EFFECT OF SERVICE QUALITY ON CUSTOMER LOYALTY; THE MEDIATING

ROLE OF CUSTOMER SATISFACTION; INCASE OF HIBRET BANK GONDAR

CITYBRANCH’S

UNIVERSITY OF GONDAR

COLLEGE OF BUSINESS AND ECONOMICS

SCHOOL OF MANAGNEMENT

DEPARTMENT OFMANAGNEMENT MBA PROGRAM

BY: ASCHALEW ADEBA

ADIVISOR: ASMAMAW (phD)

THE PROPOSAL SUBMITTED TO THE DEPARTMENT OF MANAGEMENT IN

PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE

DEGREE OF MASTER OF BUSINESS ADMINISRATION

October 2024

GONDAR, ETHIOPIA

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 Acknowledgements

First and foremost, I would like to thank Almighty God and his mother St. Mary for giving me for granting me the
strength, courage, patience, and inspirations in completing this work. Next, I am very grateful to express my
greatest and deepest gratitude to my advisor DrAsmamaw for his kind supervision, professional assistance, patience,
and support throughout the preparation of this Proposal up to the end. The completion of this Proposal work would
not have been achieved without the support of his help. Second, I kindly thank staffs of HibretBank by filling the
distributed questionnaire with a tight schedule. Last, but not least, I am also thankful to my friends for their
cooperation, encouragement, constructive comment, support and guidance.

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List of Acronyms

HB: HibretBank

CLRM; classical linear regression model

MBA: Masters of Business Administration

SERVQUAL: Service quality Scale/ Model

SPSS: Statistical Package for Social Sciences

TA-EM: tangible-empathy factor

Table of Contents
ii
Acknowledgements................................................................................................................................................i
List of Acronyms...................................................................................................................................................ii
Abstract................................................................................................................................................................iv
CHAPTER ONE.......................................................................................................................................................1
1. INTRODUCTION.............................................................................................................................................1
1.1. Background of the Study........................................................................................................................1
1.3. Research questions........................................................................................................................................4
1.4. The Objective of the study.....................................................................................................................4
1.4.1. Generalobjective.................................................................................................................................4
CHAPTER TWO..................................................................................................................................................6
2. LITERATURE REVIEW..................................................................................................................................6
2.9 Conceptual Framework of the Study.........................................................................................................20
CHAPTER THREE..................................................................................................................................................21
3. METHODOLOGY OF THE STUDY......................................................................................................................21
Introduction........................................................................................................................................................21
3.1. Description of the Study Area.........................................................................................................21
3.2. Research design....................................................................................................................................21
3.3. Research approach................................................................................................................................22
3.4 Target population..................................................................................................................................22
3.4.1 Sampling size and Sampling technique..............................................................................................22
3.4.2 Sampling Technique.............................................................................................................................23
3.5 Data Source and Types.......................................................................................................................23
3.6 Data collection Instrument....................................................................................................................24
3.7 data validity and reliability.............................................................................................................24
3.7.1 Validity............................................................................................................................................24
3.7.2 Reliability........................................................................................................................................24
3.8. Methods of Data analysis.....................................................................................................................24
3.8.1 Method of quantitative data analysis.........................................................................................25
3.8.2 Method of qualitative data analysis......................................................................................26
3.9. Ethical consideration............................................................................................................................26
3.10. Time Table and Budget......................................................................................................................27
4.2. Budget Schedule(cost).......................................................................................................................27

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 Reference....................................................................................................................................................28

Abstract

This study will aim to examine how customer satisfaction, acting as a mediator between service
quality and customer loyalty, will impact the branches of Hibret Bank in Gondar city. Additionally, it
will seek to gauge client fidelity, contentment, and the level of service provided by Hibret Bank
branches in Gondar city. The SERVQUAL model's five dimensions—tangibility, reliability,
responsiveness, assurance, and empathy—will be utilized to assess the quality of customer service at
Hibret Bank.A total of 320 customers will be selected through convenience sampling from the
customer base across six Hibret Bank branches in Gondar city, after employing stratified and
purposive sampling techniques to choose representative samples from the bank's branches. For this
study, both primary and secondary data will be utilized. Primary data will be gathered using
questionnaires based on a Likert scale.After collecting the raw data, SPSS version 25 will be used for
analysis. Additionally, secondary data will be obtained from bank manuals, annual reports, and
various literatures related to service quality, customer satisfaction, and loyalty. Descriptive statistics,
Pearson correlation, and multiple linear regression analyses will be conducted. The independent
variables—reliability, responsiveness, and empathy—are expected to show statistically significant
effects on customer loyalty, while customer satisfaction will be anticipated to have a partial mediating
effect on the relationship between service quality and loyalty.

Key words: Service quality, customer satisfaction, customer loyalty, CLRM.

