Risk Perception of Customers in Enhancing Customer Satisfaction in the Light of Financial Crisis - Research Paper Example

Important Determinants of Service Quality and Risk Perception s in enhancing Satisfaction in the light of Financial Crisis Contents Contents 2 Introduction 3 Research Background and Motivation 3 Research Problem 6 Research Aim and Objectives 7 Research Questions 8 Rationale for Chosen Topic 9 Methodology 11 Conclusion 13 Reference List 13 Introduction The purpose of this paper is to analyze the impacts of service quality and risk propensity on the customer satisfaction of UAE banks especially during the global financial crisis. It has been argued that strict adherence to the Islamic principles have helped the banks to maintain their profitability even during the financial crisis (Mohsin and Lockyer, 2010). This analysis can be helpful in providing the interrelation between service quality and risk propensity in raising the level of customer satisfaction of Islamic banking industry. The aim of this research is to critically analyze the existing theories of service quality to understand its impact of it on the level of customer satisfaction. A similar approach is also undertaken to understand the risk propensity and its impact on customer satisfaction. This study is particularly an exploratory study and focuses on the customers to comprehend their views about the level of service quality and risk perception towards the banking system. This will be done in order to investigate whether any the financial crisis has impacted the level of customer satisfaction through the parameters of service quality and risk perception. This chapter puts in perspective the research aim and objective. The background of the research and rationale for undertaking it is also provided in this chapter. Research Background and Motivation It has been well documented in the existing literature that the level of customer satisfaction is an important aspect for the retail banks to improve organizational profits. Providing quality service has become one of the key measures that commercial banks have to rely on for their survival in the competitive market. This research has been particularly motivated from an article that was published in Emirates and has focused on the importance of customer satisfaction for the UAE banks. The article had confirmed that there was a growing tendency among the banks to focus on customer satisfaction (Remo-Listana, 2009). This research therefore wants to analyze whether there have been any significant impacts on the service quality and risk perception on customer satisfaction during the financial crisis. There has been considerable amount of literature that has focused on the issue of customer satisfaction in the context of banking industry. Goode and Moutinho, 1996 had argued that customer retention can be directly linked to the level of service quality improvements of an organization (Goode and Moutinho, 1996). Furer, Ching-Liu and Sudharshan (2002) had argued that the perception of customers regarding the quality of service received may be dependent on the values and belief of customers which in turn may itself be dependent on culture (Furer, Ching-Liu and Sudharshan, 2002). The study that was conducted by Naser, Jamal and Al-Khatib (1999) had focused on the customer satisfaction in case of Islamic banks. In the study that he had conducted the focus was on the customer satisfaction of Jordan banks. The results had confirmed that customers were satisfied with some of the services of the banks but were dissatisfied with others. This was mainly because they were unaware about the products being offered (Naser, Jamal and Al-Khatib, 1999). The study conducted by Parasuraman, Zeithaml and Berry 1985 had identified 11 aspects of service quality namely reliability, responsiveness, courtesy, competence, communication, tangibles, access, credibility, security, competence and understanding the customer which had been converted to a concept of SERVQUAL scale (Parasuraman, Zeithaml and Berry, 1985). However, Berry, Parasuraman and Zeithaml, (1985) had different opinion regarding the dimensions of service quality and they had identified five dimensions which are tangibles, responsiveness, assurance, reliability and empathy (Berry, Parasuraman and Zeithaml, 1985). In case of UAE banking there is only limited work has been done in relation to the issue of service quality on customer satisfaction. Among the works that has been conducted the works of few like Abdul Kader and Norizan (2009), Al-Tamimi and Al-Amiri (2003) and Hossain and Leo (2009) are quite notable (Abduh, Kassim and Dahari, 2011). The application of SERVQUAL in the banking industry is a relatively new concept and there is a dearth of empirical studies in this regard. The study conducted by Al-Tamimi and Al-Amiri (2003) had clearly shown that there is a statistically significant relationship of service quality with SERVQUAL dimensions in the Islamic banking system (Al-Tamimi and Al-Amiri, 2003). The study conducted by Naser, Jamal and Al-Khatib (1999) investigated the awareness of the banking products among the customers and had found that the customers are well aware about the Islamic Banking products like musharakah murabaha and mudarabahb (Naser, Jamal and Al-Khatib, 