,
most new external finance to firms does not occur this way. Instead, it occurs through bank-like
intermediation, in which households buy securities issued by intermediaries who in turn invest
the money by lending it to borrowers (Conning J. & Kevane M. 2002). Again, the obligations of
firms and the claims ultimately owned by investors are not the same securities; intermediaries
transform claims. The existence of such intermediaries implies that direct contact in capital
markets between households and firms is dominated. “Why is this?” is the central question for
the theory of intermediation.

Bank-like intermediaries are pervasive, but this may not require much explanation. On the
liability side, demand deposits appear to be a unique kind of security, but originally this may
have been due to regulation. Today, money market mutual funds may be good substitutes for
demand deposits. On the asset side, intermediaries may simply be passive portfolio managers,
that is, there may be nothing special about bank loans relative to corporate bonds. This is the
view articulated by Fama (1980). Similarly, Black (1975) sees nothing special about bank loans.

2.9 Financial Sector Development and Financial Intermediation

Emerging evidence suggests that both the level of banking sector development and stock market
development exert a causal impact on economic growth. While banking is more deeply
entrenched in Sub-Saharan African economies than securities markets and other non-bank
sectors, distinct challenges face policymakers in trying to ensure that both banks and markets
reach their full functional potential. Measures that succeed in deepening financial markets and
limiting the distorting exercise of market power result in more firms and individuals securing

23
access to credit at acceptable cost. Experience shows that formal financial institutions are slow to
incur the set-up costs involved in reaching a dispersed, poor clientele. In looking to
improvements, however, two aspects appear crucial, namely information and the relatively high
fixed costs of small-scale lending. A range of innovative, specialised micro-finance institutions,
mostly subsidised, has become established with remarkable success. Loan delinquency has been
low - far lower than in the previous generation of subsidised lending programs operated in many
developing countries and the reach of the institutions in terms of sheer numbers, as well as to
previously, grossly neglected groups, such as women and the very poor, has been remarkable.
This success is attributed to reliance on innovation in, for example, the use of group lending
contracts exploiting the potential of social capital and peer pressure to reduce willful
delinquency, dynamic incentives using regular repayment schedules and follow-up loans or
“progressive lending,” and lighter distributed management structures that reduce costs and
enable lenders to keep loan rates down to reasonable levels.

It is through its support of growth that financial development has its strongest impact on
improving the living standards of the poor. Though some argue that the services of the formal
financial system only benefit the rich, research suggests otherwise. Furthermore, countries with
strong, deep financial systems find that, on balance, they are better insulated from
macroeconomic shocks. Major challenges mostly faced with effective financial intermediation in
various countries include:
 State-owned financial institutions are generally inefficient and lead to the blurring of the
boundaries between the political-cum-economic activities of the state and the economic
activities of the financial institution.
 Corrupt governments compel both state-owned and private financial institutions to extend
credit to particular favoured individuals and institutions on grounds other than economic.
 General conditions of political instability lead to economic instability, which in turn leads
to financial instability. Financial instability leads to reduced capital flows into a country
and reduced financial intermediation through a loss of confidence in rights enforcement.
 One of the biggest problems is that formal institutions do not have the risk analysis
expertise or the familiarity with the often rural, poor potential clients. Moreover, formal
lending is highly collateralised rendering it inappropriate for the poor. While informal

24
 organisations and NGOs are more familiar with these markets, they lack the resources of
the formal lending institutions to adequately serve the poor.
 A lack of familiarity with potential clientele often leads to inappropriate instruments
when the formal institutions dare to delve in low-end markets. Research suggests that
such players sometimes cannot distinguish between liquidity and credit needs among the
poor. Micro-credit institutions have a tendency to be supply-driven and do not match
specific needs (Rosengard, 2001).
 Related to the above, there is greater access to savings vehicles than credit and hence an
imbalance. In Senegal, from 1993 to 1995, deposits by commercial banks grew 44% in
nominal terms while credit extension fell by 16.5%. For all countries south of the Sahara
demand for deposit services outstrips demand for credit services by 7:1 (Rosengard,
2001).
 Further, savings mobilised from the poor in SA and Senegal, for example, support large
borrowers, despite the finance needs of the poor.Because the small, low-end market lacks
depth and liquidity, formal players find it difficult to exploit economies of scale in
service delivery. The added problem of lack of physical and technical infrastructure
exacerbates the problem of delivery.