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 CHAPTER ONE

1. INTRODUCTION
1.1. Background of the Study
Modern management science philosophy considers customer satisfaction as the basic performance
standard and standard of excellence for any business organization. Especially since banks offer similar
services, competition is based on customer satisfaction (Abd-El-Salam et al., 2013).Now there is a
strong competition in Ethiopian banks to increase the number of customers. This competition is being
won by providing quality service to the customer. According to Caruana, (2012) Service quality plays
an important role in maintaining customer satisfaction. The more quality products and services provided
by the company, the higher the customer satisfaction. Today, a competitive environment that provides
high-quality services is key to sustainable competitive advantage. In addition, organizations with high
quality services satisfy their customers and customer satisfaction has a positive effect on the profitability
of the organization. Satisfied customers form the foundation of any successful business because
customer satisfaction leads to repeat purchases, brand loyalty and positive word of mouth(Ahmed et al.,
2022). The definition given to the term service quality may vary from person to person. In general, the
key to acquiring and retaining customers is to satisfy customer needs (Bahadur et al., 2018). Service
quality is the degree of difference between customer expectations and their perception of service
performance (Benyam, 2016). Service quality can be assessed through ten dimensions of service quality:
tangibility, reliability, responsiveness, efficiency, courtesy, loyalty, security, accessibility,
communication, and customer awareness (Jana & Chandra, 2016). According to Rao (2013), when the
company's service exceeds the expectations of customers, the company has provided quality service,
which is important for customer satisfaction. Therefore, Bethlehem, (2015) stated that customer
satisfaction is a superior measure for service-oriented organizations, especially banks, because it is
based on the customer's personal needs about the service. Another concept is that customer loyalty
means the respect of customers for a company built on positive experience and value, which leads to the
purchase of products, even if this does not seem like the most logical decision. For such situations, loyal
customers, despite mistakes, do not leave(Kumar, 2020). Customer loyalty is considered essential to
organizational success and profitability. Firms with more loyal customers have been shown to have
greater market competition. In fact, many organizations believe that high customer satisfaction leads to
1
high customer loyalty (Kumar, 2020)which, in turn, leads to future revenue (Li et al., 2019)After all,
many organizations (including banks) that have begun to achieve superior service quality have been
found to be market leaders in terms of sales and long-term customer loyalty and retention (Li et al.,
2019). Therefore, the success and sustainability of service companies (including banks) depend on
various factors such as accountability, quality service and technological changes (Ngoc Duy Phuong &
Thi Dai Trang, 2018). Many empirical and conceptual studies have been conducted on customer service
quality and customer satisfaction. The author suggests that customer satisfaction plays a mediating role
in the effect of service quality on service loyalty. Indeed, service quality affects service loyalty through
customer satisfaction. The purpose of this study is to identify which of the primary dimensions produces
the greatest results for overall customer satisfaction and customer loyalty. Thus, in this study, customer
satisfaction is acting as a mediator between service quality and customer loyalty .

1.2. Statement of the problem

Currently, the banking industry in Ethiopia consists of more than twenty-eight commercial banks,
two of which are state-owned banks and the others are owned by shareholders. Similarly, the
banking industry plays a key role in the development process of any country, and Ethiopia is one of
them. According to the annual report of most banks, they are increasing their profits, opening new
branches, number of employees and market share from year to year. Such progress in addition to the
profit margin shows that the sector is growing in the future (National Bank of Ethiopia, 2020). In
addition, these above-mentioned achievements are the result of quality service. Providing good
service quality is the main concern of all businesses. Therefore, customer satisfaction determines the
success or failure of the business. This means that customer satisfaction, customer loyalty and
service quality are linked and this creates value for the customer. Therefore, any service provider,
whether public or private sector, is crucial to their survival, continuity and success in providing
quality service to their customers. This needs to measure the satisfaction level of the customers
served and the factors affecting satisfaction,(Ngoc Duy Phuong & Thi Dai Trang, 2018). According
to Rao (2013), companies can be successful only by creating and attracting customers through its
quality service. From the point of view of total quality management, the measure of every
organization's strategy is the customer. One of the factors that contribute to the success of the
company is the perception of the quality of service provided by customers. In addition, (Nyan et al.,
2020)stated that providing excellent service quality and high customer satisfaction is an important
issue and challenge facing the current service industry. High customer satisfaction and loyalty
2
remain key issues for operational management in service industries such as banks. Therefore, this
study focuses on the effect of service quality on customer satisfaction in the case of HibretBank.
Currently, new banks are emerging in Ethiopia and the competition between existing banks has
increased to a great extent. There are many complaints about the banking service delivery system,
such as network interruption, efficient service delivery and access to technology are the main
problems. They can negatively affect service quality and customer satisfaction in most banks (Rawat
& Kumar, 2017). Despite the challenges mentioned above, like any service industry, HibretBank
strives to provide quality services that satisfy the needs of customers and achieve the long-term
goals of the organization. Achieving this goal requires continuous improvement of service and
continuous monitoring of customer needs. Because in addition to achieving the objective, it helps to
retain customers for a long time and meet their needs in a better way by achieving service quality.
Therefore, the main objective of this study is to evaluate the service quality and customer
satisfaction of HibretBank and its impact on the Gondar city branch and try to identify the weak
problem in the delivery process. Recommends quality service and possible solutions to identified
problems. This study is unique, at least on the ground of filling these gaps that were not covered by
previous studies. First of all, there are very few and old studies that examine the effect of service
quality on customer satisfaction in Ethiopia, and there is no comprehensive study that focuses on
service quality on customer satisfaction and customer loyalty in the case of HB Gondar city branch.
The current problem is that Hibret Bank faces significant challenges in maintaining service quality,
leading to customer dissatisfaction and loyalty issues, amid increasing competition and complaints
about service delivery in Ethiopia's banking sector.

Therefore, in this proposal, the researcher aims to examine the effect of service quality on customer
satisfaction and customer loyalty in the case of HibretBank, especially in Gondar city branch, based
on different branch samples. Second and finally, previous studies mostly focus on the effect of
service quality on customer satisfaction and are incomplete to capture the relationships of highly
relevant variables such as service quality, customer satisfaction, and customer loyalty. However, this
study attempts to fill these previous research gaps by simultaneously delving into the impact of
service quality on customer satisfaction and customer loyalty.

3
 1.3. Research questions
The studyanswer the following questions.

 What is the level of service quality ofHibret Bank in Gondar city addimenstration?
 Are customers satisfied with the quality of service provided by HibretBank?
 What is the impact of service quality measures on customer satisfaction?
 What is the impact of service quality dimensions on customer loyalty?
 What is the impact of service quality on customer loyalty through customer satisfaction?

1.4. The Objective of the study

1.4.1. Generalobjective

The main objective of this study is to examine the effect of service quality on customer
loyalty through the mediation of customer satisfaction at Hibret Bank branches in Gondar
city.

1.4.2. A specific objective

The specific objectives of this study are:

 To evaluate the quality of services provided by the HibretBankbranches in Gondar

cityaddimenstration.
 To identify the level of customer satisfaction and loyalty in the service provided by
HibretBank in Gondar city addimenstration.
 To explore the effect of service quality measurement on customer satisfaction in the branches
of HibretBank in Gondar cityaddimenstration.
 To examine the effect of service quality measures on customer loyalty in the branches of
HibretBank in Gondar city addimenstration.
 To investigate the effect of service quality on customer loyalty as a mediating variable of
customer satisfaction through service quality measures at HibretBank in Gondar city
addimenstration.

