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SERVICE QUALITY DIMENSIONS AND CUSTOMER SATISFACTION:

A STUDY IN THE LEBANESE RETAIL BANKING INDUSTRY

A thesis submitted in partial fulfillment

of the requirements for the degree of

Doctor of Business Administration

by

Zeina T. Al HAKIM

Grenoble Ecole De Management

2012

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To My Devoted Family and Loved Ones

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DOCTORATE OF BUSINESS ADMINISTRATION

Grenoble Ecole de Management, France

Author: Zeina T. Al Hakim

zeina.al-hakim@grenoble-em.com

zeina.alhakim@gmail.com

Title of Dissertation: Service Quality Dimensions and Customer Satisfaction: A Study

in the Lebanese Retail Banking Industry

Number of Pages: 362 pages

Year of Completion: 2012

ABSTRACT

This doctoral research was initiated for the purpose of investigating the relationship

between perceived service quality and customer satisfaction among bank customers in

Lebanon and defining service quality through uncovering its dimensions relevant to

the Lebanese culture. Due to the lack of similar studies in Lebanon and the significant

contribution of the banking sector to the Lebanese economy, it was decided that the

investigation be conducted within the Lebanese retail banking industry. Moreover,

due to the turbulent competitive banking environment in Lebanon and to the pressing

need to adopt a marketing orientation strategy that focuses on the consumer,

understanding what satisfies bank customers becomes crucial; this, in addition to

finding out what matters most to these customers in evaluating service quality to serve

them better.

Based on the extensive literature review, a model was proposed with a combination of

different variables: perceived service quality, customer satisfaction, bank reputation,

perceived payment equity, and gender. In addition to an exploratory study to discover

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the dimensions of service quality, a series of hypotheses were presented to explain the

relationship between perceived service quality and customer satisfaction. The model

was tested using a quantitative research technique. Using convenience sampling, the

research sample was chosen from customers of Lebanese banks and included 1336

respondents (54% males versus 46% females) from 36 out of the 51 commercial

banks operating in Lebanon. Data analysis uncovered the new dimensions of service

quality, measured using the SERVPERF tool, specifically applicable to Lebanese

retail bank services and provided support for five out of six hypotheses. The findings

provide support for the importance of stressing service quality to ensure customer

satisfaction by focusing on bank reputation, reliability, empathy, and tangibility

dimensions of perceived service quality. Moreover, the results uncover interesting

gender-related differences in the evaluation of perceived service quality and customer

satisfaction which should be taken into consideration when designing and delivering

bank retail services in Lebanon. The major outcome of this research is a new tool to

measure service quality in Lebanese banks: the Lebanese Bank Service Quality

Assessment Tool (LBSQAT).

Keywords: perceived service quality, customer satisfaction, perceived payment

equity, reputation, gender, retail banking, Lebanon.

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ACKNOWLEDGEMENTS

Finally, I have made it. I couldnt have done it without the support of many people

whose contribution cannot be ignored nor left without appreciation.

First, I would like to express my deepest gratitude and appreciation to my supervisor,

Dr. Caroline Cuny, for her invaluable support, guidance, and encouragement. Her

sincerity in providing me with the needed advice and critical constructive feedback

contributed highly to the quality of work generated. For that, I thank her.

Second, I would like to extend my gratefulness to the support of Dr. Benoit Aubert,

Associate Dean and Director of the Doctoral School at Grenoble Ecole De

Management who showed great consideration and empathy all through the program

and provided advice when needed. Moreover, I would like to thank Pr. Olivier

Trendel and Pr. Daniel Ray at Grenoble Ecole de Management for their precious

feedback. I would also like to thank Dr. Suzanne Altobello Nasco and Dr. Michel

Polski, the two reviewers whose comments and feedback were crucial for the

perfection of this work. For that, I thank them.

Third, I would like to thank my sincere colleagues and friends, Dr. Bassem Maamari

and Dr. Hiba Sukkarieh, for their truthful help, meticulous guidance, and sincere

support all through the process of data analysis and completion of the doctoral

dissertation. For that, I present my deepest gratitude and appreciation.

Fourth, I would like to thank all 1336 anonymous respondents for their precious time

and effort to answer my questionnaire. Without their sincere responses, this study

wouldnt have seen the light. I would also like to thank all those who helped me

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spread the questionnaire to generate such a huge number of responses; namely, Mr.

Amine Al Nassrawi, Mr. Wassim Al Hakim, Ms. Sara Al Hakim, Ms. Sukaina, Al

Nassrawi, Ms. Roueida Maamoun, Ms. Georgina Ibrahim, Ms. Maya Khateeb, Ms.

Razan Ladki, Ms. Dalia Baltaji, Dr. Yara Abdallah, Dr. Rola Chami, and finally Dr.

Esther Sleilati who also provided help and support in different areas of the research. I

would also like to deeply thank Ms. Arabia Osseiran, Head of the American

University of Beirut (AUB) Alumni Office and Dr. John McGill, Dr. Ketty

Sarouphime, and the Committee of Human Research Subjects at the Lebanese

American University (LAU) for their remarkable assistance in disseminating the

questionnaire. For that, I thank them all.

I would also like to extend my deepest gratitude to Rafik Hariri Foundation and Mr.

Mustapha Zaatari for their priceless and invaluable support, without which,

accomplishing this milestone would have been impossible. Moreover, I would like to

thank Mr. Piere Khoury, Chairperson at the Hariri Canadian University, for his

encouragement and advice to pursue the DBA.

My lovely family, to which I dedicate this piece of work, has bared a lot and for that I

express my apologies and great thankfulness for all what they have done for me. To

start with, my mother Bassima Baltaji for her heartfelt compassion, my father Dr.

Toufic Al Hakim for his encouragement, my brother Wassim Al Hakim for his

support and technical advice, and my sister Sara Al Hakim for being there when I

really needed her.

My greatest gratitude goes to my dearest and lovable husband and best friend, Amine

Al Nassrawi for no words can really express how grateful I am to what he has done to

help me achieve my goal. His genuine devotion, support, and encouragement go way

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back to the day he motivated me to commit to a doctoral program. His love, affection,

devotion, compassion, and care were the major drivers that kept me right on track to

complete my dissertation. For that, I greatly thank him and dedicate my DBA to him.

Finally, I cannot but thank my sweet and adorable 4-year old daughter, Dunia, who

has helped me in her own special way. Just the sight or thought of her were enough

incentives to work hard, persevere, and achieve a higher degree, perhaps that would

make her proud of me one day. For that, I affectionately thank her and promise to

make up for any time spent away from her.

Thank you!

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TABLE OF CONTENTS

ABSTRACT ................................................................................................................... 3

ACKNOWLEDGEMENTS ........................................................................................... 5

TABLE OF CONTENTS ............................................................................................... 8

LIST OF FIGURES .................................................................................................. 12

LIST OF TABLES ....................................................................................................... 13

GENERAL INTRODUCTION .................................................................................... 16

INTRODUCTION .................................................................................................... 16

BACKGROUND AND SIGNIFICANCE OF THE RESEARCH ............................. 20

OBJECTIVES, SCOPE, AND RELEVANCE OF THE RESEARCH ....................... 31

EXPECTED CONTRIBUTIONS OF THE RESEARCH .......................................... 34

Theoretical Implications ....................................................................................... 34

Managerial Implications ....................................................................................... 35

ORGANIZATION OF THE RESEARCH ................................................................ 36

PART 1: LITERATURE REVIEW ............................................................................. 39

Introduction .................................................................................................................. 39

CHAPTER 1: SERVICES - A FOCUS ON THE BANKING SECTOR .................... 43

1.1 CHARACTERISTICS OF SERVICES ............................................................... 45

1.2 CLASSIFICATION OF SERVICES ................................................................... 48

1.3 BANKING SERVICES ...................................................................................... 51

1.3.1 RETAIL BANKING SERVICES IN LEBANON ...................................... 54

1.4 CONCLUSIONS AND IMPLICATIONS FOR THE RESEARCH QUESTIONS

................................................................................................................................. 59

