Determinants of Customers' retail Bank Choices in … Randiwela, Ruwika... · Web viewHence, there...

2015 Cambridge Business & Economics Conference ISBN : 9780974211428

DETERMINANTS OF CUSTOMERS’RETAIL BANK CHOICES IN SRI LANKA

PradeepRandiwelaDepartment of Marketing

Faculty of Management and Finance,University of Colombo

Sri Lanka(+) 94 718161312

[email protected][email protected]

RuwikaShalika FernandoInstitute of Human Resource Advancement

University of ColomboSri Lanka

+ (94) [email protected]

July 1-2, 2015Cambridge, UK 1

mailto:[email protected]




DETERMINANTS OF CUSTOMERS’RETAIL BANK CHOICES IN SRI LANKA

Abstract:

Service organizations need to focus heavily on how to attract and retain customers effectively. No

service organization would be able to attract and retain customers without satisfying their needs,

wants or expectations. Therefore, service organizations needs to understand customers’ value

proposition in order to attract and retain their target customers. To be profitable in a competitive

industry, any service organization needs to offer customers more value.Organizations fail in

achieving their goals if they fail to identify thecustomers’unique value in general, and in selecting

bank1 in particular. The intense competition that exists in the market for financial services

presents a big challenge to the profitability of retail banking institutions of all sizes2. Customer

churn has become critical in the banking sector in general and in the retail banking in particular in

Sri Lanka. Bankers provide many reasons for such a move yet formal academic studies are

lacking in this regard. Hence this article is an attempt to understand the retail bank selection

criteria from the customers’ perspective.

Banking being a service oriented, the “SURVQUAL” was the predominant model used for the

study. This research was carried out with special reference to business executives3 in Sri Lanka.

Findings of the research provides many insights for policy makers in the banking sector in Sri

Lanka.

Key Words: Retail Bank Choice, Customer perception, SERVQUAL. Sri Lanka, Business

Executives, retail banking perspectives.

1Khazeh, K., & Decker, W. (1992). How customers choose banks. Journal of Retail Banking, Vol. 14, No. 4,winter, pp. 41-4.2Mokhlis, s. (2009). Determinants of Choice Criteria in Malaysia Retail Banking: An Analysis of Gender Based Choice Decisions. European Journal of Economics, Finance, and Administrative Sciences Iss: 163Business executives were considered as individuals who have higher disposable capacity for retail banking transactions.



INTRODUCTION:

Customers are exposed to diversified choices, given competition and they are much concerned

about the value for money. This means in other words there are unlimited switching choices. The

competition in the banking has dramatically increased during the last couple of decades in Sri

Lanka due to many new players entered in to the sector as liberalized economic policies

introduced in early 1980s. The banking customers are now provided with a wider choice in

selecting a bank. Hence, banks need to identify factors that influence customer choice of bank and

work on improving customer attraction and retention.Many retail banks in Sri Lanka try to be

competitive in the market by following the market leaders i.e. if one of the market leaders comes

up with a new product /or service, others do follow the same, irrespective of the appropriateness

and the degree of suitability of the product/service to the customer’s unique value proposition. As

such the the market followers may also come up with a more or less a similar product. This has

failed as a strategic move in Sri Lankan context to attract customers and retain them for a long

term benefit.

Based on the preliminary interviews the researchershad with retail bank customersas a pilot study,

most of them were of the view that all the retail banks in Sri Lanka provide retail bank solutions

at different levels. However, they cannot find a perfect retail bank which fulfills all their needs

and wants at the same time. For example, a bank that provides a comparatively low interest rate

on housing loans does not provide a customized or personalized service to the customer and has

fewer number of branches,thereby it cause many inconvenience to the customers. Therefore, on

the other hand, banks are experiencing increased customer switching. In a similar situation with a

different customer the decision of his or her choice of retail bank is different because different

individual customers have their own unique preferences, requirements, attitudes and perceptions.



Hence, there is a drastic need for retail banks in Sri Lanka to identify the factors that determine

customers’ retail bank choice in order to attract and retain term.

Although many researchhave been conducted on the same issue in other countries, no such a

study has been conducted in Sri Lankan context. Hence this study is an attempt to bridge the

observed gap in the existing body of knowledge.

THE OBJECTIVE OF THE STUDY:

The main objective of the study is to empirically investigate and identify the determinants of the

customers’ retail bank choices inSri Lanka. The findings of this study will help the decision

makers of retail banks in Sri Lanka.

SPECIAL REFERANCE ON THE RESEARCH:

This research is carried out with special reference to business executives in Sri Lanka. The

business executives are considered to be the most prospective segment in terms of their earning

capacity.Therefore, the findings of the research has derived only focusing on this segment as this

segment plays a significant role in the retail banking sector inSri Lanka.

METHOD/S:

Focusing on the business executives in Sri Lanka the researchers has selected sample of 140

business executives in the Colombo City limits using the convenience sampling method. A self-

administered questionnaire was distributed among 247 business executives in 34 reputed

organizations situated in Colombo as it is the largest commercial city in Sri Lanka.