1999). Regarding the issue of risk perception, the study conducted by Dohen, et al. (2011) had provided a useful insight regarding the subject. Their study had shown that the individual’s willingness to take risks depends on demographic factors like gender, age and parental background (Dohen, Falk, Huffman and Sunde, 2011). The study that has been conducted by Rehman and Masood (2012) had confirmed that the choice of Islamic Banks by the consumers depends not only on factors like “religious belief” and “convenient location”. Factors like security of the customers, issues relating to quality and efficiency of the banks are also considered by the customers in picking their banks (Rehman and Masood, 2012). The findings of Gerard and Cunningham (2001) had also suggested that all the customers dealing with any financial institutions involving money concentrates on safeguarding every type of risk involving social, psychological or financial. Islamic banking principles are quite different from conventional banking practices. The first national bank was established in U.A.E. three decades ago and since then it has undergone rapid growth (Iqbal and Mirakhor, 2011). The growth story of the Islamic banks has become one of the most talked about topic in the banking industry (Tiby, 2010). It has been recognized as the fastest growing financial institutions in the banking industry. Islamic banks operating in U.A.E. does not pay interest (riba), does not allow excessive uncertainty (gharar) or speculative trading (maysir). The instruments primarily used by these banks are Musharaka and Mudaraba (for equity-based financing) and Salam, Murabaha, Ijara, Istijrar and Istisna’a (for debt-base financing) (Metwally, 1997). So the culture of the Islamic banks is considerably different from the conventional banks. It has been well documented in the researches conducted by scholars like Al-Hamzani (2008), Hassan (2009) and Amba and Almukharreq (2013) had shown that Islamic banks could maintain their profitability during the financial crisis (Amba and Almukharreq, 2013). However, none of the researchers had focused on the issue of customer satisfaction during the crisis. Also the factors of service quality determinants during the crisis have not been explored in any of the researches. This shows that there is a gap in the existing literature about this field which this research wishes to close. Research Problem The global financial crisis has been one of the most talked about topic in the financial markets. There has been extensive works in literature that has showed that Islamic banks functions differently than conventional banks. This research therefore wants to analyze what factors are most important determinants of service quality particularly for the customers of U.A.E. banks as there is a dearth in the existing literature regarding this topic. This research wants to find out the most important factors of service quality that affects customer satisfaction in the banking industry and also to examine the risk perceptions of the customers in choosing their banks. The purpose of doing this research is that customer satisfaction has long been identified as one of the most important determinants of profitability for banks. So, on completion of this research the major factors determining the satisfaction of the customers and their risk perception will be determined and this can help the managers to develop a more customer centric approach to survive in this highly competitive industry. Research Aim and Objectives The aim of this research is twofold. The first aim is to find out the most important determinants of service quality that is responsible for impacting customer satisfaction during the period of financial crisis in the U.A.E. banking sector. The second aim is to analyze the risk perceptions of the customers and its impact on customer satisfaction during the financial crisis. This will allow establishing the service quality factors which are particularly important for U.A.E. banks and help the banks to improve on them to enhance the level of customer satisfaction. The second objective will help in the understanding the risk factors that are most important for customers in taking the decisions related to banking. In order to accomplish this aim the following are the research objectives: To critically analyze the existing literature emphasizing on the aspect of service quality on customer satisfaction and distill the factors that are most important determinants of service quality in relation to the Islamic Banks. This will help in constructing a model which is most appropriate in the context of U.A.E. banks. To analyze the perceptions of risk among the customers regarding the products and services offered by the Islamic Banks. This will also provide an insight regarding the risk factors that the customer considers in selecting the Islamic bank of his choice. To incorporate the issue of financial crisis of 2008 relating to service quality and risk perception to comprehend whether there has been any significant impact of the financial crisis in altering the factors of service quality and risk perception for the Islamic Banks. Research Questions The research questions that have been designed in line with the research aims and objectives are summarized below: Which