CHAPTER 2: CUSTOMER SATISFACTION ........................................................... 62

2.1 DEFINITION OF CUSTOMER SATISFACTION ............................................. 63

2.1.1 APPROACHES TO COMPARISON STANDARDS IN THE

DISCONFIRMATION CONSTRUCT OF CUSTOMER SATISFACTION ...... 66

2.2 TYPES OF CUSTOMER SATISFACTION ....................................................... 75

2.2.1 SATISFACTION AS A COGNITIVE CONCEPT ..................................... 75

2.2.2 SATISFACTION AS AN AFFECTIVE CONCEPT .................................. 76

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2.2.3 SATISFACTION AS A COMBINATION OF COGNITIVE AND

AFFECTIVE CONCEPTS ................................................................................... 79

2.2.4 CUMULATIVE SATISFACTION ............................................................. 80

2.2.4.1 ANTECEDENTS OF CUMULATIVE SATISFACTION .................. 85

2.2.4.2 CONSEQUENCES OF CUMULATIVE SATISFACTION

(CUSTOMER COMPLAINTS AND LOYALTY) ......................................... 88

2.2.5 TRANSACTIONAL SATISFACTION ...................................................... 90

2.2.5.1 ANTECEDENTS OF TRANSACTIONAL CUSTOMER

SATISFACTION ............................................................................................. 91

2.3 CONCLUSIONS AND IMPLICATIONS FOR THE RESEARCH QUESTION 95

CHAPTER 3: SERVICE QUALITY ........................................................................... 96

3.1 DEFINITION OF SERVICE QUALITY .......................................................... 100

3.2 SERVICE QUALITY MODELS ...................................................................... 104

3.2.1 SERVQUAL: DIMENSIONS, APPLICATIONS, AND LIMITATIONS109

3.2.2 SERVPERF ............................................................................................... 118

3.3 CONCLUSIONS AND IMPLICATIONS FOR THE RESEARCH QUESTION

............................................................................................................................... 122

CHAPTER 4: BANK REPUTATION THE PROPOSED DIMENSION OF

SERVICE QUALITY ................................................................................................ 125

4.1 DEFINITION OF REPUTATION .................................................................... 126

4.2 REPUTATION VERSUS IMAGE AND IDENTITY ....................................... 134

4.3 RELATIONSHIPS BETWEEN REPUTATION AND OTHER CONSTRUCTS

............................................................................................................................... 137

4.4 MEASURING REPUTATION ......................................................................... 141

4.5 CONCLUSIONS AND IMPLICATIONS FOR THE RESEARCH QUESTION

............................................................................................................................... 143

CHAPTER 5: OTHER FACTORS INFLUENCING SERVICE QUALITY AND

CUSTOMER SATISFACTION ................................................................................ 146

5.1 GENDER ......................................................................................................... 147

5.2 PERCEIVED PAYMENT EQUITY ................................................................. 155

5.3 CONCLUSIONS AND IMPLICATIONS FOR THE RESEARCH QUESTION

............................................................................................................................... 159

CONCLUSION OF PART 1: LITERATURE REVIEW .......................................... 161

PART 2: RESEARCH HYPOTHESES, METHODOLOGY, MEASURES, AND

RESULTS .................................................................................................................. 163

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INTRODUCTION ..................................................................................................... 163

CHAPTER 6: RESEARCH HYPOTHESES ............................................................. 167

6.1 DESIGN OF THE RESEARCH MODEL ......................................................... 167

6.2 RESEARCH HYPOTHESES ........................................................................... 170

6.2.1 Bank Reputation An additional Dimension Explaining Perceived Service

Quality and its Impact on Customer Satisfaction (H1 H2) .............................. 170

6.2.2 Impact of Perceived Service Quality on Customer Satisfaction with the

Bank .................................................................................................................... 173

6.2.3 Gender Differences in Overall Perceived Service Quality and Customer

Satisfaction Ratings ............................................................................................ 174

6.2.4 The Moderating Role of Perceived payment equity on the Relationship

between Perceived Service Quality and Customer Satisfaction (H4) ................ 176

6.3 CONCLUSIONS ON THE RESEARCH HYPOTHESES ................................ 178

CHAPTER 7: METHODOLOGY, MEASURES, AND RESULTS ......................... 180

7.1 CHARACTERISTICS OF THE DESCRIPTIVE STUDY ................................ 180

7.2 CHARACTERISTICS OF THE EMPIRICAL STUDY .................................... 180

7.2.1 Components of Perceived Service Quality ................................................ 181

7.2.2 Research Hypotheses ................................................................................. 182

7.2.2.1 The Quantitative Study ...................................................................... 183

7.3 SCALE DEVELOPMENT AND VALIDATION ............................................. 188

7.3.1 METHODOLOGY FOR THE DEVELOPMENT OF SCALES .............. 188

7.3.1.1 Questionnaire Design ......................................................................... 188

7.3.1.2 The Specification of the Domain of Construct .................................. 189

7.3.1.3 Customer Satisfaction Scale .............................................................. 189

7.3.1.4 Overall Service Quality and Service Quality Dimensions Scales ..... 190

7.3.1.5 Bank Reputation Scale ....................................................................... 190

7.3.1.6 Perceived Payment Equity Scale ....................................................... 191

7.3.2 PILOT TESTING ...................................................................................... 191

7.4 TESTING THE FINAL MODEL...................................................................... 203

7.4.1 SAMPLING AND POPULATION ........................................................... 204

7.4.2 DATA COLLECTION .............................................................................. 204

7.4.2.1 Ethical Considerations in Data Collection ......................................... 206

7.4.3 BASIC SAMPLE DESCRIPTION ............................................................ 211

7.4.4 FINAL SCALE DEVELOPMENT AND VALIDATION ........................ 214

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7.4.4.1 The Purification of Measure .............................................................. 214

7.4.4.2 The Assessment of Reliability ........................................................... 224

7.4.4.3 The Assessment of Validity ............................................................... 230

7.4.5 TESTING OF HYPOTHESES AND RESEARCH RESULTS ................ 233

7.4.5.1 Statistical Methodology: Multiple Regression Model ....................... 233

7.4.5.2 Statistical Methodology: Correlation ................................................. 241

7.4.5.3 Statistical Methodology: Independent-samples t-test ........................ 242

7.4.5.4 Validation of the Hypotheses ............................................................. 243

7.4.5.5 Validation of the Moderating Role of Perceived Payment Equity .... 255

7.5 DISCUSSION OF THE MEASURE AND RESULTS ...................................... 258

CONCLUSION OF PART 2: RESEARCH HYPOTHESES, MEASURES, AND

RESULTS .................................................................................................................. 269

GENERAL CONCLUSION ...................................................................................... 271

CONTRIBUTION OF THE RESEARCH ................................................................. 273

Theoretical Contribution ......................................................................................... 273

Managerial Contribution......................................................................................... 276

LIMITATIONS OF THE RESEARCH ..................................................................... 287

IMPLICATIONS FOR FUTURE RESEARCH ........................................................ 292

REFERENCES .......................................................................................................... 299

APPENDICES ........................................................................................................... 334

APPENDIX A: LIST OF COMMERCIAL BANKS CLASSIFIED BY ABL .. 334

APPENDIX B: CUSTOMER SATISFACTION IN EXISTING LITERATURE

............................................................................................................................ 335

APPENDIX C: MEASURING SCALES ........................................................... 344

APPENDIX D: QUESTIONNAIRE PILOT STUDY STAGE ....................... 346

APPENDIX E: QUESTIONNAIRE DATA COLLECTION STAGE............ 351

APPENDIX F: RESULTS OF THE KMO AND BARTLETTS TESTS ......... 357

APPENDIX G: LBSQAT QUESTIONNAIRE NEW TOOL TO MEASURE

SERVICE QUALITY AND CUSTOMER SATISFACTION WITH BANKS IN

LEBANON ......................................................................................................... 358

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LIST OF FIGURES

Figure 1: Organization of PART 1 Literature Review ............................................. 41

Figure 2: Geographic Distribution of Commercial Banks in Lebanon end 2010 (ABL,

2011: 216) ............................................................................................................ 57

Figure 3: Expectancy Disconfirmation Paradigm (Adapted from Oliver, 1980; Oliver,

2010) .................................................................................................................... 68

Figure 4: The American Customer Satisfaction Index (ACSI) Model (Fornell et al.,

1996:8) ................................................................................................................. 85

