CHAPTER ONE BACKGROUND OF STUDY

1.1    INTRODUCTION 

 The present chapter contains the research background, problems statement, objectives of the research, research questions, and justification of the study. The chapter also shed a light on the significance of the study and the final section provides the study limitations.  The issue of service quality is a critical one throughout service industries as businesses attempt to sustain their competitive advantage in the marketplace. Owing to the financial services like banks’ competition in the marketplace through undifferentiated products, this highlights service quality as the basic competitive tool (Stafford, 1996). In other words, a banking organization may attract customers through the provision of high quality services. As such, structural modifications have led to banks being enabled to carry out various activities which in turn, allow them to be more competitive even against non-banking financial institutions (Angur et al., 1999). In addition, technological advancements are helping banks develop their service strategies being offered to individual as well as commercial customers. Moreover, banks offering quality services own a distinctive marketing edge because enhanced quality service is associated with higher revenue, customer retention and higher cross-sell ratios (Bennett & Higgins, 1988). Banks are also well aware of the fact that customer’s loyalty lies in the banks’ production of greater value compared to their competitors (Dawes & Swailes, 1999).  Banks are more likely to earn higher profits if they are able to position themselves in a superior way to their competitors in a particular market (Davies et al., 1995). Therefore, it is imperative for banks to concentrate on service quality as their primary competitive strategy (Chaoprasert & Elsey, 2004). Additionally, both customer satisfaction and service quality have been highlighted by all banking institutions throughout the world (Hossain & Leo, 2009) with the inclusion of the Libyan banking sector. Libya is a country extending over an area of 1,759,540 square kilometers and is ranked 17th nation in the world according to size. In the context of land area, Libya is smaller compared to Indonesia and approximately akin to the size of Alaska, U.S. To the north, it is bound by the Mediterranean Sea, to the west by Tunis and Algeria, to the southwest by Niger, to the south by both Chad and Sudan and finally to the east by Egypt. The Libyan economy is primarily dependent on oil sector revenues which makes up almost all export earnings and around a quarter of the GDP (gross domestic product).  In Libya, the discovery of oil and natural gas reserves back in 1959 resulted in the shift in the country from a poor economy to Africa’s richest. According to the World Bank, Libya is an Upper Middle Income Economy with seven other African countries. As a result, Libya used to the among the wealthiest countries in the world in the earlier years of 1980s with a GDP per capita greater compared to developed countries such as South Korea, Italy, Singapore, New Zealand, and Spain. The Libyan banking sector has experienced significant developments particularly following the issuance of laws concerning banks and money by the Central Bank of Libya. In 2005, the Central Bank of Libya played a key role in organizing banks and restructuring capitals inducing them to look for investment opportunities in order to compete in the provision of services akin to that of international banking services and in order to attract depositors and investors to increase the equities and complete the capital. These laws urged banks to have a capital not less than 30 million Libyan dinars. Consequently, banks initiated their new marketing services that used to be lacking in Libya including the Visa Card, Electronic Bank Services, Mobile bank, Western Union and Money Gram. In addition, top financial institutions looked to satisfy the customers’ needs and demands for their survival and successful competition in the current dynamic corporate marketplace. Financial institutions generally believe that customers are the aim behind their services and hence their activities depend on their customers. This is why financial institutions are more concerned with customer satisfaction, customer loyalty and their retention (Zairi, 2000). In fact, customer loyalty stems from the organization’s creation of benefit for customers so they will be retained and continue doing business with the organization (Anderson & Jacobsen, 2000).      