The sample was inclusive of business executives from 3 public entities & 31 private companies.

Finally the data gathered on 140 duly completed questionnaires wereused for this study. In

addition face to face discussions and informal interviews were carried out with to 20 business

executives selected on a judgmental basis..

CONCEPTUAL FRAME WORK:

The conceptual frame-work with regard to the study was designed using the findings of the

previous research conducted elsewhere. The Figure1 shows the framework used for the study.

Banking business being a service oriented, the SURVQUAL4 model was also used as an

underlying tool to move forward with the research.

LITRETURE REVIEW:

Eight main factors were identified from a comprehensive literature survey for this purpose. The

researchers have searchedthe literature mainly globally&locally which includes inputs and

empirical literature.The literature review mainly focuses on how different researches have

addressed similar type of issues from different parts in the world including South

Africa,Malaysia, Pakistan, Bahrain,Nigeria,Kuwait,

Ukraine,America,Bangladesh,Iran,India,Sweden, UAE, Poland, Singapore, and Hong Kong, and

what factors that determines the bank choice in such countries by different customer segments.

The findings of each similar study mainly depended on the type of customer segment i.e.

undergraduates, post graduates, business customers, households and other demographic segments.

4Parasuraman, A., Zeithaml, V.A. and Berry, L.L. (1985)





It is also revealed that regardless of thestructure, private banking products andservices should not

only be confined to abank's domestic headquarters and should be frequently offered tocustomers

throughout any bank's globalnetwork of affiliated entities, includingbranches and representative

offices inany region of the world aspeople can use the bank servicesanywhere, at any time, to

fulfill theirfinancial needs and wants

BACKGROUND OF THE SRI LANKAN RETAIL BANKING INDUSTRY

The retail banking industry in Sri Lankais broad in nature and it caters to the individuals who

earns a monthly income through a salary. Almost all commercial banks or specialized banks in

the country offer retail banking productsto individual consumers or in other words provides

personal financial services. Retail banking can also be called consumer banking or personal

banking .

Commercial and Retail banking started in Sri Lanka in mid nineteenth century Nadaraja (2010)

with the introduction of the money economy resulted from local and international trade and

commerce and also with the change in the economy from the subsistence to plantation

agriculture .In early stages during the colonial and early post-colonial period for about ten years

after the independence , individuals and most of the businessmen had very little access to

banking. Therefore retail banking was very limited and done only by affluent retail clients

during that period (Nadaraja 2010)

Before 1825 there were no banks in Sri Lanka. The first bank to be set up was a privateinstitution

established by Peiris and Peiris in Kandy in 1828. It was called the Bank of Kandy and was

established in the early days of the coffee era with a view to meeting the needs of expanding



commerce and trade. That is the first joint stock commercial bank in the country,

Karunatilaka(1986).At the time of independence, the financial system in Sri Lanka was

elementary and fragmented.Himali (2008).

However, with the major changes that took place in the political, economic and the social life in

1970s due to the change in government under the United Left Coalition there were developments

in the banking sector with the formation of the two local banks-Hatton National Bank and

Commercial bank which subsequently became the largest private banks. This was also the

beginning of the intense competition among banks for a higher share in the market and this

competition has grown immensely with further developments in the banking sector including the

increase in the number of banks in Sri Lanka.

With such competition that already exists in the present banking industry, banks focus more on

how to improve their individual market share and to be profitable and also to survive in the

competitive industry complying with the regularity frameworks ,co-operate governance and code

of business ethics, which is a challenging for banks in Sri Lanka. Nowadays theSri Lankan

banks have focus on the above mentioned since there were examples for failures in retail banks

in the past Sri Lankan banking industry. In 2002 the failure of Pramuka Bank and in 2009

where Seylan bank had liquidity problems due to a collapse of a related company (Golden Key)

of the Ceylinco group.

Present banking sector comprises of 24 licensed commercial banks and 9 licensed specialized

banks totaling to 33 banks who provide customers retail banking services all around the island in

very large scale. The licensed commercial banks further comprises of 12 domestic banks and 12

foreign banks. Therefore the total bank branches and other outlets which provides retail banking



services to customers in Sri Lanka is 6478 as at the end of the 1 st quarter of 2014.(Central Bank

Sri Lanka5).

