Journal of Finance and Bank Management

March 2014, Vol. 2, No. 1, pp. 09-30

ISSN: 2333-6064 (Print), 2333-6072 (Online)
Copyright The Author(s). 2014. All Rights Reserved.
American Research Institute for Policy Development
42 Monticello Street, New York, NY 12701, USA.
Phone: 1.347.757.4901 Website: www.aripd.org/jfbm

Determinants of Customer Retention in Commercial Banks in Tanzania

Msoka Caroline M1 and Msoka Elizabeth M2

Abstract
This study examined determinants of customer retention in commercial banks in
Tanzania. Four specific objectives were developed related to latent variables:
customer service, quality of the products provided by banks, pricing of bank
products as well as services and customer satisfaction. The variables relationships
were established through explanatory studies under positivism paradigm. The study
adopted convenience sampling technique to select a sample of 200 bank customers.
Primary data were collected using questionnaires and all 200 bank customers
responded positively. The Chi-square and multiple regression analyses were used to
test the hypotheses. Each latent variable was found to be effective in determining
customers retention. The study discovered that academics need to incorporate
quality of products provided by the banks together with pricing of banks products
in customer retention models. For Bank of Tanzania, there is a need to expand
monitoring and include quality of the products provided by banks to determine the
sustainability of banking industry. Moreover, for the banks, there is an opportunity
to customize their services as well as increase revenue and at the same time improve
service quality by employing more Customer Relationship Managers to serve
customers better and enhance their retention.
Keywords: Determinants , Customer, Retention, Commercial banks

Operational Officer, Public Service Pension Fund (PSPF), P.O Box +255 382 Mwanza, Tanzania.
Tell +255 713708922, Email: [email protected]
2 Institute of Development Studies, St Johns University of Tanzania, P.o Box +255 47, Dodoma,
Tanzania. Tell +255 767 412582,Email:[email protected]

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Journal of Finance and Bank Management , Vol. 2(1), March 2014

1.0 General Introduction

The banking industry is highly competitive, with banks not only competing
among each other but also competing with non-banks and other financial institutions
(Kaynak and Kucukemiroglu, 1992; Hull, 2002). Most bank product developments are
easy to duplicate and when banks provide nearly identical services, they can only
distinguish themselves on the basis of price and quality. Therefore, customer
satisfaction and retention is potentially an effective tool that banks can use to gain a
strategic advantage and survive in todays ever-increasing banking competitive
environment. One strategic focus that banks can implement to remain competitive
would be to retain as many customers as possible (Ro King, 2005).
The costs of acquiring customers to replace those who have been lost are
high because the expense of acquiring customers is incurred only in the beginning
stages of the commercial relationship (Ouma et al., 2013). In addition, longer-term
customers buy more and, if satisfied, may generate positive word-of-mouth
promotion for the company and they also take less of the companys time and are less
sensitive to price changes (Cvent, 2013). In addition, customer retention is very
important because it has a bearing on costs and profitability over time (Kottler, 2000).
Ro King (2005) also explained that customer retention involves steps taken by
a selling organization in order to reduce customer defection and successful customer
retention starts with the first contact an organization has with a customer and
continues throughout the entire lifetime of a relationship. Also customer retention is
important to most companies because the cost of acquiring a new customer is far
greater than the cost of maintaining a relationship with a current customer (James,
2012). Moreover, Gabriel (2006), in his study of application of porters five forces
framework in the banking industry of Tanzania, investigated porters five forces to 22
fully Fledged banks, 5 Regional Unit Banks, 5 Financial Institutions and 102 Bureau
de Change and concluded that there is high bargaining power of customers and also
barriers to entry are gentle thereby allowing more entrants to get in to the industry.
Since customers have a high bargaining power and entrance is gentle, it is imperative
for the banks to make sure that they have a customer retention strategy in place.
In Tanzania there has been an increase in number of commercial banks from
a monopoly NBC to many local and foreign banks with subsequent competitive
pressures, which bring about the importance of customer retention to the banks.