Figure 5: The Service Profit Chain (Heskett et al., 1994:120) .................................... 98

Figure 6: The Gaps Model of Service Quality (Parasuraman et al., 1985: 44) .......... 110

Figure 7: Organization of Part 2, Research Hypotheses, Methodology, Measures, and Results .............................................................................................................. 166

Figure 8: The Research Model ................................................................................... 168

Figure 9: Research Model and the Research Hypotheses .......................................... 178

Figure 10: The 6 Factorized Reliable Dimensions of Perceived Service Quality ..... 230

Figure 11: Normality Probability Plot Overall Service Quality as the Dependent Variable .............................................................................................................. 237

Figure 12: Scatterplot Overall Service Quality as the Dependent Variable ........... 237

Figure 13: Normality Probability Plot Customer Satisfaction as the Dependent Variable .............................................................................................................. 251

Figure 14: Scatterplot Customer Satisfaction as the Dependent Variable .............. 251

Figure 15: Comparison of Service Quality Dimensions Proposed Versus Actual . 259

Figure 16: The New Verified Research Results ........................................................ 261

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LIST OF TABLES

Table 1: Top 10 Banks by Assets as at 31/12/2010 (Bank Audi sal Audi Saradar Group, 2010) ........................................................................................................ 56

Table 2: Facts and Figures Lebanon 2010 (Bank Audi sal Audi Saradar Group, 2010) .................................................................................................................... 56

Table 3: Components of Customer Satisfaction (adopted from Fornell, 1992) ........... 66

Table 4: IZARDs (1977) Affective Experience Taxonomy (Westbrook, 1987: 259) 77

Table 5: Summary Criticisms of Selected Research Adopting SERVQUAL ........... 117

Table 6: Summary Criticisms from Selected Research Adopting SERVPERF ........ 121

Table 7: Reputation Definitions and Categorizations ................................................ 132

Table 8: Differentiating Matrix: Corporate Identity, Corporate Image, and Corporate

Reputation (Adapted from Walker (2010:367). ................................................. 137

Table 9: Sub Research Questions and the Means to Answering Them ..................... 165

Table 10: Summary of the Research Hypotheses ...................................................... 179

Table 11: Item-Total Statistics for the Tangibility Dimension .................................. 195

Table 12: Item-Total Statistics for the Reliability Dimension ................................... 197

Table 13: Item-Total Statistics for the Responsiveness Dimension .......................... 198

Table 14: Item-Total Statistics for the Assurance Dimension ................................... 199

Table 15: Item-Total Statistics for the Empathy Dimension ..................................... 200

Table 16: Item-Total Statistics for Customer Satisfaction ......................................... 201

Table 17: Original and Modified PPE Scale Items .................................................... 202

Table 18: Item-Total Statistics for Bank Reputation ................................................. 202

Table 19: Gender Distribution of the Lebanese Population 2010 (UNDESA, 2010) ............................................................................................................................ 204

Table 20: Age Distribution of Sample ....................................................................... 212

Table 21: Duration with Bank (years) ....................................................................... 213

Table 22: Frequency of Bank Visits .......................................................................... 213

Table 23: Results of Eigenvalues Test for Service Quality Scale Values Greater than 1.0 ....................................................................................................................... 217

Table 24: Results of Eigenvalues Test for the Customer Satisfaction Scale ............. 217

Table 25: Results of Eigenvalues Test for Perceived Payment Equity Scale ............ 218

Table 26: Results of Eigenvalues Test for Bank Reputation Scale ........................... 219

Table 27: Communalities of the perceived service quality scale ............................... 220

Table 28: Communalities of the Customer satisfaction Scale ................................... 221

Table 29: Communalities of the Perceived Payment Equity Scale............................ 221

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Table 30: Communalities of Bank Reputation Scale ................................................. 221

Table 31: Oblimin Rotation for 5 Components after Removing Items with

Communalities < 0.4 (P7, P16) .......................................................................... 223

Table 32: Component 1 Reliability Statistics Reliability Dimension ..................... 225

Table 33: Component 1 Item-Total Statistics Reliability Dimension ..................... 225

Table 34: Component 2 Reliability Statistics Empathy Dimension ....................... 226

Table 35: Component 2 Item-Total Statistics Empathy Dimension ....................... 226

Table 36: Component 3 Reliability Statistics Online Banking Effectiveness Dimension .......................................................................................................... 227

Table 37: Component 3 Item-Total Statistics Online Banking Effectiveness Dimension .......................................................................................................... 227

Table 38: Component 4 Reliability Statistics Tangibility Dimension .................... 228

Table 39: Component 4 Item-Total Statistics Tangibility Dimension .................... 228

Table 40: Component 5 Reliability Statistics ATM Effectiveness Dimension ...... 229

Table 41: Component 5 Item-Total Statistics ATM Effectiveness Dimension ...... 229

Table 42: Correlations Results .................................................................................. 235

Table 43: Coefficients for the 6 Factorized Dimensions ........................................... 236

Table 44: R Square Evaluating the Model .............................................................. 238

Table 45: ANOVA Evaluating the Model .............................................................. 238

Table 46: Coefficients Evaluating Each of the Independent Variables .................. 241

Table 47: Correlations between Reputation and Perceived Service Quality ............. 244

Table 48: Correlations Bank Reputation and Customer Satisfaction ..................... 246

Table 49: R Square Reputation and Customer Satisfaction .................................... 246

Table 50: Coefficients Reputation and Customer Satisfaction ............................... 246

Table 51: Correlations Perceived Service Quality and Customer Satisfaction....... 247

Table 52: Correlations - The 6 Factorized Dimensions and Customer Satisfaction .. 248

Table 53: R Square The 6 Factorized Dimensions and Customer Satisfaction ...... 248

Table 54: ANOVA The 6 Factorized Dimensions and Customer Satisfaction ...... 249

Table 55: Coefficients The 6 Factorized Dimensions and Customer Satisfaction . 250

Table 56: Overall Perceived Service Quality Means for Males and Females ........... 252

Table 57: Independent-samples t-test Results for Gender and OSQ ......................... 252

Table 58: Customer Satisfaction Means for Males and Females ............................... 254

Table 59: Independent-samples t-test Results for Gender and CS ............................ 254

Table 60: R Square Moderating Effect of PPE ....................................................... 256

Table 61: ANOVA - Moderating Effect of PPE256

Table 62: Change Statistics - Moderating Effect of PPE...257

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Table 63: Coefficients Moderating Effect of PPE .................................................. 257

Table 64: Regression results of Perceived Payment Equity moderating the relationship

between Perceived Service Quality and Customer Satisfaction (H6) .............. 2588

Table 65: Dimensions of Service Quality across Difference Contextual Studies ..... 259

Table 66: Summary of Hypotheses Testing Results .................................................. 260

Table 67: Top 10 Banks by Assets as at 31/12/2010 (Bank Audi Audi Saradar Group, 2010) ...................................................................................................... 263

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GENERAL INTRODUCTION

This research project is conducted to investigate perceived service quality and

customer satisfaction in Lebanon in general and in the retail banking industry in

specific. For that, the relevance of this project is discussed linking the importance of

uncovering such findings to world-wide trends such as an increased focus on

customer service and customer-oriented marketing. The significance of the study in

Lebanon is also discussed taking into consideration the Lebanese culture in addition

to the Lebanese societys composition and values. Therefore, the framework of this

research project and its theoretical and practical relevance are hereafter presented.

Moreover, the distribution of sections of this dissertation is underlined to conclude

with a logical guideline of the document for the reader to easily navigate through the

subjects.

INTRODUCTION

The world around us is not only changing but also evolving rapidly; no one disagrees

about that. World changes are also reflected in world markets and thus affect the way

businesses are conducted, products and services are produced and delivered, and

customer relationships are built and managed. The major change that cannot be

ignored is globalization. Globalization is defined as the intensification of world-wide

social relations which link distant localities in such a way that local happenings are

shaped by events occurring many miles away and vice versa (Giddens, 1990: 64). To

strive in a market characterized by globalization, strong and ruthless competition, and

fast technological advancements, companies need to be more customer-focused to

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survive, let alone to lead. Trends that accompany the 21st century's business markets

include rapid globalization, a call for more ethics and social responsibility, increased

diversity, a focus on and demand for quality, competition and of course digitalization

(Schermerhorn, 2008; Kotler & Armstrong, 2010). Technology is one of the major

macro-environmental factors that affect today's businesses (Armstrong & Kotler,

2011) in terms of what they provide, how they provide it, and what the customer

really wants. Political and economic instabilities also affect businesses' need to secure

their position and ensure sustainability. Not to forget the influence of changing

demographics of the market place, the evolving customer needs, and the necessity to

comply with the different cultures of the various markets.