1.2    RESEARCH PROBLEM 

  The main issue being faced by the Libyan banks is that most of them are still being driven under the operation of the outdated programs. Another issue is the lack of qualified and experienced workforce which eventually explains the low quality service delivery to their customers (Ahmida Ali, 2011). Owing to this reason, most banks have developed a method to tackle customer problems. This includes the provision of a suggestion box at the banks’ foyer or entrance and the carrying out of a survey with the aims of realizing customer satisfaction. This indicates that to hold the customers’ attention and loyalty, it is imperative for banks to set up suggestion and complaint sections like hotlines, 24-hour call services as well as online services (Ahmed Freed, 2012). In the present study, study factors including service quality, security, and customer loyalty are adopted from prior literature. Customer satisfaction is referred to as the feeling or attitude of the customer towards a certain product or service after using such product or service. It is the major result of marketing activity and it serves as a connection between different phases of customer buying behavior; for example, when customers are satisfied with a specific service following its use, they are more likely to repeat their purchase and attempt at trying out the service line extensions (East, 1997). In addition, although customer satisfaction has long been the focus of the local press, there is little evidence revealing that it plays a key role in Libyan local banking market. The significance of customer satisfaction in banks vary from one country to another owing to reasons such as social, economic, political and technological environmental factors. Factors relating to customer satisfaction are significant in some countries but are not in others and this relates to the banking services in Libya.  This research is conducted in the context of Islamic Banks customers in Libya in an attempt to examine the impact of customer loyalty and customer intention through service quality moderated by customer satisfaction.  In sum, the problem that the present study is attempting to address is whether any relationship exists between service quality, customer satisfaction and customer loyalty in the context of Libyan Islamic Banks customers.  In the Islamic finance system, business operations and investment have their basis on the Islamic principal and this differs from the investment concept existing in conventional financial system. The difference lies in the fact that in the former, there is abrogation in the benefit rate (riba), and the procedures and finance covenant are according to Islamic business principal. The Islamic finance system enables profit sharing in investments (Othman & Owen, 2000). Moreover, the research concerning service quality in the conventional financial system has been carried out by academicians in the past and hence, it is not a new aspect (Le Blanc & Nguyen, 1999).  According to Parasuraman, Berry and Zeithaml (1985), several researches reveal that service quality is an important strategy in gaining success and excellence in every organization. Similarly, Othman and Owen (2001) stated that good service quality is the basis of every organization’s success and this includes the service sector such as the Islamic financial institutions. Hence, these institutions are not only facing strong competitions from their Islamic counterparts but also from conventional financial institutions (Naser, Jamal & Al-Khatib, 1999).  Moreover, banking institutions are facing the challenge of customer satisfaction of in light of their service in several situations; impolite service at the counter, no enough employees to attend customers, busy telephone lines and limited banking times (Abdullah, 1996). This is particularly true in Libya, a developing country where the banking culture lacks structure. Therefore, the Libyan banking institutions are required to expend more efforts and to carry out research to direct banking services in the attainment of customer satisfaction. 

1.3    RESEARSH OBJECTIVE

  The present research aims to achieve the following objectives; 1.      To examine the needs of Libyan Islamic banks. 2.      To determine the main factors influencing the level of customer satisfaction in Libyan commercial banking. 3.      To assess the level of customer loyalty in Libyan banking services. 4.      To assess the level of customer satisfaction of the quality of service provided by the Libyan banks. 5.      To assess the level of safety perception of the customers in Libyan banks.  

1.4    RESEARSH QUESTIONS 

 On the basis of the aforementioned problem statement and the study objectives, the research attempts to answer the following questions; 1.      What are the needs of the Libyan banking sector? 2.      What are the main factors influencing the level of customer satisfaction in Libyan commercial banking? 3.      What is the level of customer loyalty to Libyan banking services? 4.      What is the level of customer satisfaction to the quality of services offered by Libyan banks? 5.      What is the level of customer’s safety perception towards Libyan banks? 

1.5    SIGNIFICANT OF STUDY 

 The Libyan banking system is highly dependent on the government banks; an approach not often associated with customer satisfaction. For this reason, the present study offers practitioners with the incentive to find novel ways in improving their services to customers and to modify the services currently provided; for instance, to substitute traditional/conventional services by Islamic financial services and to provide timely and efficient services. The present research contributes to individual or institutions and parties desirous of obtaining knowledge concerning bank customers’ behaviors. The current political changes in Libya has a key role in the attempts to improve the country’s banking system where all the financial systems were previously controlled by dictatorship whose only aim is to accumulate individual wealth while disregarding the country’s economic development. Such a system continued for over four decades (1969-2011) which culminated in digression in social, economic and administrative sectors of the country. In order to prevent the return to the previous regime, Libyan banks are attempting to engage in investment activities by overseeing their dealings and minimizing competition among financial institutions. They have also denied employing Islamic transactions within commercial banks with the exception of what has been addressed in Law of banking and monetary Act No.1 of 2005. The current situation in the country is a consequence of political repression and economic deprivation and social digression prior to the revolution on February 17, 2011 which was supported by the opposition to the old regime.  Following this revolution, Libya attempts to activate all the financial institutions in the country along with the non-financial ones in order to achieve the country’s aims of improving its level in all aspects. The present research is invaluable for reference of future studies particularly those related to service quality, customer satisfaction, customer loyalty and customer intention to switch.  

1.6    STUDY LIMITATION

 The present study collects relevant data from various sources relating to the respondents’ view and for content analysis. In addition, some of the sub-samples are quite small in number while the overall sample is confined to the Libyan banks customers. These findings should be generalized in providing a description of customer satisfaction of Libyan banks to the rest of the population. However, the findings cannot be generalized to other types of bank customers  Moreover, another limitation to the study is the time required to complete the study with the inclusion of analysis and the findings which are all confined to 14 weeks.