factors of service quality are most important in determining the experience of service quality of customers in the U.A.E. banks? How does the level of perceived risk regarding the service offerings affect the decision of the customers in choosing the U.A.E. banks? Have the financial crisis made a significant impact in altering the service quality dimensions and risk perceptions specifically? The research questions are directly related to the objectives of the research and it will help in finding the most relevant factors relating to service quality and understanding risk perceptions for enhancing customer satisfaction in U.A.E. banks. It can be argued that there is limited research done in the context of U.A.E. banks relating to these factors. Moreover studies that have been conducted have not incorporated the impact of financial crisis on these parameters. So this research is expected to add valuable information in relation to the U.A.E. banks. Rationale for Chosen Topic The global financial crisis is a relatively new topic for researchers to work on. It has created a considerably higher interest among all researchers. As the profitability of the banking industry is largely determined by the level of customer satisfaction it provides so enhancing this satisfaction is a major determinant of success of banks in the long run. Only limited research has been conducted in this field pertaining to U.A.E. banks. This implies that the chosen research can help the banks to understand the ways in which they can develop their customer satisfaction. Islamic banks are considered to be different from the conventional model of banks in the Western countries. The concept of religious belief is of utmost importance particularly for Islamic banks and they are guided by Shariah law. Some of the specific characteristics of Islamic banks include absence of interest-free transactions and avoidance of speculation. Though improving service quality has been identified as one of the most important aspects of improving customer satisfaction yet there is a dearth of research for determining the exact parameters of service quality for U.A.E. banks (Kumar, Kee and Manshor, 2009). Some of the studies conducted in this field have shown that culture plays an important role in affecting the parameters of service quality (Chong and Liu, 2009). Donthu and Yoo (1998) had conducted a study to incorporate Hofstede’s cultural dimension into the dimensions of service quality to explore the impact of culture on service quality (Donthu and Yoo, 1998). As U.A.E. banks are essentially Islamic banks with a different culture so this research wants to examine the specific dimensions of service quality particularly impacting the customers of U.A.E. banks. The research of Jabnoun and Khalifa (2005) had focused on the concept of adapting the service quality dimensions according to cultural difference for U.A.E. banks. Their research can therefore be an important benchmark for conducting this research as it will help to distinguish the most important aspects of service quality for U.A.E. customers (Jabnoun and Khalifa, 2005). However, this research was undertaken prior to the financial crisis for which the impact of the crisis could not be incorporated. In this regard this research will add a new dimension which can be useful. The existing literature has well documented the fact that the performance of the Islamic banks had been considerably better during the global financial crisis (Khan and Bhatti, 2008). This is because in research conducted by IMF it has been observed that the even after the crisis the asset and credit rate growth of the Islamic banks were higher than the conventional banks (IMF, 2010). The nature of the products and the risks associated with them can be treated as a major factor in which customers associates their perceptions of risk. As Islamic banks does not operate on the basis of interest like conventional banks so the unique characteristics and products of these banks also subjects them to specific risks (Čihák and Hesse, 2010). There are various researches which deals with the risk factors associated with the Islamic banking products and the risks associated with them. For instance the research of Ahmed, Akhtar and Usman (2011) it was revealed products of Islamic banks are subjected to credit risk and there are also externalities encountered on the account of counter-party risks (Ahmed, Akhtar and Usman, 2011). The research of Usmani (1998) had pointed out that market risk in terms of price volatility is also present in the Salam contracts. Though the risk factors have been analyzed in details but the perception of customers regarding the risk is a relatively new research area. In this regard the research of Lee and Ullah (2011) on the banks of Pakistan had showed the attitude of customers towards the banks. It has been revealed from their study that customers are generally dissatisfied with the banks if the banks do not follow Shari’a compliance factors. The research had also confirmed that customers equate their security of capital and satisfaction to Shari’a compliance (Lee and Ullah, 2011). The study conducted by Hudayati and Auzair (2009) had concentrated on the relation between risk perception, performance management and profit sharing for Islamic banks. This