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11

Customers have always been complaining on issue of quality, implying that

banks have not been able to meet what they promise (Lwiza and Nwankwo, 2002).
This has led to an increasing trend in customer switching between bank branches and
from one bank to another, which signals that the particular branches and banks have
failed to meet customer expectations (Lwiza and Nwankwo, 2002).
According to Lwiza and Nwankwo (2002), after the financial reforms of
banking sector in Tanzania in 1991 and globalization, there has been an increase in
public awareness of different financial products and services available at different
banks, which, in turn, made customers to be highly sensitive to the quality of services
offered. Customers have been moving around demanding banks audited reports,
brochures and even change within branches of the same bank seeking for the best
services and also from one bank to another bank because of bank failures and
problems. The situation has forced the banks to be highly sensitive to the needs of
their customers and make an effort to retain them (Lwiza and Nwankwo, 2002).
There are existing researches about customer service in the banking industry
around the world, but there are no clear conclusions as to the most important
customer service dimensions and strategies for satisfying bank customers in order to
retain them (see also Owusuah, 2012). Several previous studies focused on exploring
significance of customer retention as well as efficiency in the banking industry (for
example, Dawkins and Reichheld, 1990; Marple and Zimmerman, 1999; Page, et. al.,
1996; Fisher, 2001; Aikaeli, 2008; Lwiza and Nwankwo, 2002). However, there has
been little effort to investigate factors that might lead to customer retention.
Therefore, this study focused on determinants of customer retention in Tanzania
commercial banking services.
2.0 Literature Review
2.1 Competing Models of Customer Retention
These models are among models of customer retention explaining the
behavior of customers and they tend to explain the link between various factors,
which cause customers to remain with particular firm. This study has adopted the
following models:

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2.1.1 SERVQUAL Model

SERVQUAL is a multi-item scale, which stands for service quality developed
by Parasuraman, Zeithaml and Berry (1990) to assess customer perceptions on service
quality in service and actual experience. SERVQUAL when originally developed in
1985 was measuring 10 aspects of service quality, which were competence, courtesy,
credibility, security, access, communication, knowing the customer, tangibles,
reliability and responsiveness.
After the original SERVQUAL model was seen to be complex, subjective and
statistically unreliable, it was modified in the early 1990s and proponents refined the
model to the useful acronym RATER, which stands for responsiveness (willingness to
help customers and provide prompt services), assurance (knowledge and courtesy of
employees and their ability to gain trust and confidence), tangibles (physical facilities,
equipment and personnel appearance), empathy (providing individualized attention to
the customers) and reliability (ability to perform the promised service dependably and
accurately) (Zeithaml, Parasuraman and Berry, 1990). The simplified model is simple
and has been useful for quantitatively assessing customers experiences in service
(Zeithaml et al., 1990).
The purpose of SERVQUAL is to serve as a diagnostic methodology for
uncovering wide areas of an organizations service quality weaknesses, strength and
discovering the main requirements for delivering high service quality (Zeithaml et al.,
1990). The instrument is designed for use in any kind of service business and provides
a basic skeleton through its expectations/perceptions format, encompassing
statement for each of the five dimensions (Zeithaml, et. al., 1990).
Despite its wide usage in service industry, SERVQUAL model has been
criticized by several researchers (for example, Carman, 1990; Babakus and Boller,
1992; Teas, 1994). Criticisms were mainly directed at the conceptual and operational
base of the model, mostly in reliability, validity, dimensional structure and
operationalization of expectations. However, it has been generally agreed that
SERVQUAL items are reliable predictors of overall service quality (Khan, 2003).
2.1.2 Satisfaction Model
Consumer satisfaction is a post-choice evaluation made by the customer
concerning a specific purchase or choice for fulfillment of a need or want (Day,
1984).