Great variations are accompanying the economic changes where the main

characteristics of the past economy were mass production and mass consumption of

products; while the current economy depends on producing and consuming goods and

services that are more differentiated (Fornell et al., 1996). There is substantial support

in the literature reviewed for both market share and customer satisfaction to be

leading to profitability although there is no certainty that these two are related

positively but more likely to be related negatively (Fornell, 1992); this means that

poor satisfaction is associated with poor profitability.

Generally speaking, customers occupy a great share of consideration in business

strategies. Business strategies constitute offensive and defensive strategies where the

objective of offensive strategies is to acquire new customers or to capture market

share, and the objective of defensive strategies is to maintain current customers and

avoid losing them to the competition by creating customer satisfaction (Fornell &

Wernerfelt 1987, 1988 and Fornell, 1992). These strategies are used when there is no

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hope for the company to grow except by snatching business from rivals due to slow

growth and saturated markets (Fornell, 1992). Therefore, customer needs and causes

for satisfaction should not be ignored when designing business strategies.

To protect ones market share, markets, and products, companies aim to have

customers who are highly satisfied as a form of defensive strategy to minimize the

number of customers exiting or switching to competitors (Fornell & Wernerfelt, 1987;

1988; Fornell, 1992). Such strategies seek customer turnover reduction and customer

retention maximization (Fornell & Wernerfelt, 1987, 1988) in two ways: increasing

switching barriers and increasing customer satisfaction (Fornell, 1992). Given the

slowly growing markets that are characterized by intense competitiveness, defensive

strategies are necessary since some companies try to grow by capturing market share

from others. So companies with no strong defense; that is, defensive strategy, will

eventually be the primary losers of market share (Fornell, 1992).

Not all industries are affected in the same way by customer satisfaction in terms of

loyalty and repeat purchases (Fornell, 1992). While Oliver (1997) declares that

customer satisfaction is linked to customer retention and customer loyalty, Fornell

(1992) declares that there is no proof that customer loyalty leads to satisfaction

although there is evidence that the opposite is true: satisfied customers eventually

become loyal customers (Fornell, 1992). Moreover, Lovelock & Wirtz (2011) confirm

that customer satisfaction and service quality are antecedents of customer loyalty. In

addition to customer loyalty, customer satisfaction significantly affects repeat sales

and word-of-mouth (Bearden & Teel, 1983; Anderson & Sullivan, 1993).

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The importance of achieving high levels of customer satisfaction has increased as

world markets are becoming more competitive and service industries are continuously

growing (Anderson, Fornell, & Rust, 1997). It is evident that the role that service

industries play in contributing to the whole economy, in almost all economies, is

significant (Ndhlovu & Senguder, 2002). Given the fierce competition among service

companies, many are attempting to find new means of differentiation in hope to be set

apart from rivals (Tam, 2000; Ndhlovu & Senguder, 2002). As a result, service

quality has emerged as the new way of differentiation, leading to the creation of a new

competitive advantage (Brown & Swartz, 1989; Ndhlovu & Senguder, 2002). The

same has been suggested in the case of banking services: differentiation and

customization of services are key success factors in competitive environments

(Mishra, 2009).

In general, quality is regarded as a competitive precedence for managers and a driver

of growth; therefore, quality improvement has become a mission for most firms

(Legcevic, 2008). With respect to services, it is obvious that one indicator of a

companys success is how its customers perceive the level of service quality, where

perceived service quality appears to be an antecedent of perceived value (Kumar, Kee,

& Manshor, 2009). With respect to banks, service quality has become a vital element

affecting profitability and market share in light of intensive competitive forces

(Anderson, Fornell, & Lehmann, 1994; Spathis, Pteridou, & Glaveli, 2004).

Outstanding service is considered to be a strategy for profit by itself, since it brings in

more customers, repeat business with current customers, fewer customers lost to

competition, high resistance to price competition, and an improved learning curve of

performing services (Berry, Parasuraman, Zeithaml, and Adsit, 1994; Lai,

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Hutchinson, Li, Bai, 2007). Hence, managing service quality and measuring it is

imperative for service firms to grow and survive (Legcevic, 2008).

Therefore, it is important for banks to understand what affects customer satisfaction,

and how to optimize service quality as a driver of customer satisfaction. Since no such

studies were conducted in Lebanon, it would be empirically significant to undergo

such an initiative and in one of the most viable sectors in Lebanon. Hence, the

background and significance of the research are put forward to focus the attention on

its nature and value.

BACKGROUND AND SIGNIFICANCE OF THE RESEARCH

This section discloses the significance of studying perceived service quality as a main

contributor of customer satisfaction in addition to the significance of choosing the

Lebanese retail banking industry as the contextual background for such an

investigation.

- The growing theoretical and managerial significance of customer

satisfaction and perceived service quality

The significance of customer satisfaction is increasingly growing for both consumer

researchers and marketers from the theoretical and managerial point-of-view (Mishra,

2009). Hundreds of studies have researched customer satisfaction in different

industries across various countries. Several research studies uncovered the different

types of satisfaction (e.g. Oliver, 1980; Vanhamme, 2002), approaches and concepts

(e.g. Westbrook & Reilly, 1983; Oliver, 1993), antecedents (e.g. Fornell et al., 1996),

and consequences (e.g. Fornell & Wernerfelt, 1987; Fornell et al., 1996). Moreover,

from the managerial point-of-view, customer satisfaction has become a strategic goal

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for most corporations (Mishra, 2009). In a nutshell, customer satisfaction is

fundamental to the well-being of individual consumers, to the profits of firms

supported through purchasing and patronization, and to the stability of economic and

political structures (Oliver, 2010: 4).

As for service quality, it is becoming an increasingly serious and important concern

across all service industries and as a major means for creating and sustaining a

competitive advantage in the market (Marla, 1996). Once again, numerous studies

were conducted on service quality in different industries such as banking, general

retailing, telecommunications, and utilities. Moreover, service quality was

investigated across various countries; to name a few: USA, India, UK, UAE, China,

Malaysia, Cyprus, South Korea, and Bangladesh. Several studies concluded with

service quality models and presented them as instruments to measure service quality,

such as SERVQUAL (Parasuraman, Berry, and Zeithaml, 1988) and SERVPERF

(Cronin & Taylor, 1992). Theoretically, service quality was confirmed as a major

antecedent of customer satisfaction in several research studies such as that of

Woodside, Frey, and Daly (1989), Cronin and Taylor (1992), Oliver (1993), Spreng

and MacKoy (1996), and Lee, Lee, and Yoo (2000). Managerially, service quality is

becoming a major component integrated into firms competitive strategies (Newman,

2001). Legcevic (2008) asserted that for organizations to effectively and efficiently

deal with the areas that contribute to their competitive advantage, they need to be

knowledgeable about perceived service quality in terms of its constituencies and

foundation. More importantly, it has been suggested that service firms who

experienced poor performance did not know their customers well in terms of their

expectations of service quality (Zeithaml, Berry, and Parasuraman, 1993).

22

- The need for investigating customer satisfaction and perceived service

quality in Lebanon

Among the hundreds of studies that investigated service quality or customer

satisfaction, none were conducted in Lebanon. Since Lebanon is a country that

primarily depends on services in its economic composition, then there is a definite

need to explore the nature of perceived service quality and customer satisfaction.

Moreover, being a Lebanese who has witnessed a fluctuation in the level of service

delivery in Lebanon, this triggered the interest in such a scrutiny.

Since the study is conducted in Lebanon, a brief description of the economic and

cultural background of the country should be exemplified. The following subsection

presents a brief economic and cultural overview of Lebanon which will give

contextual meaning to the designed model, proposed hypotheses, uncovered findings,

respective recommendations, and managerial contributions.