1.5. The Significance of the study

Considering the high cost of acquiring new customers and high customer turnover in banks, it is very
important to study the determinants of customer satisfaction. Customer satisfaction is the key to the
4
company's success; so it is very important to measure it. Therefore, this study provides knowledge about
the importance of quality service on customer satisfaction and the resulting impact on customer loyalty
and enables the banks to know the most important amount to spend on customer satisfaction. This
enables them to reduce gaps and meet customer expectations. In addition, the study adds some
recognition to the existing literature for the readers and can serve as a reference point for future
researchers who want to conduct detailed research in the area.
1.6. Scope of the study
The research proposal focuses on evaluating the impact of customer service quality on customer loyalty
using customer satisfaction as a mediating variable; the case of Hibret Bank focusing on the aspects of
service reliability, responsiveness and objectivity, empathy and assurance of the bank's branches in
Gondar city in particular. The geographical setting of the study is the branches of the bank located in
Gondar city and the branches located in Gondar city have more customers compared to the local
branches. The time scope is form June to October 15/2024.The conceptual scope of the study is the
effect of customer service quality on customer satisfaction and customer loyalty, and the scope of the
methodology is a quantitative approach. Therefore, to achieve the objective, the study uses multiple
linear regression models and research question are verified respectively

1.7. Organization of the study

This proposal organized into three chapters. The first chapter covers the background of the study and
the description of the problem. It also includes the general and specific objectives, scope, and
significance of the study. Chapter two introduces the literature review on the relationship between
service quality and customer satisfaction. Under chapter three research methodology used to conduct the
study, model specification and sampling technique are described.

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CHAPTER TWO

2. LITERATURE REVIEW
2.1. The concept of service and service quality
Many scholars define "service" in different ways, according to TienDat et al.(2021) defined a service
as “any activity or benefit performed by a service provider that is essentially intangible to another
and whose product may or may not be associated with a physical product.This means the intangible
actions performed by human or machine or both to create a good impression in the users called
service. (Sanny et al., 2020)“Service can be defined as an economic activity that produces time,
space, form or psychological resources.Many service organizations have been successful in
identifying previously unknown or dissatisfied customers.According to ( et al., 2020)"services are
identifiable, intangible activities that are the core of marketing designed to provide customer
satisfaction."According to Kotler and Akrol (2012), "services are the fastest growing in the world
economy, accounting for a quarter of the value of all international trade."A service is essentially an
intangible act or performance that one can partially provide to another and does not entail ownership
of an object.

The product may or may not be tied to a physical product. In addition, services are an important
source of income for regions, nations and the world (Hafiz and Muhammad, 2012).Therefore, the
main strategy of service providers in the industries of building and maintaining relationships with
customers is that customer loyalty and customer retention enable long-term relationships and
organizational performance (Hassan et al., 2019).

Another basic concept is that service quality can be defined by meeting the needs and wants of the
customers( et al., 2020).Service quality is the difference between customers' perception of the
service being provided by an organization and customers' expectations of good service in a given
industry(Shahid Iqbal et al., 2018).

service quality is the overall customer evaluation of a service, while others consider that the service
is of good quality when it conforms to customers' expectations. According to (Shahid Iqbal et al.,
2018)service quality as an approach to managing business processes.

6
Thus, it is possible to ensure complete customer satisfaction, which in turn, increases the
effectiveness and efficiency of the given industry.These show that businesses need to take a better
position in the era of globalization and evaluate the performance of their services to their
customers(Sulaiman et al., 2021).This is because service quality is an important component of
customer satisfaction (Surahman et al., 2020)pointed out that service quality has a significant role in
the service sector, including service quality, which contributes greatly to business growth and is one
of the leading players in the business environment.Because it has an unshakable character that can't
be expressed to customers to make a judgment before reaching a final decision.

2.2 Theoretical analysis

2.2.1 Service quality model

As mentioned earlier, service quality has been raised in different ways by different researchers in
different articles from their own understanding.It is difficult to limit it to a few definitions.

According to (Vun et al., 2013)service quality is very difficult to assess.Quality is a comparison

between expectation and performance.Service quality is a measure of how well the level of service
matches customer expectations (Yaqub et al., 2019)Moreover, many researchers have disagreed on
how to measure service quality as it has specific characteristics that are intangible, distinct,
indivisible and perishable (Yaqub et al., 2019)Perhaps the most widely used measure is based on a
set of five dimensions consistently ranked by customers as most important to service quality,
regardless of service industry. The most widely used models for measuring quality in the service
industry in general and in the banking sector are the SERVQUAL and SERVPERF models. Since
SERVPERF is derived from SERVQUAL, literature on both models is reviewed.

2.2.1.1. The SERVQUAL model

(Abd-El-Salam et al., 2013)defined service quality as the difference between consumers'

expectations of what they want and what they 'get'.In the yearIt was developed in 1985 but was
refined in their subsequent articles by (Ahmed et al., 2022)The SERVQUAL scale is an important
indicator in the service quality literature and has been widely applied in a variety of service
settings.Moreover, many scholars agree that service quality can be broken down into two main
components (Bahadur et al., 2018).The first is referred to as "output quality" by (Bahadur et al.,

7
2018)and the second as "technical quality" by (Benyam, 2016).However, the first dimension refers
to what the service provides and on the other hand;The second dimension concerns how the service
is delivered: the process the customer goes through to obtain the service's outcome. According to
Buttle (1996), SERVQUAL is to measure and manage service quality.

According to Asubonteng et al (1996) also recently stated that the model can be used to measure
service quality from the customer's perspective. The main objective of SERVQUAL is to find a
standardized and reliable tool to measure service quality in different service sectors (Curry and
Sinclair, 2002).First; they introduced ten dimensions or attributes of service quality that constituted
SERVQUAL.These are: tangibility, reliability, responsiveness, efficiency, courtesy, communication,
loyalty, security, customer access and understanding.However, in a 1988 article, these were refined
and developed into five dimensions (Parasuraman et al., 1988).The SERVQUAL model is used in
focus group interviews, 22 service quality questions, and executive interviews.It is used to service
quality gaps of customer expectation and perception ((Jana & Chandra, 2016). SERVQUAL "is a
short multi-item instrument with good reliability and validity that the researcher can use to better
understand consumers' service expectations and attitudes and thereby improve service" According to
Parasuraman et al.(1988) SERVQUAL was also selected.