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Giese and Cote (2000) summarised satisfaction literature by stating that

satisfaction is an emotional or cognitive response to a particular focus such as
expectations, product or consumption experience, and the response occur at a
particular time after consumption or accumulated experience. Customers satisfaction
with their banks is based on the expectations, interactions and experiences with the
banks.
Oliver (1993) tested a model to represent influences on satisfaction response.
The model theorized that expectations and attribute performance each influence
satisfaction. In addition, if attribute performance and expectations do not match, then
disconfirmation may occur, which impacts satisfaction (Oliver, 1993).
Figure 2. 1: Consumer satisfaction/dissatisfaction Model

Source: Adapted from Oliver (1993)

There is a strong link between customer satisfaction and repurchase intentions
(Patterson, Johnson and Spreng, 1997). If the customer is dissatisfied, he/she is less
likely to repurchase the product (Oliver, 1993). Repurchase intentions are based on
the evaluation of many underlying service dimensions (Boulton, Kannan, and
Bramlett, 2000). In banks, retention is a repurchase decision. Ideally, satisfied
customers will be retained at a higher rate than dissatisfied customers (Patterson et al.,
1996).
2.2 Empirical Studies

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Radomir, Wilson and Scridon (2010) in the study of Improving Bank Quality
Dimensions to Increase Customer Satisfaction examined the relationship between
service quality dimensions and customer satisfaction with bank territorial units. The
study revealed that human resources had the greatest impact on customers
satisfaction with bank territorial units and that both Convenience and Efficiency
and Bank personnel were dimensions that bank management should consider in
their efforts to improve and maintain the service quality level. Mascareigne (2009)
explained about several factors that influence customer retention.
They included creating customer satisfaction, creating customer trust,
customer involvement, creating switching barriers, communication effectiveness,
service quality and price and several customer retention strategies and processes for
customers to remain loyal and stay longer with the organization, more specifically in
the advertising sector. The study revealed that when it comes to retention of
customers, professional service providers neither have any standardized nor normal
procedures to follow and the strategies used by the firms are highly customized to
each individual customer based on a few number of clients in the firms.
Moreover, Filip and Anghel (2009), aimed at researching customer level of
loyalty toward Romanian organizations acting in the retail banking sector and the
factors influencing customers actions in the relationships with banking institutions
including reasons of customer retention. Findings were that the Romanian customers
remained in banks relationships due to existence of both favorable attitudes or
positive motivations and constraint factors or inertia.
Also loyalty level stated by customers did not only depend on satisfaction but
also by other factors like banks attitude towards its own customers, the level of
customer trust toward the organization or its employees in ensuring financial interests
of clients and by the level of customer commitment. The study found out that high
level of dissatisfaction by customers determines switching behavior. However, the
study failed to show the relationship between customer service, price of banks
products, quality of the products developed by banks and customer satisfaction.
Furthermore, Kaura (2012) examined whether or not perceived price increases
price fairness and price fairness further promoted customer satisfaction in Indian
commercial banks. It also tried to find the relationship between perceived price and
customer satisfaction.

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15

Results suggested that perceived price increased price fairness and price
fairness increased customer satisfaction. It also revealed that transparency of price
structure in banking industry is very important in customer satisfaction. Perceived
price did not have any impact on customer satisfaction (Kaura, 2012).
Afsar, Rehman, Qureshi and Shahjehan (2010) attempted to find factors of
customer loyalty and their relationships with the banking industry in one of the
developing countries, which is Pakistan. The study revealed that effect of satisfaction
and trust on commitment was positive as well as significant and the greater the
satisfaction, the greater was commitment and the greater the trust, the greater was the
commitment. Additionally, Rootman, Tait and Sharp (2011) addressed the need for
understanding relationship of marketing and customer retention of banks, and related
lessons that can be learned from banks in Canada and the United Kingdom (UK).
Results from the study revealed that six banking service delivery variables influenced
banks relationship marketing and customer retention. Bank fees were viewed by
respondents to be the most significant variable.
Canada was identified as the country with the most highly regarded banks in
terms of relationship marketing, customer retention, empowerment of bank
employees and personalization of banking services. UK banks were highlighted as
superior in setting fee structures, communication strategies and ethical behavior.
Therefore, strategies implemented by Canadian and UK banks relating to the variables
were adapted to fit South African banks as well as institutions in other developing
countries.
Mller (2007) in his research assessed customer expectations based on service
quality factors for retail banks across ten countries in Africa. Specifically, the
objectives were to determine whether cross-national differences in customer service
expectations existed in the African retail banking sector, to identify relative
importance of key service dimensions in African retail banking and to determine
whether or not those service expectations were constant over time.
Results from the study led to suggest that core dimensions such as
responsiveness (driven by staff efficiency and shorter queues) and reliability
(performing dependably and accurately) were more important while relational issues
surrounding assurance and empathy were of less importance.