2.9.1 Regulatory and Legal Factors

Other problems in accessing finance find root in the legal and regulatory environment as the
following illustrate:
 Weak judiciaries call into question the ability of the judicial system to enforce creditor
rights in the event of default.
 In many African countries, central bank leadership is politically determined and the
institution itself may lack autonomy. The unfortunate result is that its ability to supervise
the financial system coherently is compromised.
 Compounding the above, over-regulation can emerge, for instance, preventing foreign
players in local markets (Conning and Kevane, 2002). Further, most financial regulations
were scoped for large players with sizeable deposits, and prudential requirements that
focus on protection of depositors restrict banks’ ability to cater for the poor.

25
  Furthermore, most countries still lack legal frameworks that recognise micro-financiers;
some countries like South Africa and Senegal have started to make changes. This affects
nontraditional banks’ ability to mobilise deposits legally.
 Often, legislation is complex and difficult to administer. Interest rate caps are prevalent
and these are distortionary. Contrary to popular expectations, research suggests that the
poor are willing to pay market rates for productive uses of borrowed funds (Nelson,
1999).
 Problematic legislation leads to fragmentation whereby no operational or strategic
linkage among formal, semi-formal and informal micro-finance institutions exists. This
leads to a failure to tap into synergies – where some are good at collecting deposits but
lack local knowledge and information and vice versa.

2.9.2 Social, Religious and Cultural Factor

Effective financial intermediation is impeded by the following social factors:
 Illiteracy is high among rural poor people, especially women, and specialised credit
officers are required to deal with this type of client. In sense, employees of formal
institutions are also illiterate when it comes to dealing with these clients.
 In some places, women have cultural and religious restrictions that prevent them from
seeking credit. They may take up credit only with their fathers, brothers or husbands as
co-signatories.
 In predominantly Muslim societies, fair market interest rates cannot be charged on
religious and moral grounds.

2.9.3 Technological Factor

The financial sector has long been an early adopter of innovations in information and
communications technology. Internationalisation of finance (despite efforts to block it) has been
one consequence. This has helped lower the cost of equity and loan capital on average, even if it
has also heightened vulnerability to capital flows. While a few countries such as South Africa
and Swaziland have started making use of technological advances in financial services, such as
smart cards, many African countries are still some way behind international norms in rolling out
the relevant infrastructure that will facilitate delivery to rural populations.

26
2.10 The ISO 9001:2000 standards and Customer Satisfaction
The ISO standards are a set of recommendations that can be applied by organizations of any size,
regardless of type and service or products provided. An organization that applies the standards
correctly is able to deliver services that make customers satisfied. ISO is a non-governmental
organization and the standards are not required to be applied, however, many organizations
recognize and implement them, since the standards help measure customer satisfaction and
demands. ISO 9001:2000 standards put customer satisfaction in the center of a successful
organization (Hoyle 2009, 4). The principle of customer focused is explained as follows:

Organizations depend on their customers and therefore should understand current and future
customer needs, should meet customer requirements and strive to exceed customer expectations
(Eight Quality Management Principles,). The standard states that an organization should
understand customer's needs. In this case, customers can be purchasers or users of inside or
outside of an organization. It states that by understanding customer needs and wishes,
organizations can achieve a better position on the market and be more flexible toward changes.
The standard also claims that organizations should constantly measure customer satisfaction and
take steps to increase it (Mutafelija and Stromberg 2003, 122). To measure customer satisfaction,
ISO standards recommend conducting a survey, but there are no requirements about what kind of
survey a company should have. However, there are advices on what to do with results:
 Company is able to determine current level of customer satisfaction;
 Company knows what customers’ needs that have not met;
 Company is above to develop new ideas about products and services;
 Company is looking for new opportunities regarding customers’ satisfaction.

2.11 SERVQUAL Measurements of Customer Expectation and

Ultimate Satisfaction
The SERVQUAL model was developed by Parasuraman, Zeithaml and Berry (1988,) to identify
five different gaps between customers’ expectation and service that is provided by a company to
satisfy that expectation. Customer expectations mean desires and hopes they have prior to the
service and perceptions mean evaluation of the service that have been provided. If expectations
are greater than the actual performance, then customer dissatisfaction occurs. On a contrary, the

27
smaller these gaps, the better service quality is. The SERVQUAL model measures five gaps that
enables analyses of the service quality from the customer perspective (Strong, 2014, 211).