It is important when used infrequently to monitor trends in service quality and when used in
combination with other service quality tools .

The SERVQUAL scale is the primary method used to measure customer perceptions of service
quality.originally proposed 97 attributes to measure customer perceived service quality.After that,
improve the characteristics of service quality dimensions, which means that they are the best
dimensions used to measure service quality and then come to ten dimensions such as objectivity,
reliability, responsiveness, communication, credibility, safety, efficiency, courtesy, understanding,
awareness, customers, andAccess.After that, the second level of consolidation is concentrated on
size and reliability.The final 27 decisions make up to five dimensions of service qualityAccording to
(Parasuraman et al., 1985).

The five dimensions of service quality are as follows and this paper uses these dimensions as a
measure of service quality in the analyses.

8
Assurance: - It is the knowledge and courtesy of employees and the ability to convey trust and
confidence. This measure can be particularly important for services that customers perceive to
involve high leverage and feel confident about their ability to evaluate. Trust and confidence can be
instilled in someone who endears customers to the company.

Empathy: - It means caring for the individual attention that the company gives to its customers. In
some countries, it is important to give individual attention to show the customer that the company
works best to meet his needs. Empathy is an added plus that increases customer trust and confidence
and at the same time loyalty. In a competitive world, customer needs are increasing day by day, and
meeting customer needs is the company's top duty, otherwise customers who don't accept individual
attention, look elsewhere.

Reliability: - The ability to perform the promised service reliably and accurately. Reliability means
that the company fulfills its promises - about delivery, service delivery problem solving and pricing.

Responsiveness:- It is the sensitivity to help customers and provide prompt service. In this
dimension it focuses on attention and promptness in solving customer queries, questions, complaints
and problems. Responsiveness is communicated to customers when they provide assistance, answers
to questions, or attention to problems. Responsiveness captures the ability to be flexible and tailor
the service to customer needs.

Tangibility: - Since services are objective customers, they get their understanding of service quality
by comparing the actual conditions related to service quality. It is the aspect of physical facilities,
equipment, personnel and communication materials. The limitation of the model is that the five
dimensions of service quality are not universal and cannot be applied in all service industries
(Kumar, 2020)have argued. The definitions and numbers vary depending on the context in which the
measures are applied, According to Babakus and Boller's (1992) study of an electric and gas utility
company using SERVQUAL is the scope of this industry. Not one and five. to the banking, pest
control and dry cleaning and fast food industries and found that there was no evidence of the five
dimensions, According to, Johnston (1997) and Joseph et al., (1997) research in the banking
industry. They do not support the five dimensions The former study revealed 18 service quality
attributes while the latter found six dimensions.

2.2.1.2. The SERVPERF model

9
The SERVPERF model was adapted from SERVQUAL by Cronin and Taylor in 1992.SERVPERF
measures service quality using customer perceptions.The SERVPERF scale is used to measure the
service quality performance of the service organization.Cronin and Taylor argued that perception
alone is sufficient to measure service quality and therefore expectations should not be included as
suggested by SERVQUAL (Baumann et al., 2018).Studies conducted by researchers such as
(Kumar, 2020), advocates of SERVPERF believe it is a better alternative to SERVQUAL. But
SERVPERF has hit a snag.According to Gilmore and McMullan, (2009), Taylor and Cronin
examined the psychometric properties of the SERVPERF scale and in 1994 the results of a multi-
industry study found that SERVPERF lacked a consistent and general factor structure.For this
reason, the following recommendations are given.

• Practitioners should adapt service quality data to specific or different settings.

• Academic researchers should re-examine their research objectives and apply reliable and valid
multidimensional service quality to service delivery areas. While SERVQUAL measures service
quality through the difference between customer perceptions and expectations (P-E), perspective
should not be lost as SERVPERF uses only perceptions.Again, SERVPERF adopts the five
dimensions of SERVQUAL and a 22-item scale to measure service quality.

Based on the above, Cronin and Taylor cannot claim to have developed a new model
(SERVPERF).In fact, that was more or less what they proposed.

2.3. The concept of customer satisfaction and customer loyalty

Customer satisfaction is the first requirement in every business to get a loyal customer.A satisfied
customer is retained by the business and marketer to others by saying good things about the
business.But this is ensured by providing quality service to the customer (Li et al., 2019). Customer
satisfaction is the state of mind customers have about the company when their expectations of the
product or service are met or exceeded during the lifetime of the product or service .

Customer satisfaction is measured on an individual level, but is almost always reported on an

aggregate level.Customer satisfaction is a vague and abstract concept and the exact manifestation of
the state of satisfaction, it varies from person to person and product/service to product/service

10
((Ngoc Duy Phuong & Thi Dai Trang, 2018)Satisfaction level is based on many psychological and
physical variables that are related to satisfaction characteristics such as return and selection rate.

The level of satisfaction may vary depending on the other options the customer may have and the
other products the customer may compare the company's products to (David, 2013). Customer
satisfaction has a direct relationship with the success of every organization in all situations.

It is said that when customers receive better service, each customer typically tells nine to ten other
parties.On the other hand, customers who experience unpleasant service, often relate their
complaints to fifteen to twenty others (Nyan et al., 2020).Therefore, customer satisfaction is key to
the organizations and should be given special attention as an asset of the organization.

The term customer loyalty means that the customer intends to purchase the brand or services from
the service provider over time, while attitudinal loyalty means that the customer intends to
repurchase and recommend to others, which is a good sign of customer loyalty (Rawat & Kumar,
2017). High customer satisfaction leads to high customer loyalty which in turn leads to high success
in the business.Therefore, many market leaders are found to be highly customer service
oriented.They are given high revenue and customer retention.As a result, organizations in the same
market sector are forced to evaluate the quality of their services to attract and retain their
customers.Because happy customers are the key to long-term business success (Sanny et al., 2020).
Many service organizations have developed customer loyalty programs as part of their relationship
development activities.Customer loyalty is a complex concept.

