Effect of Service quality differentiation Strategy on Customer Loyalty among Commercial Banks in Nakuru Town, Kenya

Abstract

Commercial banks are important financial institutions in any economy because they mobilize savings for investments and wealth creation. The service industry is very competitive while products offered are similar hence their only source of competitive strategy is differentiation of service offered. Consequently this study examines the relationship between the service quality dimensions (SERVQUAL) and customer loyalty among major commercial banks in Nakuru town. The dimensions studied are service environment (Tangibility), interaction quality, reliability of service and empathy as explained by SERVQUAL framework. The objective is to examine how the commercial banks leverage on the service quality dimensions to gain competitive advantage in the form of enhancing customer loyalty and whether customer loyalty differ across the banking institutions in any significant way. It adopts descriptive research design which is applied on six major commercial banks in Nakuru as listed by the Central Bank of Kenya. The population targeted includes existing customers visiting the major commercial banks in Nakuru town. A systematic random sampling method was used to select 120 bank customers from all the six major banks in the town. Data collected was analyzed using SPSS to test the independence and relationship using Kruskal-wallis difference test, Pearson correlation coefficient and OLS multiple regression analysis. The results indicate that SERVQUAL is applied in the major banking institutions in Nakuru town but with some difference. Service environment, interaction quality, empathy and reliability are positively and significantly related to customer loyalty. A banks service environment has the strongest association with customer loyalty (r=0.7) followed by reliability (r=0.44) then interaction quality (r=0.40) and lastly empathy (r=0.3) However when testing for their predictive power, only service environment, interaction quality and empathy are statistically significant. The reliability factor fails the test by returning a statistically insignificant regression coefficient. Overall bank managers and staff need to focus their attention at modernizing their facilities, providing sufficient lighting and ventilation and strive to be more empathetic to their customers. The customers want to see a more personalized attention when it comes to banking service while facilities like Automated Teller Machine (ATMs) and mobile banking channels should be more reliable. This way customer satisfaction may increase and thus loyalty would follow. The moderator (customer satisfaction) does not have a significant effect on the relationship between service quality and customer loyalty which implies that major banks in Nakuru town deliver near similar services measured by SERVEQUAL.