Lebanon: An Economic and Cultural Overview

To begin with, Lebanon is an Asian, Middle Eastern, and Arab country located at the

Mediterranean with a surface of 10,452 km2. Its population is about 4.2 million,

according to the World Populations Prospect report of the United Nations Department

of Economic and Social Affairs, UNDESA (2010). The Lebanese population is

considered youthful in general where the average age is 28 years (Zbib, Wooldbridge,

Ahmed, & Benlian, 2010). Moreover, approximately 51% of the total population is

less than 30 years of age (UNDESA, 2010). In 2011, the overall median age was 29.8

years (28.7 years for males versus 31 years for females) and life expectancy for the

total population was 75.23 years (73.67 years for males versus 76.88 years for

females) (CIA World Factbook, 2011).

23

Economically, there has been a clear shift of the contribution of economic sectors

from agricultural to services between 1950 and 2005 (Maamari, 2010). While the

contributions of the agricultural and industrial sectors to national income dropped

respectively from 20% and 13% in 1950 to 5.2% and 11.65% in 2005, the

contributions of the banking sector rose from 4% to a remarkable 25.46%, the

transportation sector from 4% to 7.26%, and the construction, government, and trade

sectors each from 0% to 8.21%, 11.45%, and 23.18% respectively (Ashi & Ayache,

2002). Before the civil war that broke out in 1975, Lebanon was known as a liberal

country which is unique among the Third World. Moreover, the 30 years preceding

that war were known as the golden age of the Lebanese economy especially in the

banking and tourism industries (Khalaf, 1987; Dirani, 2006). This was due to the

governments adoption of an advanced banking system and allowing for a liberal

environment to prevail, in contrast to neighboring countries. This gave way to the

flood of money and tourists into Lebanon labeling the country as the Switzerland of

the Middle East (Hitti, 1962; Pheraon, 1993; Dirani, 2006). Additionally, the pre-war

stage was prosperous where Lebanon witnessed high rankings of the human

development index (HDI), life expectancy, per capita income, and educational

attainment (Economic and Social Commission for Western Asia (ESCWA), 2001;

Dirani, 2006). In the post-war stage, mainly until the year 1990, the political and

economic impact of the war was devastatingly huge where the business sector, for

example, bore the greatest share of the damage especially in the services and tourism

industries (Dirani, 2006). The most noticeable events that affected the business sector

were the drastic fall of the Lira, the Lebanese currency, from 2.50 LL to 1500 LL

for every 1 USD, and the vanishing of the international confidence in the country. As

of the 1990s, the country witnessed great political, social, and economic challenges

24

especially that its different economic sectors had no competitive advantage (Dirani,

2006).

For the past ten years, the economy has seen great improvements in different areas.

The banking sector became the major source for Lebanons gross domestic product

contributing to around 25% of GDP (Ashi & Ayache, 2002; Maamari, 2010) and

income (Association of Banks in Lebanon-ABL, 2000; Dirani, 2006). Moreover, in

terms of human development, Lebanon has the highest ranking compared to the Arab

countries with no large oil revenues (Dirani, 2006) while in general, Arab societies

witnessed medium levels of HDI representing quality of life, education levels, and life

expectancy (Kabaskal & Bodur, 2002; Dirani, 2006). Education is recognized as a

main driver for manpower training required for the Lebanese infrastructures

development and management, and has received high attention by investors (Dirani,

2006). The education in Lebanon is greatly influenced by the Western-style education

of Latin and Anglo-Saxon institutions, which gained the recipients of Lebanese

education higher prestige and enhanced earning power (Barakat, 1993; Dirani, 2006).

Compared to the needs of the local market, the Lebanese labor force is rated as

overeducated which has led, along with the economic recession, to the emigration of

an average of 7,500 young people on a monthly basis (Hamdan, 1999; Dirani, 2006).

Despite the fact that the educational system in Lebanon is rendered as the most

advanced among Arab countries, it is also considered the most advanced in terms of

gender equality, where female enrolment has surpassed that of males at the school

level (Dirani, 2006). Nevertheless, despite the advanced educational system in

Lebanon, research is dreadful. Only 500 papers were published in refereed

international journals between 1990 and 1995 compared to 743 papers published

between 1970 and 1975 (Dirani, 2006). Between 1992 and 2002, only 18 empirical

25

scientific studies were published as manuscripts in refereed publications (BouJaoude

& Abd-El-Khalick, 2004; Dirani, 2006). The lack of research in Lebanon has led to

the shortage of reliable data; thus, it would be hard to design an efficient economic

and social strategy since the needs of people are not properly assessed (Dirani, 2006).

As for Lebanons strategy of openness to technology and globalization, its effect is

greatly noticed and reflects its ability and potential to play the role of an intermediary

between the region and the global economy thus develop into a major participant in

international networking (Dirani, 2006).

With respect to Lebanons culture, very few studies have been published to depict it.

In several studies about culture, Lebanon was included among other Arab or Middle-

Eastern countries. The fact that 95% of the Lebanese population belongs to the Arab

ethnicity (CIA World Factbook, 2011) could be the reason behind not separating the

Lebanese culture from that of other Arab countries. Despite the commonalities

between Lebanon and other Arab countries, such as the Arabic language, huge

differences exist in national culture, development level, education level, and legal-

political systems (Harnish, 2003; Dirani, 2006). Lebanon is especially different from

its surrounding due to the great influence of the West for the past half a century

(Dirani, 2006). Yet, the Global Leadership and Organizational Behavior Effectiveness

(GLOBE) study showed that Arab countries in general experience societal practices

with high scores of power distance and group and family collectivism, medium scores

of uncertainty avoidance, humane orientation, assertiveness, and performance

orientation, low scores of future orientation, and gender egalitarianism (Kabaskal &

Bodur, 2002; Dirani, 2006). Similar results were found by Hofstedes (1984) study

that provided an international comparison on work-related values where large power

26

distance and uncertainty avoidance appeared to be the main dimensions of national

culture implying that both obedience to authority and control are reflected in the

Lebanese culture (Dirani, 2006). Jabbras (1989) study on Lebanon revealed that in

the Lebanese society great emphasis is placed on social conformity versus innovation

and creativity. Moreover, Lebanon like other Middle-Eastern countries shares the

value of subordination of the individual to group values where the individual, in Arab

thinking, is viewed as subservient to the group, and where his or her distinction is

usually subordinated to the enhancement of the relevant group (Shihadeh, 1963).

Group solidarity and primarily allegiance to the family and secondarily to ones

religious group, is inculcated into the individual beginning with early childhood

(Shihadeh, 1963: 4). Furthermore, the Lebanese culture is characterized by a

patriarchal nature in such a way that the family resembles the most significant social

structure (Sharabi, 1988) or institution (Khalaf, 1987; Super, 1988) and individuals

submit to the father, the head of the family, thus relinquishing their independence

(Sharabi, 1988; Dirani, 2006). In fact, Lebanon like all Middle Eastern cultures shares

this commonality where the family value system is at the center, and where the father

prevails as the unquestionable head of the family who is greatly respected that even

his grown up and married sons submit to his authority (Shihadeh, 1963:3). Unlike

Americans, Lebanese remain dependent on their family and find it very difficult to

leave it (Dirani, 2006). Although Lebanese individuals are open to new ideas and

inclined to challenge traditions and social values, as indicated by Jabbra (1989) and

Sharabi (1988), they remain under the influence of the family towards which their

loyalty persists to be stronger than towards their work, organization, or even their

nation (Dirani, 2006). According to Shihadeh (1963), in Lebanon like in other Middle

Eastern countries, age has a high value standing and is considered an asset to the

27

individual. As for women, the Lebanese culture supports their active role in society

(Dirani, 2006). Lebanon has witnessed significant changes in its demographic

composition which led to changes in family structures, gender roles, and working

patterns (Sugita, 2008; Sidani & Al Hakim, 2012) where Lebanese women are

expected to attend to their home and share the burden of financially supporting their

families (Sidani & Al Hakim, 2012). They are given wider opportunities to build

careers, hold professional positions in traditional and nontraditional jobs, hold public

offices, and engage in social and political activities in the government; all of which

contributes to the significant advancement in Lebanese society (Dirani, 2006).