2.11.1 GAP 1 – Expected Service: Management Perception of

Consumer Expectations
The GAP 1 shows the gap between customer expectations and how management sees those
expectations. The gap appears when managements do not understand customer wants and
wishes. It is likely to happen in companies with lack of good customer satisfaction research.
Moreover, bureaucracy is also responsible for a big gap since it is an ineffective way of
communication. To avoid the gap, the company should always conduct different researches and
be aware of customer expectations. A company that is aware about the gap should seek the best
ways to get in touch with customers and become aware of their expectations. To keep the gap
small, a company should aim at building strong relationships with customers, avoid many layers
of management and develop an effective way of upward communication. (Zeithaml, Bitner and
Gremler 2006, 38.)

2.11.2 GAP 2 – Management Perception: Service Specifications

Understanding customer needs is important, though companies also need to know what kind of
services should be provided to customers. GAP 2 appears when services are designed without
thinking about customer needs. It can appear because of inadequate service scope, absence of
goal settings or inappropriate task standardization. To make the gap smaller, a company should
develop strategy to measure customer perception and company's performance. (Zeithaml et al.
2006, 39.)

2.11.3 GAP 3 – Service Delivery Gap

Even if a company has closed the first two gaps, it may still have problems providing services
that meet customer expectations. GAP 3 appears when the company fails to deliver services in
the way that customers need. The gap indicates that delivered service did not match the
standards. It happens due to failure to analyze and match the supply and demand, as well as
inefficient human resource policy. To close this gap, companies should build their strategies

28
around delivering excellent service. To be more precise, service is delivered as it was designed
when employees are motivated and are able to deliver quality service. A company should hire
people with necessary skills and interest in doing the work. Then the company should reward and
promote the employees to retain them. (Maglio, Kieliszewski 2010, 210.) Team-work and co-
operation are essential elements that company should consider in order to close this gap
(Zeithaml et al. 2006, 42).

2.11.4 GAP 4 – Service Delivery: External Communications

When a company has done everything to close previous gaps, there is still a risk of failure to
meet customer expectations, if the service that is delivered does not match with communications
about it. The GAP 4 can be also called a communication gap: when companies advertise the
services on different Medias, customers expect the quality of services to be as promised.
Otherwise, customers are dissatisfied and consider the quality of service low. Therefore,
companies should focus on developing strategies to reach customers in order to provide services
in the right way (Zeithaml et al. 2006, 43). Companies can close the GAP 4 by creating
advertisements that accurately describe the offerings and how they delivered. As a result,
realistic expectations will promote positive perception of services (Kulasin, Fortuny-Santos
2005, 134).

2.11.5 GAP 5 – Expected Service: Perceived Service

The previous gaps create the GAP 5, which define the difference between expected services and
perception of the received service. The key to closing the GAP 5 is to close previous four gaps.
Companies should carry out different researches to know customer expectations while working
with employees to provide the right service in the right time. After publishing the GAP model,
Parasuraman, Berry and Ziethaml developed five dimensions and a scale named SERVQUAL to
measure the gaps mentioned above. The dimensions are described as followed:

 Tangibles: Aspects of personnel, equipment and physical facilities

 Assurance: The ability of employees to convey trust, their knowledge and courtesy
 Reliability: The ability of a company to perform the services accurately

29
  Empathy: The level of individualized attention to customers
 Responsiveness: The willingness of employees to help customers and deliver quality
service. (Iwaarden, J., Wiele, T., Ball, L. & Millen, R. International Journal of Quality &
Reliability Management Vol.20 Issue 8 2003, 922).

2.12 Summary
This chapter exhaustively explored both theoretical and empirical perspectives relevant to the
study area with the aim of identifying research gaps in relation to financial intermediation and
customer satisfaction from the point of view of financial institutions. The chapter began with an
introduction revealing the purpose of the chapter and providing precise explanation on general
concept of financial intermediation and customer satisfaction. The subsequent chapter discusses
the research methodology and design adopted for the study, with particular emphasis on the link
between the theoretical framework discussed in this chapter and the design of the questionnaires
used in data collection.

30