The Oxford Dictionary of Service Quality Impact on Customer Satisfaction and Loyalty in the
Ethiopian Insurance Industry 12 Loyalty defines Loyalty as Loyalty.But repeat customer purchases
are mixed with the aforementioned definition of loyalty.

In the service domain, loyalty is broadly defined as “perceived behaviors” ( et al., 2020) argues that
behavior is an expression of total loyalty to a brand, not just ideas.However, behavioral criteria
(such as repeat purchase) have been criticized, as they lack a conceptual basis for a dynamic
process.For example, low repeat purchases of a particular service may be due to various factors such
as the lack of availability or availability of a service provider.According to this view, loyal behavior
cannot provide a comprehensive understanding of the underlying causes of loyalty (Caruana, 2012).
Regarding the relationship between customer satisfaction, service quality and service loyalty in
11
 Maltese banks, Caruana (2012) concluded that customer satisfaction plays a mediating role in the
effect of service quality on service loyalty.Indeed, service quality affects service loyalty through
customer satisfaction.Additionally, a study by Suprianto et al (2021) found that service quality is an
important predictor of customer satisfaction, and explains 53% of the variance. Customer loyalty is
achieved through customer satisfaction.

If customers are satisfied with the products and services they purchase, they will be loyal to the
company that provides the products and services and customers, and will purchase more products
and services.Therefore, a customer is said to be loyal when he repeatedly buys a product or service
from a particular seller.According to Oliver, loyalty is the commitment to repeat or purchase a
chosen product or service despite situational influences and marketing efforts that have the potential
to create switching behavior (cited in Kotler, 2000).

A customer's perception of satisfaction or loyalty to the product or service affects the perceived
value of the product or service.Customer loyalty is closely related to a company's continued
existence and strong future growth and profitability (Fornell, 1992).

Customers who are highly satisfied with a company's products and services are more likely to stay
with the company, which drives future revenue for the company. It is now a widely accepted
business concept that customer retention can increase profitability and maintain satisfied and loyal
customers.The cost of acquiring new customers is higher than keeping existing customers.Therefore,
customer retention reduces the cost of acquiring new customers and the objective of a service
organization is to increase profits and reduce costs by satisfying customers to keep customers and
repeat the purchase of services.

2.4 Service quality in the banking sector

Currently there is high competition in the banking sector;In order to increase their profitability and
growth, banks need to maximize their customer satisfaction (Guo et al., 2008).Due to the level of
awareness of customers and the need for quality services, there has been a remarkable change in
banking services in the last two decades.

Customers have different banking preferences and want quality service with time.Banks compete with
each other by offering better quality services or products than their competitors to retain existing

12
customers and attract new customers.Service quality is the most important motivating factor for the
advancement of banking services in the high-tech ladder.The banking industry is a customer-oriented
industry, which is an important part of the service industry (Newman and Cowling, 1996). Banks are
providing services to their customers and their activities are related to service quality.If banks combine
their operations with quality to provide better services than their competitors and improve customer
satisfaction and service quality, banks can gain an opportunity to enhance their image and services to be
preferred by customers, which will make the banks perform better.Profitability and staying in the market
for a long time.Quality service hires by organizations can increase customer and employee satisfaction
and retention, thereby reducing turnover (Newman, 2001).

2.5 Customer satisfaction in the banking sector

Banking is doing its business using customer money and it is a very sensitive business sector about
customer care management.Customer satisfaction in the banking sector is inevitable for the long term
success of the business. According to Tsoukatos and Rand (2006), customer satisfaction is a key factor
for the survival and future growth of businesses.

To maintain or gain market share, organizations must outperform competitors by providing a high-
quality product or service to ensure customer satisfaction and increase customer loyalty. According to
Alkarim (2014), satisfaction means a feeling of happiness because of having something or achieving
something desired.It is the act of satisfying a need, want, need, or expectation.

Customers compare their expectations of a particular product or service with the actual benefits they
receive. "Satisfaction is an individual's feelings of pleasure or displeasure with a product compared to its
expected performance" (Kumer&Hafeez, 2013).Customer's feelings and beliefs affect their level of
satisfaction. According to Zeithaml et al (2010), satisfaction or dissatisfaction is a measure of the ability
of a performance product or service to meet customer needs or expectations.Razak et al.(2017) also
stated that overall satisfaction is the result of a customer's evaluation of a set of experiences associated
with a particular service provider.The organization found that focusing on customer expectations
resulted in greater satisfaction.If organizations can satisfy their customers, customers will be loyal to the
organization and as a result, organizations will increase their profits and market share (Karatepe et al.,
2005). Banks use customer satisfaction as a competitive advantage and customer satisfaction in the
banking industry has been increasing (Berry et al., 2002).

13
It is important to systematically measure customer satisfaction in the service industry Chakravarty and
Mohd (2014) Customer is an important asset of financial organizations such as banks and other micro
and micro finance organizations to ensure sustainable growth and profitability. Satisfied customers
express their feelings for the products and services they have purchased by repurchasing or repurchasing
products and services from the company and by giving good words.On the other hand, customers who
are not satisfied with the product or service they buy will express their feelings by switching to
alternative products or services and negative words (Cronin et al., 2000).

2.6. Factors affecting customer satisfaction

Customer satisfaction as employee friendly, when companies hire and treat friendly customers, feel
comfortable and increase their stay and buy the company's products and services again and again,
courteous employees, knowledgeable employees, employees can be affected.They must have
specific knowledge and skills for the specific job they are assigned to perform.Helpful staff should
listen to the needs and wants of customers and respond accordingly.Accuracy is one factor that
affects customer satisfaction, in which error-free service increases customer satisfaction.

Timeliness of billing, prompt service to customers, increases customer satisfaction.Customer

competitive pricing, offering products or services to customers at a relatively low price, increases
customer satisfaction, service quality, good pricing and billing transparency ( et al., 2020). From
studies conducted by many researchers, such as service quality and perceived value affect customer
satisfaction.

They are key constructs.Research also suggests that customer satisfaction ultimately leads to trust,
price tolerance, and customer loyalty.Therefore, providing quality service and creating good
relationship with customers is the main reason for profitability and growth of companies.In today's
service companies, issues such as customer satisfaction, service quality, and customer loyalty are
key issues that improve the organization's performance and translate into more profits.