With respect to the nature of consumers in Lebanon, it was asserted by Rawwas,

Vitell, and Al-Khatib (1994) in a comparative study between Lebanon and Egypt, that

they tend to be more Machiavellian, less idealistic, and more relativistic than the

Egyptians. Lebanese consumers exhibit more tendencies to accept doubtful consumer

practices; this is attributed to the war that ripped the country and made way for such

behavior (Rawwas et al., 1994; Ford, Nonis, & Hudson, 2005). In a study by Ford et

al. (2005) that compares Middle Eastern consumers to US consumers, the results

reveal a high mean for the social value of Middle Eastern consumers which

demonstrates their group orientation and indicates the degree to which social and

group interactions receive great emphasis in the Middle East. Usually in cultures that

are group-oriented, social interactions exhibit unselfish behaviors (Ford et al., 2005).

Based on Hofstede (1980), high values for the social dimension is crucial in such

cultures and what people think of the individual is imperative to be accepted in the

group (Ford et al., 2005). Therefore, the reputation of the individual can be critical in

the Lebanese society. Furthermore, Lebanese consumers are described by Rawwas

(2001) as followers since they care about the common welfare, protect the interests

28

of their members, expect respect and loyalty in return, follow rules, and do what is

right and beneficial for the society. In cultures that value formalities, rules, and

standards, the need for well-defined policies and procedures when customers deal

with an organization becomes necessary. This increases their comfort and decreases

uncertainty, since they will know what the organization they deal with expects from

them (Ford et al., 2005). This can be implemented by organizations making their

policies, procedures, and guarantees of quality and customer satisfaction public by

different means, especially when interactions with customers take place (Rawwas,

2001; Ford et al., 2005). Rawwas (2001) also describes Lebanese as absolutists who

stress on the importance of cooperation, security, and affiliation. In this sense, human

relations are affected by paternalism, titles, thrift, cordiality, and ultimate respect for

seniority (Ford et al., 2005: 43). When cultures value absolutism rather than

utilitarianism, more emphasis is placed on trust and idealism such that it would be

unacceptable if an individual is harmed in a transaction (Ford et al., 2005). Therefore,

organizational success can be achieved if trustworthiness is exhibited by honoring

ones word and or any commitment made to customers, and sincerely responding to

customer complaints with complete honesty. In such idealistic cultures, customers

value well-made products and truthful messages where a one-time transaction can

build relationships based on trust and encourage loyalty (Ford et al., 2005). Finally,

with respect to the value for power, Middle Eastern consumers score high on the

political value dimension shedding light on the significance of power and influence in

such cultures. In Lebanon, who an individual knows is more important to the group

than how he or she get things done (Ford et al., 2005).

29

- The importance of studying perceived service quality and customer

satisfaction in the retail banking industry

The significance of selecting retail banking as the premises to investigate perceived

service quality and customer satisfaction is two-fold. The first reason is general and

relates to the nature of the banking industry and type of services provided. The second

is specific and relates to the significant contribution of the banking industry to the

overall Lebanese economy and the non-existence of such a study in Lebanon.

Generally speaking, the banking industry has witnessed a remarkable shift since the

1990s where profits peaked, retail services were revolutionized with the rise of

electronic technology, mergers among major banks were made, and securitization

appeared as a main source of funding (Rhoades, 2000). Due to liberalization,

deregulation, and advances in information technology, all financial sectors have

experienced radical transformation (Boot & Marinc, 2008: 1173). In general, banking

all around the world has become fiercely competitive (Stiroh & Strahan, 2003).

Additionally the competitive pressures facing the global market environment have

triggered banks to focus on service quality (Angur, Nataraajan, & Jahera, 1999;

Kumar et al., 2009; Karatepe, 2011). Retail banking has received a large portion of

attention by service quality researchers recently (Siddiqi, 2011). It is now evident for

banks that providing quality services is the key to survival and success in such a

competitive environment (Wang, Lo, and Hui, 2003; Arasli, Mehtap-Smadi, and

Katircioglu, 2005b); and the essence of that success is customer satisfaction (Siddiqi,

2011). Smart bank managers now know that high levels of service quality are directly

related to positive results related to reduced number of complaining customers,

increased levels of customer satisfaction, loyalty, retention, and willingness to spread

30

positive word-of-mouth (Angur et al., 1999; Karatepe, 2011). Attention is directed

today to service quality as a means for competing in the banking environment mainly

because banks offer undifferentiated products (Marla, 1996) and because todays

customers, who are more educated, are increasingly demanding superior quality of

bank services (Karatepe, 2011). Obviously, the bargaining power has shifted from

banks to customers.

As for the banking industry in Lebanon, its marked significance in the economy and

the changes it has witnessed are no different than in any other country. As per ABL

(2011), the Lebanese banking industry has proved to be healthy and stable and

characterized by openness, high resilience to financial crises, competence of its

human resources, innovative services in addition to the traditional ones, compliance

with international standards, and ability to satisfy the financing needs of the local

economy. The main reasons behind selecting the banking industry among other

industries to investigate the relationship between perceived service quality and

customer satisfaction is that banks, in general, play a significant role in influencing

the economic system of any country (Naeem, Akram, & Saif, 2009) and that it is one

of the largest industries in Lebanon, and is considered one of the major foundations of

the Lebanese economy (ABL, 2011). Further discussion about the Lebanese banking

industry will be presented later in this document.

Now that the background of the research has been exhibited in details, the objectives,

scope, and relevance of the research are depicted hereafter leading to the presentation

of the organization of the research.

31

OBJECTIVES, SCOPE, AND RELEVANCE OF THE RESEARCH

This research aims to investigate the concept of service quality specifically in the

Lebanese retail banking industry to further understand the impact of different service

dimensions on perceived service quality and customer satisfaction. Thus, to accurately

answer the later proposed research question, the scope of this research was

delimitated to perceived service quality and customer satisfaction in addition to

conducting this research in a defined field and in a specific country, which is the retail

banking industry in Lebanon.

The choice to study service quality and customer satisfaction is justified as follows.

Customer satisfaction is proven by many researchers as a main reason for company

success. Customer satisfaction has been clearly related to customer loyalty, profit,

increased market share, etc. (Fornell, 1992; Anderson & Sullivan, 1993; Jones &

Sasser, 1995; Rust, Zahorik, & Keiningham, 1995; Fornell, Mithas, Morgeson, &

Krishnan, 2006).

Moreover, service quality has become an area of interest to many researchers

although not many studies have inspected the dissimilarities in consumer perceptions

regarding the various service quality dimensions (Davis, Nhat Lu, Veale, 2009). In

addition to that, the nature of the relationship between customer satisfaction and

service quality is an area in great need of additional exploration (Cronin & Taylor,

1992), especially in Lebanon where it was never researched before. Additionally, it

would be interesting to test whether the already-established scales to measure

perceived service quality and customer satisfaction can be replicated in the Lebanese

context or require changes due to cultural differences.

32

Finally, since the banking sector is one of the most active sectors in Lebanon (Ashi &

Ayache, 2002; Iskandar & Oueiss, 2002), it was chosen as the subject of the study.

Therefore, this study aims at better understanding the dimensions of service quality

that matter most to retail bank customers in Lebanon and that lead to their

satisfaction, in addition to exploring a new dimension which is bank reputation, a

moderating variable which is perceived payment equity, and gender-related

differences with respect to service quality perception.

As such, the research questions have been formulated:

What are the factors that are most important to explain customer perception of

service quality and satisfaction with the quality of Lebanese retail banking

services?

o What are the main dimensions of service quality in the Lebanese

retail banking sector?

o Is bank reputation positively related to service quality in the

Lebanese retail banking sector? Is it positively related to customer

satisfaction?

o Is service quality positively related to customer satisfaction in the

Lebanese retail banking sector?

o Do any gender-related differences exist in the perception of service

quality and customer satisfaction of Lebanese retail bank

customers?

o Does perceived payment equity moderate the relationship between

perceived service quality and customer satisfaction?