research was conducted for Indonesia with no special reference for U.A.E. banks (Hudayati and Auzair, 2009). Moreover this study had mainly focused on the bank’s perception of risk regarding debt based financing or profit sharing financing. In this regard it can be said that this research will particularly focus on customer’s attitude towards risk perception for the U.A.E. banks which makes this research valid. Therefore it is expected that this research will contribute positively towards developing a specific service quality model that has the maximum impact in influencing the customer satisfaction. Also it will provide a fresh perspective in the understanding of risk attitude towards the banks and help the way to comprehend the factors of risk that the customers consider in choosing their banks. The inclusion of financial crisis to understand whether these factors have been altered by its occurrence will also be a relatively new addition to the literature. Methodology This research wishes to use a mixed methodology in order to conduct the work. This is essentially employs an exploratory research design. An interpretivist stance has been adopted for this research and its validity is expected to be established by using an inductive process. This research will use both a qualitative as well as quantitative approach to reach the conclusions (Denzin and Lincoln, 2005). The qualitative aspect of the research will be helpful in exploring the attitude and perception of customers towards service quality and risk perception. In order to conduct this research semi-structured interviews and questionnaire surveys will be used. Semi-structured interviews has been conducted in order to understand the social behavior of the people that guides them in a particular way (Kotler, 2011). This method is indeed suitable for an exploratory analysis as the idea is to develop the factors which influence the customers (Gratton and Jones, 2010). The rationale for including the questionnaire survey is that is that it allows collecting information from a relatively large sample in a small span of time. The questionnaire with close-ended questions will also be helpful in conducting the quantitative analysis. Sample for this research will mainly consist of customers and bank mangers of the U.A.E. banks both from a Muslim and a non-Muslim background. The information obtained from the bank managers will be crucial in framing the questions regarding the service quality and risk perceptions. Also the information can be used to understand if there are any other significant factors that are considered by the customers in selecting their banks. Finally, the information that will be collected from this process will be carefully used to frame questions for questionnaire survey on the customers (Saunders, Lewis and Thornhill, 2012). A semi-structured interview session will be conducted on the customers in order to collect the primary data for the research. This will help in the process of understanding any additional factors that customers consider while selecting a bank of their choice. For obtaining the secondary data, journals, articles and online sources are to be referred. This will help in understanding whether the findings from the research are consistent or inconsistent with previous studies that have been conducted in this field. Finally, the data that will be obtained will be analyzed by using SPSS software package. Statistical tools like factor analysis will be used in order to reduce the number of factors to simplify the analysis. The data collected will be tested for presence of autocorrelation and multicollinearity by using Durbin Watson test and Variance Inflation Factors respectively (Malhotra, Birks and Wills, 2012). Multiple Linear Regression model is to be used for determining the relationship between the dependent and the independent variable. The rationale behind including the statistical measures is that it increases the robustness of the analysis and increases the dependability of the results. Conclusion The first chapter of the research focuses on the research problem and the research aims and objectives. This will set out the tone of the research that is to be conducted. In this chapter the rationale for conducting this research is also stated. It has been found that though there has been relatively large number of research has been done in the related field but no such similar research has been conducted in the context of U.A.E. So it can be concluded that this research will add new ideas to the existing literature. The section on methodology focuses on the approach that is to be taken in this research. It has been specified that this research will particularly use an exploratory framework. This is because qualitative research will be helpful in developing new ideas that can be helpful even for researches taken in the future. Reference List Abduh, M., Kassim, S. and Dahari, Z., 2011. Customer Satisfaction and Switching Behavior in Islamic Banking: Evidence from Indonesia. [pdf] School of Doctoral Studies (European Union) Journal. Available at: [Accessed 15 May 2014]. Ahmed, N., Akhtar, M. F. and Usman, M., 2011. Risk Management Practices and Islamic Banks: An Empirical Investigation from Pakistan. 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