2.7. Relationship between service quality and customer satisfaction

In a competitive market, service quality plays an important role for organizations to gain a
competitive advantage over their competitors through quality products or services that create
customer satisfaction.

14
 Customer satisfaction and service quality are interrelated and the service provided to customers must
meet customer needs and in turn provide customer satisfaction (Mano and Oliver, 1993).Researchers
have proposed some definitions and measures of customer satisfaction and service quality.

Service quality and customer satisfaction have certain common characteristics, service quality is one
of the factors of customer satisfaction and focuses on service dimensions (Ok et al.,
2018).Satisfaction is broad, however, as there are factors other than service quality that affect
customer satisfaction, either positively or negatively (Shahid Iqbal et al., 2018). Service quality has
five dimensions that evaluate customer perceptions, these dimensions are reliability, assurance,
responsiveness, empathy and objectivity, and these dimensions are particularly focused on service
dimensions.

However, satisfaction is general and is influenced by customers' attitudes towards service quality,
value and quality of products or services, as well as situational factors and personal factors
(Sulaiman et al., 2021)As the level of awareness of bank customers increases, banks understand the
individual needs of their customers to answer their needs and wants and increase customer
satisfaction.

2.8. Empirical Review

Many studies have been done on service quality and customer satisfaction and the
relationship between them for different companies from different sectors. Among those
mentioned, they are evaluated by the researcher who is divided into two sub-categories.

2.8.1. The relationship between service quality and customer satisfaction and loyalty
in Ethiopia
According to Fasil, (2014) tries to evaluate and analyze the results Service Quality and Customer
Loyalty in the Ethiopian Insurance Industry Using Primary Data Collected by Multilevel Sampling
Technique and SERVPERF Service Quality Measures on a Five-Point Likert Scale. The results of
this study show that all dimensions of service quality have a positive and significant effect on
customer satisfaction and customer loyalty. At the same time, customer satisfaction has a positive
and significant effect on customer loyalty. The findings show that service quality and all its

15
dimensions have a significant and positive relationship with customer satisfaction and customer
loyalty.

A study conducted on 250 sample respondents from five branches to assess the impact of service
quality on Wagan Bank by applying SERVPERF dimensions to customer satisfaction, indicated that
all five dimensions of service quality were positively related to the bank's customer satisfaction.
Also, the regression results show that empathy has a significant effect on customer satisfaction,
followed by assurance and responsiveness, respectively, and the highest perceived service quality is
responsiveness and assurance (Elsa, 2014). From a sample of 250 respondents selected by simple
random sampling method, five SERVQUAL dimensions developed by (Wang & Shieh, 2006)were
found in a paper focused on evaluating service quality and customer satisfaction in Lifan Motor
Spare Parts Sales and Vehicle Repair Services. Majority 93.4% (228) are satisfied with Lifan Motors
service. The results of the study indicated that empathy is the second most important factor that can
affect overall customer satisfaction, next to validation. However, other dimensions such as
objectivity, credibility and responsiveness have less impact on customer satisfaction (Wang &
Shieh, 2006)evaluated the effect of service quality on customer satisfaction of Abyssinia Bank in
Addis Ababa with 220 customers of five selected branches of Abyssinia Bank using descriptive and
inferential statistics. The researcher used SERVQUAL instrument for the study and the correlation
analysis results confirmed that all dimensions of service quality are associated with overall customer
satisfaction. Therefore, the bank should pay great attention to all dimensions of service quality in
maintaining and improving the service quality of the bank. The bank is more than you realize. It
means that there are negative gaps in the five parameters of service quality. Thus, the bank could not
meet the needs of its customers in all these dimensions. Analysis.

The findings show that three dimensions of service quality (reliability, responsiveness and empathy)
are positively and High impact on customer satisfaction. Furthermore, the findings of this study
show that the perception of two dimensions of service quality is equal to the expectation. For the
remaining eighteen service quality dimensions, perception scores are lower than expected. Fasten,
(2017) investigated the effect of service quality on customer satisfaction in three branches ofBankof
Abyssinia (Africa Union, ECA and IBD branches) using questionnaire data collection technique,
SERVPERF method and statistical tools such as mean, standard deviation.

16
A sample of 308 foreign customers, correlation and multiple regression analysis. The results of this
study indicate that all five dimensions of service quality (objectivity, reliability, responsiveness,
assurance and empathy) have a positive and significant relationship with external customer
satisfaction. Dereje, (2018) evaluated the relationship between service quality and customer
satisfaction in the hotel industry in Adama city through a survey of 151 three-star hotel customers.
The study adapted the SERVQUAL model as the main framework for analyzing service quality and
descriptive analysis was used to examine the relationship between service quality dimensions and
customer satisfaction.

The results indicate that the dimensions of service quality namely objectivity, reliability,
responsiveness, trust, communication and empathy have a statistically significant effect on customer
satisfaction at the 5 percent significant level. This result indicates that service quality confirms its
role as an important driver of customer satisfaction, which leads to customer loyalty and hotel
profits. It is planned to measure the level of service quality in banks from the point of view of their
customers in Ethiopia and through questionnaires among 334 respondents selected from four banks
in Addis Ababa, the SERVQUAL model measures all the quality parameters such as responsiveness,
assurance, empathy, reliability and tangibles and the finding is 3.979 (79.58%) of satisfaction.

It showed results. Furthermore, the regression results indicated that all service quality dimensions
had an overall positive effect on customer satisfaction with an R square value of 0.568, but empathy
and assurance had no significant i effect among the five service quality dimensions (Debebe, 2019).
M. Daniel, (2019) Ethio Telecom Broadband Service Quality, Ethio Telecom, Addis Ababa City,
Enterprise Customers Broadband Internet Using Primary Data Collected by Distributed
SERVQUAL Tool Questionnaires and 399 Respondents Selected by Simple Randomization. A
sample of the entire population

According to Laohasirichaikul et al., (2011) study titled: "Effective customer relationship

management in health care: a study of hospitals in Thailand". This study investigated the influence
and relative importance of four dimensions of perceived service quality on corporate image,
customer satisfaction and customer.