33

Therefore, to answer these questions, first, the demographic characteristics of the

retail banking services customers need to be identified, and second, the criteria and

dimensions of service quality that make these people satisfied need to be labeled and

studied via a slightly modified SERVPERF tool adapted to the Lebanese context,

which lies at the core of this research. Moreover, a new dimension, bank reputation,

will be proposed as an addition to the model due to cultural reasons applicable in the

Lebanese context. Gender will be investigated as a possible differentiator of service

quality perceptions and customer satisfaction. Finally a specific moderating factor,

perceived payment equity, will be considered to determine if the relationship between

perceived service quality and customer satisfaction is affected by customers

perception of the fairness of fees charged.

Accordingly, as the main output of this research study, a new service quality

measurement tool is presented as an instrument that can be used by managers of

Lebanese banks to assess service quality and levels of customer satisfaction for

corrective or improvement purposes. Moreover, recommendations on how to satisfy

these customers depending on the most important dimension(s) will be presented for

banks, taking gender differences into consideration.

Studying the perception of service quality in retail banking services in Lebanon will

lead to understanding the nature of bank customers in Lebanon and finding out:

- Which dimensions of service quality matter most to bank customers in

Lebanon?

- What satisfies the bank customers in Lebanon?

- What should banks do to attract more customers in Lebanon in a tempting

market?

34

- How to plan strategies to target different genders?

EXPECTED CONTRIBUTIONS OF THE RESEARCH

This research is expected to fill current gaps in the existing literature which are

identified due to realizing the following:

1- A shortage of studies that include or propose corporate reputation as a

dimension of service quality.

2- A lack of studies that propose perceived payment equity as a moderator of the

relationship between perceived service quality and customer satisfaction

3- The absence of similar studies in the Lebanese context, where none exist to

investigate service quality and customer satisfaction in the Lebanese retail

banking industry or any other Lebanese industry.

Accordingly, theoretical and managerial implications are expected and presented

hereafter.

Theoretical Implications

This research is expected to contribute to service quality and customer satisfaction

theories due to its application in a new culture, Lebanon, and a specific industry, retail

banking. Moreover, these contributions are anticipated due to incorporating new

variables into the model relating service quality to customer satisfaction: a new

dimension of service quality, bank reputation; a moderator, perceived payment equity;

and a differentiating variable, gender.

With the model proposed in this study, which is unique and not proposed before, new

findings are expected. After concluding the quantitative research conducted and data

35

analysis completed, a new series of dimensions of service quality are expected to be

uncovered, in addition to a new set of questionnaire items to measure both these

dimensions and overall perceived service quality. Finding whether bank reputation

contributes to perceived service quality or not, would also add value to the service

literature and encourage related future investigations. Additionally, the presence or

absence of a moderating effect of perceived payment equity is expected to explain the

role of perceived fairness of price or fees charged by banks in affecting customers

satisfaction based on service quality. Finally, uncovering any differentiating effect of

gender on both perceived service quality and customer satisfaction would help

conclude whether gender should be incorporated into such models or not.

Managerial Implications

Since this study is limited to the Lebanese context and to the retail banking industry,

the findings are expected to provide valuable contributions to bank managers in

Lebanon in the form of solutions to improve service quality, and thus enhance the

satisfaction of their customers. Such contributions are important in light of the highly

competitive banking industry in Lebanon, and the need for differentiation as a form of

competitive advantage.

The primary expected outcome of this research is a new tool to measure bank service

quality and customer satisfaction, applicable to Lebanon, taking cultural differences

into consideration. This tool could be valuable for bank managers to uncover any

deficiencies in their production and delivery of service quality, thus helping them

satisfy their customers. Moreover, finding what matters most to customers in Lebanon

is crucial for bank managers especially if customers in Lebanon revealed behavioral

differences regarding perception of service quality and satisfaction. This will guide

36

managers towards directing their efforts and allocating their budgets to improve in the

areas that are most important to customers, that is the identified service quality

dimensions, and shifting their attention away from areas that are unimportant to

customers. This will lead to an increased efficiency as opposed to inefficiencies in

managing bank services. Hence, specific recommendations would be proposed at the

end of this study on how to improve the identified dimensions of service quality and

advise bank managers whether to invest in reputation programs, tailor retail bank

products and services according to gender differences, or focus on customers

perception of perceived payment equity or not.

ORGANIZATION OF THE RESEARCH

Following the general introduction, this research is divided into seven chapters

organized in two parts, as explained hereafter.

PART 1: LITERATURE REVIEW

Literature review is comprised of five chapters. Chapter 1, entitled Services A

Focus on the Banking Sector presents a detailed description of services and their

nature, as opposed to tangible products, in addition to their characteristics and

different classifications. Moving from this general description, banking services are

then discussed, followed by a subsection about retail banking services in Lebanon, the

contextual setting of this study, for further specificity. The purpose of having this

chapter as part of this document, and the first, is to provide the proper background

about and framework of banking services to aid in the choice of other related

variables in the proposed model and the selection of the proper tools to measure

service quality. Chapter 2, entitled Customer Satisfaction, aims to define customer

37

satisfaction, its antecedents, and consequences since customer satisfaction will be

presented as the ultimate dependent variable in this study. Types and approaches to

measuring customer satisfaction are presented and compared to justify the choice of

the proper scale to measure it for the purpose of this study. Chapter 3, entitled

Service Quality, presents the different definitions and models of service quality in a

comparative manner leading to the choice of the most appropriate model to be

adopted in this study. Moreover, the different dimensions of service quality are

discussed for the purpose of defining the dimensions that will be studied in this

research. Chapter 4, entitled Bank Reputation The Proposed Dimension of Service

Quality, defines bank reputation and presents its relationships with other constructs,

logically leading to portraying it as a new dimension of service quality in the

Lebanese banking industry. Finally, chapter 5, titled Other Factors Influencing

Service Quality and Customer Satisfaction presents and defines Gender, as a

differentiating variable, and perceived payment equity as a moderating variable to the

relationship between service quality and customer satisfaction.

PART 2: RESEARCH HYPOTHESES, METHODOLOGY, MEASURES, AND

RESULTS

The second part of the document comprises of two chapters discussing the research

hypotheses and the methods used to collect data and analyze results. Chapter 6,

entitled Research Hypotheses, presents the research model and the subsequent

hypotheses to be studied for the first time in the Lebanese banking sector. Chapter 7

entitled Methodology, Measures, and Results, defines the characteristics of the

descriptive and the empirical parts of the study. Furthermore, the methodology is

detailed leading to the final results of both the exploratory study and hypotheses

38

testing, finally arriving to the conclusion of the research and the final tool to measure

service quality and customer satisfaction in the Lebanese banking industry.

Last but not least, the GENERAL CONCLUSION of the research is presented as an

appropriate closure for this study. Primarily, all the results attained are portrayed and

summarized. Moreover, theoretical and managerial contributions of this study are

presented in addition to the possible limitations. Accordingly, possible implications

for future research are raised as the finale of this study.

39

PART 1: LITERATURE REVIEW

Introduction

This research study is mainly concerned with what makes bank customers in Lebanon

satisfied with the service provided. Thus, the major concepts studied are customer

satisfaction, perceived service quality, and service dimensions: tangibility, reliability,

responsiveness, assurance, and empathy. Moreover, as an added value to this topic,

two variables are studied: the first is bank reputation as a new dimension of service

quality and the second is perceived payment equity in terms of its moderating impact.

Finally, gender is closely considered as a possible differentiator of perceived service

quality and customer satisfaction.

This chapter presents the different findings existing in literature based on previous

research about this topic. Despite that a lot of research has been conducted on

customer satisfaction and service quality, yet no similar study has been undertaken in

Lebanon, nor considered bank reputation as a dimension of service quality, nor

studied the moderating effect of perceived payment equity. Therefore, this part is for

the purpose of providing a general overview of existing published research related to

customer satisfaction, perceived service quality, the five main dimensions of service

quality, bank reputation, and perceived payment equity.

The literature review is organized in five chapters (see figure 1).

Since the study will be conducted in a services context, then the first chapter is

designed to define services and present their characteristics and classifications to

differentiate them from physical and tangible products. Moreover, under this chapter,

40

a section is dedicated to discussing the nature of banking service with a specific

description of the retail banking sector in Lebanon.