Table 1: Banks in Sri Lanka

As at 31.03.2014

Total Licensed commercial banks 24

Total number of branches 2794

Total number of other bank outlets 2864

Total number of branches and other bank outlets of licensed commercial banks 5658

Total licensed specialized banks 09

Total number of branches 645

Total number of other bank outlets 175

Total number of branches and other bank outlets of licensed specialized banks 820

Total number of branches and other bank outlets 6478

The Table 1 shows the present composition of the Sri Lankan retail banking industry since all

most all these banks provide retail banking solutions in the country.In addition to the above

segregation Sri Lankan banks can also be divided as private banks and government or state

banks. Out of all the banks that provides retail banking services in Sri Lanka, Bank of Ceylon,

Peoples Bank ,National Savings Bank are large state banks that plays a major role in the retail

banking sector.When considering the private banking sector Commercial Bank, Hatton National

Bank, SampathBank ,National Development Bank, DFCC, Seylan Bank, Nations Trust

5www.cbsl.gov.lk



Bank,Union Bank,and PABC do also contribute to the Sri Lankan banking industry in large

scale.

All these banks are regulated by the Central bank of Sri Lanka and governed mainly by the

monetary law act of 1949 and the banking act (revised) of 1988.

Presently almost all the banks in Sri Lankamainly provides banking solutions to retail customers

and co-operate customers around the country. That is retail banking and cooperate banking.

Retail banking products can be by way of a deposit product, loan product or in the form of other

facilities which are also innovative products(ATM services) due to the technological

advancement in the banking industry. All retail banks in Sri Lankaprovides the following product

categories in different names to attract and retain individual customers.

Deposit Products: - current accounts, savings accounts, term deposit accounts. Loan Products: -

housing loans, vehicle loans, personal loans, educational loans, leasing, hire purchase. Other

Products: - foreign exchange, contingent liability products (bank guarantees, letter of credits)

pawning credit cards, debit cards, ATM facilities-banking products (internet banking, mobile

banking,and SMS banking.

DISCUSSION:

The researchers has analyzed the level of importance given for the present main bank selection

by the sample, for all 27 factors grouped under the eight main factors using the percentage values

of the respondents.

From the entire analysis of the this study,it was found that the security and stability of the bank

were the most (80.5%) considered factor among the most critical factors followed by


Figure 2:- Level of importance given for the convenience


theavailability of large number of ATM’s and reputation of the bank were of highly considered

by the business executives when they select their main retail bank to for their banking

transactions.






Figure 5 :- Level of importance given for reputation and Price



Figure 6 :- Level of importance given for security, attractiveness and availability of other facilities


SUMMERY AND CONCLUSION:

The findings of this study can add to the existing body of the literature and can serve as a starting

point on which future studies can be built. On the other hand, practically this study can help

decision makers of retail banks in Sri Lanka to identify the most critical factors that needs to be

taken in to consideration when taking decisions in relation to introducing new bank products ,

services and value additions to this segments as well as in devising appropriate marketing

strategies for reaching and attracting this market segment in Sri Lanka.

In addition this study reveals that business executives gives a very important consideration for

factors such as secure feeling which generates from the stability of the bank, availability of large

number of ATM’s which is a convenience factor and reputation of the bank followed by

assurance, reliability, responsiveness , availability of hazel free processors ,proximity, being

empathetic ,having less documentation, availability of parking facility , having extended banking

hours and offering attractive interest rates on loans and deposits. Further as an additional finding

the study revealed that business executives give less important consideration for factors such as

recommendation, reputation of the management and attractiveness when they select a retail bank

to fulfill personal banking needs.

According to this research the business executives have given their highest consideration in

bank selection for the factor secure feeling. This can be justified with the fact that there were

instances of failures of Sri Lankan retail banks in the recent past Therefore it can be said that

presently even in Sri Lanka people are very much concern about how safe and secured their bank

is to deal with. As a result the bank regulator in Sri Lanka the Central bank of Sri Lanka has

introduced a deposit insurance scheme which provides some sort fall back in a crisis situation.



Moreover, the central bank of Sri Lanka has also been regularly advising the public to always

deal with a financial institution which is registered with central bank of Sri Lanka. Therefore, it

is important for banks to concentrate on enhancing the stability of the bank and ensure to create

confidence about their respective banks among business executive customers before

implementing marketing strategies to attract new and retain existing customers in Sri Lanka.

In addition to the security, the business executives do consider availability of large number of

ATM’s as very important. Most business executives with their busy work schedules do not prefer

to stay in banks for (long) hours in queues for simple retail banking transactions such as cash

deposits, withdrawals, and bill payments etc..Being a part of the work force in the Sri Lankan

economy business executives prefer their respective retail bank to have a large ATM network as

they could operate their bank account from any part of the country.

Furthermore, reputation of the bank or the bank image is also given a very important

consideration by the business executives when selecting their own retail bank in Sri Lanka.

Business executives do consider about this factor as they feel confident about their own bank

which has a very good reputation. Specially,reputation of the management and the board of

directors were considered more importantly then the reputation of the socalled bank by the

business executives. Bank reputation can be measured in different ways.Reputation among the

public about the bank, status of reputation given by rating agencies. Accordingly business

executives prefer to deal with a retail bank with high reputation as they feel more secured when

dealing with a retail bank with a good reputation.

Finally banking policy makers shouldconsider on the most critical factors which effects the

choice of a retail bank by the business executives so as to attract and retain them.



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