Loyalty. Factor analysis and multiple regression methods were used to obtain data on outpatients
from five large private hospitals in Bangkok. The findings indicate that the four dimensions

17
significantly affect corporate image, customer satisfaction, and customer loyalty. In particular, the
doctor's level of concern is a very important factor affecting customer satisfaction and customer
loyalty.

A tangible dimension was the most important factor affecting corporate image. Mohammed et al
(2011) investigated the level of service quality as perceived by commercial bank customers in
Jordan using the SERVQUAL model. In conclusion, SERVQUAL is a consistent and reliable
standard for measuring the quality of banking services, and service quality is a major indicator of
customer 27 satisfactions.

They also noted that five dimensions of service quality have a significant impact on customer
satisfaction. The study of Hasan et al., (2011) on the effects of e-banking functionality and customer
satisfaction in Jordanian commercial banks, aims to explore the adoption of e-banking functionality
and examines the effect of e-banking on customer outcomes. Satisfaction. A purposive sampling
method was employed to recruit 179 customers representing the desired demographic characteristics
(eg, gender, age, and computer use), levels of prior Internet experience, and product-related
knowledge. The study found that the adoption of e-banking (accessibility, convenience, security,
privacy, content, design, speed, fees and charges) had a positive effect on the satisfaction of
Jordanian Commercial El Bank customers. Zamil et al (2012) conducted a study titled: “The Impact
of Health Care Quality on Patient Satisfaction in Private and Public Hospitals in Jordan: A
Comparative Study. The study used a random sample of inpatients and used SERVPERF to measure
service quality. The results indicate that: the effect of health service quality on patient satisfaction,
the statistical difference between the quality of health service between public and private hospitals is
high, and the effect of health service quality on patient satisfaction was better in private hospitals.
Compared to public hospitals and the responsiveness of health service quality reduction is the lowest
average of service quality reduction in other public and private hospitals. Regarding the relationship
between customer satisfaction, service quality and service loyalty in Maltese banks, Caruana (2012)
concluded that customer satisfaction plays a mediating role in the effect of service quality on service
loyalty. Indeed, service quality affects service loyalty through customer satisfaction. In addition, the
results of this study show that service quality is an important predictor of customer satisfaction and
explains 53 percent of the variance. Another study conducted is the evaluation of service quality and
customer satisfaction using the SERVQUAL model, a case study of a Tanzanian

18
telecommunications company. The paper shows that the analysis carried out shows that the overall
quality of service perceived by customers is not satisfactory; It means that customer expectations go
beyond perception. Analysis also revealed that the company's customer care, network coverage,
voucher provision, flexibility of handsets and airtime payment are significant factors hindering
satisfaction. Findings on the theory confirmed that the SERVQUAL model is not the best tool for
measuring service quality for the company because the dimensions were negative gaps (Wang &
Shieh, 2006)investigated the service quality of a Vietnamese organization using the SERVPERF
model proposed by Cronin and Taylor (1992) to study the relationship between an organization's
service quality and customer satisfaction. According to the results of their study, they identified five
classes - TA-EM (Tactical-emotional state), responsive.

19
2.9 Conceptual Framework of the Study

The independent variables are the five dimensions adopted in the most popular service quality model
and proposed by Parasuraman et al.(1985, 1988) known as SERVQUAL.It had five dimensions and
could be described as: Tangibility, Responsiveness, Credibility, Assurance and Empathy.Customer
satisfaction is the dependent variable measured along with the independent variables of the study.

Figure 2.1 Conceptual framework of the study.

Independent variable Dependent variable

Tangibility
Mediating variable

Responsiveness

Customer satisfaction

Reliability

Assurance
Customer loyalty

Empathy

Source: adopted from Benyam, (2016)

20
CHAPTER THREE

3. METHODOLOGY OF THE STUDY

Introduction

In this chapter, we will discuss the practical methodological framework employed to address the
research questions and achieve the study's objectives. Key elements will include an overview of the
research setting and design, the chosen method, and the characteristics of the study population.

It will outline the sampling technique and detail the entire data collection process. Furthermore, we
will explore the analysis methods utilized to interpret the data and the ethical considerations that
guided the research. This comprehensive approach will ensure that the study is conducted rigorously
and ethically, ultimately contributing to the reliability and validity of the findings.

3.1. Description of the Study Area

The study will conduct at the hibret Bank specifically in the Gondar city addimenstration. At
the time of the study's planning, the branches comprised 6 branches This context provided a
rich environment for exploring the research questions.

3.2. Research design

The research design will serve as the general plan for how the research questions will be answered,
acting as the conceptual structure within which the research will be conducted (Saunders et al.,
2007). As Kothari (2004) notes, "The research design constitutes the blueprint for the collection,
measurement, and analysis of data." The choice of research design will depend on the objectives of
the study.

Given that the objective of this research is to examine the effect of service quality on customer
loyalty, as well as the mediating role of customer satisfaction, a descriptive and explanatory research
design will be chosen for implementation. This design will not only describe the characteristics of
the phenomenon but also provide insights into the relationships between the variables under

21
 investigation. By utilizing a descriptive research design, the study will be able to systematically
collect and analyze data, facilitating a comprehensive understanding of the dynamics at play.

3.3. Research approach

This study will use a quantitative approach to examine the relationship between the independent and
dependent variables, as well as to develop hypotheses and analyze findings from the survey. The
quantitative approach will assess the indirect effects of five service quality measurement dimensions:
responsiveness, reliability, assurance, empathy, and tangibles on the variables of customer satisfaction
and customer loyalty. This method will allow for a systematic analysis of how these dimensions
influence customer perceptions and behaviors, providing valuable insights into the overall service
quality of Hibret Bank SC.

3.4 Target population

A target population, also known as a theoretical population, will serve as the primary environment
for the researcher's hypothesis. Conversely, the study population also referred to as the accessible
population, will be the population drawn from the target population to conduct the study within a
certain period. This study population will consist of a specific group of people, making it
manageable and easy to sample. Thus, there will be two types of populations: the target population
(theoretical population) and the study population.

In theory, the target population for this research will be the customers from all branches of the bank
who have a regular savings account in the city of Gondar due to constraints related to money and
time. According to the information expected to be obtained from the main branch of the bank, the
number of customers in Gondar city branches will be around 80,000.