41

Figure 1: Organization of PART 1 Literature Review

42

Moreover, since the dependent variable, which is the main and ultimate object of the

research, is customer satisfaction, then the second chapter aims to explore the concept

of customer satisfaction which is a wide construct that has been researched

exhaustively. Thus, this chapter would present the different definitions of customer

satisfaction, its various types, and its antecedents and outcomes.

The third chapter is devoted to explore service quality and the different measures

available in the literature to evaluate service quality. Moreover, this chapter will

convey how the different dimensions of service quality explain perceived service

quality which will then be related to customer satisfaction. The main focus will be on

two models for measuring service quality: SERVQUAL and SERVPERF, where a

critical comparison between the two models will be presented to lead to the final and

justified choice of the most relevant model to be used in this specific study.

The fourth chapter presents prior findings and explanations of corporate reputation, or

bank reputation in the context of the study, as a new dimension of service quality that

explains customer satisfaction in the Lebanese retail banking sector. Arguments are

presented as to why bank reputation was selected as a new dimension.

Last but not least, the final and fifth chapter in the literature review section aims to

explore two other variables namely influencing service quality and customer

satisfaction. The first variable is gender, which is presented as a differentiating

variable in service quality perceptions and customer satisfaction. The other variable is

perceived payment equity, which is presented as a moderator of the perceived service

quality and customer satisfaction relationship. Although several existing variables can

play a moderating role, only one will be considered in this study: perceived payment

equity.

43

CHAPTER 1: SERVICES - A FOCUS ON THE BANKING SECTOR

Services are economic activities offered by one party to another. []. In

exchange for money, time, and effort, service customers expect value from

access to goods, labor, professional skills, facilities, networks, and systems;

but they do not normally take ownership of the physical elements

involved(Lovelock & Wirtz, 2011: 37).

In general, service industries are practicing a progressively more significant role in

the United States economy (Cronin & Taylor, 1992), where more attention has been

directed to services and to how to deliver them across all its sectors (Schneider,

Holcombe, & White, 1997). According to Kotler (2003), 79 percent of all employees

work in the service sector which accounts for 76 percent of the US economys GDP;

moreover, according to the OECD (Organization for Economic Co-operation and

Development), the service sector employs more than 70 percent of the people in the

European community (Arasli et al., 2005b).

The significance of services have been realized several decades ago; for instance,

Bessom and Jackson (1975) declared that services have conquered a major part of

customers lives and have become a major contributor to their lifestyle. Many

researchers agree that this sector is continuously improving and increasing in size. But

this is not just limited to the United States since services by 1992 accounted for 58

percent of the total worldwide GNP (Cronin & Taylor, 1992). Global service exports

marked an 18.1% growth to reach 3.3 trillion USD in 2007 according to the United

Nations Conference on Trade and Development (2008) while according to de Prabit

44

(2006) and World Trade Organization (2008) services exports in developed countries

contribute to more than 70% of GDP and in lower income countries between 45% and

55% of GDP (Davis et al., 2009). According to the latest statistics provided by The

WORLD FACTBOOK, services account for 63.2% of world GDP and for 79.4% of

Lebanons GDP (CIA World Factbook, 2011), which highlights the significant role

services play in the Lebanese economy. By 2014, it is expected that services will

make up 64 percent of gross world product (Armstrong & Kotler, 2011). Due to the

great importance of the services sector in a global context, it is becoming more vital

for marketers of services to unveil the best and most effective ways to market their

services internationally (Bang, Raymond, Taylor, & Moon, 2005; Davis et al., 2009).

The major requirement for success in offering best services is to understand the

essence of service, and thus services marketing is the area that should be

investigated for that purpose (Schneider et al., 1997). Before the year 1975, services

were not considered as part of the marketing field where marketing referred only to

the efforts exerted by a firm to promote packaged goods. Since then, a drastic change

occurred and the field of services marketing started to develop (Schneider et al.,

1997).

The banking industry in Lebanon is the context in which the study will be conducted.

Since the banking sector in Lebanon is one of the most powerful and solid service

sector among other sectors (ABL, 2010a), it is chosen to test the model and

hypotheses.

This chapter aims at exploring the concept of services, definitions, characteristics, and

classifications since such information is directly applicable on banking services. The

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chapter will be concluded by describing retail banking services and presenting

contextual information about retail banking in Lebanon.

1.1 CHARACTERISTICS OF SERVICES

Berry (1980) describes a service as a deed, act, or performance (Lovelock, 1983:

10). Moreover, Heizer and Render (1999) define services as: those economic

activities that typically produce an intangible product such as education,

entertainment, food and lodging, transportation, insurance, trade, government,

financial, real estate, medical repair and maintenance like occupations (Arasli et al.

2005b: 41). Shahin and Janatyan (2011: 100) define a service as an activity or series

of activities of more or less intangible nature.

It is generally accepted that services have four main characteristics that differentiate

them from goods: intangibility, inseparability, variability, and perishability

(Armstrong & Kotler, 2011). Understanding these characteristics is essential to this

study for methodological and service quality measurement purposes. The

characteristics of services along with the growing importance of this sector have

reinforced the need for higher quality of service as a major requirement to enhance

financial returns and attract new customers given the highly-competitive marketing

environment (Wang et al., 2003; Arasli et al., 2005b).

Service intangibility refers to the fact that services cannot be seen, tasted, felt,

heard, or smelled before they are bought (Armstrong & Kotler, 2011: 249). For this

reason, customers try to evaluate the quality of a service by looking at tangible

components such as the place, people, price, equipment, and communications

apparent (Armstrong & Kotler, 2011). It is worth noting that price is not included in

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the scales that measure service quality SERVQUAL and SERVPERF- which will be

discussed later in chapter 3, and this will be taken into consideration when designing

the model of the study.

Service inseparability refers to the fact that services cannot be separated from their

providers, whether the providers are people or machines (Armstrong & Kotler,

2011: 250). This means that the employee providing the service becomes part of the

service, although Lovelock and Wirtz (2011) provide examples of services whose

production and consumption are indeed separable like dry cleaning and weather

forecasting. Moreover, in most cases, the customer is also present at the time of

providing the service; therefore, the provider-customer interaction becomes important

in determining the outcome of the service (Armstrong & Kotler, 2011). A service

occurs when an interaction is established between customers and service providers

and/or the physical component of the service and/or the systems through which the

service is delivered (Shahin & Janatyan, 2011). Consequently, this provider-customer

interaction would be important to consider when evaluating the quality of the service.

Service variability refers to the fact that the quality of services depends on who

provides them as well as when, where, and how they are provided (Armstrong &

Kotler, 2011: 250). This means that the quality of a service provided is not just

determined by the company but by the service provider too; therefore, understanding

the role of service providers is crucial to understand perceptions of service quality.

Etzel, Walker, and Stanton (2007) name this characteristic heterogeneity declaring

that it is almost impossible for service organizations and individual service sellers to

standardize output. The reason is that the human factor in production and delivery

leads to a difference between each unit of the service offered.

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Service perishability refers to the fact that services cannot be stored for later sale

or use (Armstrong & Kotler, 2011: 250), although Lovelock and Wirtz (2011, 36)

argue that not all service performances are perishable like video recordings of

events and concerts! One problematic situation that accompanies this characteristic is

when demand exceeds supply (Armstrong & Kotler, 2011). This can be applied to the

banking sector when there is traffic at the counters and not enough service providers,

thus the service in that case cannot be stored for later use. In this case, banks should

think of better ways to match the service supply with the demand. For this reason,

understanding perishability of services is important in the context of this study.

In addition to services characteristics, several researchers have highlighted the two

service components: core service and relationship components. The core service is

the part of the service that we think of when we name the service (Iacobucci &

Ostrom, 1993: 258), such as the lunch served in a certain restaurant; while, the

relationship component of a service describes the interpersonal process by which the

service is delivered (ibid), such as the courteousness of the waitress, and is

considered to be vitally important during customer-service provider interactions.

Therefore, a service encounter constitutes an interactive exchange between a customer

and a service provider during which the customer experiences both components of the

service, the core and the relational (Solomon, Surprenant, Czepiel, & Gutman, 1985;

Crosby & Stephens, 1987; Surprenant & Solomon, 1987; Swartz & Brown, 1989;

Bitner, Boo