"Factors Affecting Customer Loyalty in Islamic Banking

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Comparative Study of Islamic Banking 45

CHAPTER 3 Literature Review and Theoretical Framework

 Service Quality  Customer Satisfaction  Bank Performance  Service Quality and Customer Satisfaction in the Banking Sector  Service Quality, Customer Satisfaction and Bank Performance in the Banking Sector  Hypotheses, Conceptual Model and Theoretical Framework

Comparative Study of Islamic Banking 46 Chapter 3 Literature Review and Theoretical Framework

Banks are competing in a highly competitive environment to offer quality oriented services according to customers’ expectations. Islamic banks face stiff competition from their peers and conventional banks prevailing in the economy. Different aspects of banks are studied by researchers e.g. operations, service quality, employee satisfaction, customer satisfaction, financing products, bank efficiency, financial performance etc. as the key segments for research. Many studies tried to assess the quality of services/products offered by the banks. Customers became a center for all banking activities due to increased competition for greater market share. Banks also focus on demographic characteristics of customers to assess their needs. Every bank is trying to enhance its performance by improving its service quality according to customers' expectations. A number of Islamic banks have started their operations in Pakistan during last few years. It requires a study to analyze the bank services and its outcomes in the shape of customers’ satisfaction and performance.

3.1 Services

This study examines the influence of different dimensions of service quality on the customer's feelings of satisfaction and its influence on bank performance. A model of service quality, customer satisfaction and bank performance is developed in the light of literature to measure the performance of Islamic and conventional banks in Pakistan.

Comparative Study of Islamic Banking 47 3.1.1 Definition of Service and Service Quality

Business is a legal activity that is undertaken to earn a profit. Business activities can be divided into three categories i.e. manufacturing (conversion of inputs into outputs by a transformation process); trading (buying and selling of goods) and services (provision of benefits for reward or fee). Service is defined as a set of benefits delivered from a service provider to the service consumer. The service firm provides benefits (due to competency, skills, knowledge and experience etc.) to the customers for the sake of reward (fee, salary, wages, etc.). Services may be coaching, teaching, consultancy and other modes to facilitate the customers.

Banks provide financial inter-mediation, consultancy and agency services that are diversified with the passage of time. Services are different from goods because they are intangible as they cannot be seen, touched or felt; perishable as we are unable to store them; inseparable because they are attached with a service provider, and insubstantial due to heterogeneity (Parasuraman et al. 1985; Hoffman and Bateson, 2002).

Parasuraman et al. (1985) argued that evaluation of service quality is difficult as compared to physical goods. Physical existence of goods facilitates the customers to buy them due to its aesthetic characteristics. Services are considered as intangible because we are unable to see, touch or feel them (Hoffman and Bateson, 2002).

Comparative Study of Islamic Banking 48 Hanson (2000) suggested that service quality shows the organization's ability to meet customers' desires and needs. So organization must improve their services to meet the customers' wants and requirements. It is found that customers' perception of service quality is very important for managers to compete in the market (Hoffman and Bateson, 2002).

Quality is an ability of any product to meet customers' expectations and requirements. It is a set of features, characteristics or attributes that are required or expected by the...
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