3.4.1 Sampling size and Sampling technique

Sampling will be the process of selecting a group from a very large population, allowing the
researcher to make general statements based on the selected part that represents the whole group
(Kothari, 1375). All branches of Hibret Bank operating in Gondar city will be taken as the universe
to find more evidence.

22
From the total population, the researcher will determine the sample size of the study using Yamane's
(1967) sample size formula. The formula will be described as follows:

N 80,000 80,000
n= = = =319.6 ≈320
1+ N ( e ) 1+80000 ( 0.05∗0.05 ) 469.81
2

wheren = number of samples, N = total population (customers) of Hibret Bank in Gondar city
branch and e = level of precision or sampling error. Therefore, out of the total population of 80000,
the study took 320 samples using the formula mentioned above.

3.4.2 Sampling Technique

For the purpose of this study the researcher will use convenient sampling technique. Convenient sampling is
a non-probability sampling technique where researchers select subjects based on their easy availability and
proximity. This method is used when the sample respondent doesn't have a well-known location to address.
in the case of hibret bank Gondar branches line up is not mesmerized well. Taking this into account, the
researcher determines to use convenient sampling techniques to collect data and answer the research
questions

3.5 Data Source and Types

To generate relevant data for this study, consideration could be given to primary and secondarydata
sources. According to Biggam (2008), primary data is the information that the investigator finds
himself/herself about a specific subject. The main benefit of this type of data collection is that it is
collected taking into account the objective of the research. This implies that the information resulted
from it is more coherent with the research questions and purpose.
As this field is basically empirical in nature, primary data were collected from employees and
manager. So, the focus is more on primary data sources. The closed ended questionnaires are used to
collect primary information. Secondary data serve researchers with the opportunity to better interpret
and explain the research problem. So, it's very important to start looking at existing data with a clear
sense of what we're trying to accomplish with this study. This would assist the researcher save time
and effort because he/she can easily throw out data that holds no relevance for its own work. This
can result in information that can only be used partially for a specific subject.
The secondary data are applied to bring more honest insight on the research topic, to establish the
viable platform for the theoretical framework constituting the basis of this inquiry, and to design the
sample form and questionnaires for retrieving the primary information.
23
A further advantage of the use of secondary data lies in their comparability. Therefore, try to
validate and compare the data obtained through a questionnaire with the available literature and
articles.

3.6 Data collection Instrument

The questionnaire design will be kept very simple to encourage meaningful participation from the
respondents. The questions will be concise, with careful attention given to the wording and phrasing.
The questionnaire will consist of closed-ended questions using a five-point Likert scale.

3.7 data validity and reliability

3.7.1 Validity

To ensure the credibility and reliability of the findings, member checking may be conducted by
sharing the analysis with participants for their feedback. Peer debriefing will also be used to enhance
the rigor of the analysis, allowing for additional perspectives on the interpretations made

3.7.2 Reliability
Reliability in research refers to the consistency and stability of the measurement instruments and
methods used in the study. In the context of examining the effect of service quality on customer loyalty
ensuring reliability is crucial for obtaining credible and valid results. This section outlines various
aspects of reliability relevant to the study:

3.8. Methods of Data analysis

The data will be analyzed using the statistical package for social science (SPSS) version 20. The
analysis will cover both descriptive and inferential statistical approaches. To summarize the
demographic data of respondents, tables and percentages will be used. Moreover, to determine the
The explanation section will demonstrate the relationship between service quality, customer
satisfaction, and customer loyalty., descriptive statistics like mean and standard deviation measures
will be used. The Pearson’s correlation coefficient will be applied to find the relationship between
service quality and customer satisfaction; and regression analysis will be computed to determine
relationship between service quality, customer satisfaction, and customer loyalty; analysis of
24
variance (one-way ANOVAs); and a T-test will also be used to compare relationship between
service quality, customer satisfaction, and customer loyalty dimensions based on demographic
variables.

3.8.1 Method of quantitative data analysis

Quantitative data analysis involves the systematic examination of numerical data to understand
relationships, test hypotheses, and derive conclusions. In the context of this study examining the
effect of service quality on customer loyalty.
3.8.1.1 Model specification
The model specification for examining the effect of service quality on customer loyalty is designed to
identify and analyze the relationships between various factors influencing effect of service quality on
customer loyalty. The following outlines the structure of the model based on the general and specific
objectives of the study.
Mathematical Representation of the Model
The model can be mathematically represented as follows

Where:

CL = Customer Loyalty

SQ = Service Quality

CS = Customer Satisfaction

β0 = Intercept (constant term)

β1,β2 = Coefficients representing the direct effects of service quality and customer satisfaction on
customer loyalty

β3 = Coefficient representing the mediating effect of customer satisfaction

ϵ = Error term accounting for variability not explained by the model

25
3.8.2 Method of qualitative data analysis
Qualitative data analysis is a systematic approach to interpreting non-numerical data, providing
insights into participants' experiences, perceptions, and behaviors. In the context of examining the
effect of service quality on customer loyalty

3.9. Ethical consideration

There will be certain ethical considerations required of the researcher. Based on these, ethical
considerations regarding confidentiality and privacy will be made to ensure respondent safety. A
concerted and active effort will always be taken to uphold this promise. The researcher will assure
Hibret Bank clients of anonymity in the research report.

The researcher will inform respondents that the purpose of the study is for academic purposes only.
Additionally, participation in the study will be based on the respondents' consent. The researcher
will ensure that respondents are not personalized in any way during data presentation, analysis, and
interpretation. Finally, all materials and sources used for this research will be duly acknowledge

26
3.10. Time Table and Budget

No

August September October

1 Topicselection √

2 Literaturere √
view

3 Proposal √

4.2. Budget Schedule(cost)

No Item Quantity Unit Cost Total cost

1 Internet 120.00

2 Printing and copy 100.00

3 Paper 1pad 150.00 140.00

4 Secretary 2 180.00

5 Binding 3 12.00 36.00

6 Pen 6 25 150

7 Flash disk 1 300 100.00

8 Transportation 400.00

9 Mobile card(Telephone) 100.00

10 Other expenses 200

Total cost 1336

27
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