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Journal of Finance and Bank Management , Vol. 2(1), March 2014

Elly (2010) in the study on service quality and customers retention in

Tanzanian commercial banks tried to find out why despite efforts made by
commercial banks to retain customers, customers were still leaving their banks. The
purpose of the study was to investigate the link between service quality and retention
of customers in Tanzanian commercial banks (Elly, 2010). The research findings
revealed that the overall service quality provided by the commercial banks had a direct
relationship with customer loyalty. Fasha (2007), in the study of the impact of service
quality on customers satisfaction and retention in Tanzanian commercial banks
formulated three elements in specific objectives. The elements were provision of
information to customers with variables, which were availability of information when
needed, understanding consumers language, accuracy of information, relevance of
information and reliability of information. Findings indicated that information
provision, complaint handling and service quality had significant impact on
customers satisfaction and hence, their retention.
Previous studies have been focusing in scope of retention in the effect of
customer services, pricing of banks products and services on customer satisfaction.
This study aimed to have a more comprehensive analysis beyond customer services,
pricing of banks products and services and satisfaction and critically examine quality
of the products provided by banks where previous studies have been unclear,
considering the indicators of convenience and speed. For that case the researcher
investigated a combination of latent variables and indicators that had previously not
been studied together.
3.0 Methodology
This research based on the positivist philosophy as it relied mainly on
statistical and quantitative estimation to arrive at conclusion. This research employed
cross-sectional as well as explanatory design relying on quantitative data from
different customers who held bank accounts and who used banks services to explore
factors, which caused customers to remain in the banks and continue to use banks
products as well as services.
The study based on case study which focused on three banks of CRDB,
National Bank of Commerce (NBC) and National Microfinance Bank (NMB).

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This study was conducted in three regions of Tanzania, namely, Dar es

Salaam, Arusha and Tanga. Dar es Salaam was selected because it is one of the biggest
commercial city and populated with all banks in Tanzania with big transactions done
by customers in the city. On the other hand, Arusha was selected because it is the
tourist region with many businesses and large concentration of tourist activities
through which the researcher was able to get foreign customers with the banks
involved in the study. Tanga region was selected because is far different from Dar es
Salaam and Arusha regions because it is a low profile region with a fewer transactions
than other mentioned regions and represented other regions with similar
characteristics to get the overall picture of Tanzania.
Both primary and secondary data were used in the study. The study adopted
purposive sampling technique to select banks whereas convenience sampling
techniques were employed to select a sample of 200 bank customers. Primary data
were collected through questionnaires and all 200 bank customers responded
positively. The Chi-square and multiple regression analyses were used to test the
hypotheses.
4.0 Results and Discussion
4.1 Hypotheses Tests
The data obtained from the questionnaires were tested using Chi-square to
determine the association between the dependent and independent variables as well as
the direction of the relationship. Multiple regression was used to test the extent and
significant levels between variables. The following is the Chi-square statistical formula:
X2 = (Observed Expected)2 / Expected (Kothari, 2011).
4.1.1 Hypothesis One
The aim of hypothesis one was to test if customer service on products and
services had influence on customer satisfaction.
H0: Customer service on products and services do not have a significant influence on
customer satisfaction.
H1: Customer service on products and services have a significant influence on
customer satisfaction.

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Table 4. 1: Summary of Chi-square Values on Customer Service Indicators

Latent Variable Indicators
i.

Bank employees are willing to

help customers and to
provide quick services
(responsiveness).
ii. Bank services are consistent
(reliability).
iii. Bank has the ability or
willingness to change the
services according to
circumstances (flexibility).

Chi-square
values
213.400

DF

Status

Asymp.
Sig.
0.000

68.920

0.000

Sign.

1.002

0.000

Not
Sign.

Sign.

Source: Field Data (2013)

Note: = 0.05, critical value from table at 4 degrees of freedom (DF) = 9.488 and at
3 degrees of freedom (DF) = 7.815.
As shown in Table 4.1, the calculated Chi-square values for the first and
second indicators for the latent variable Customer Service, which are Bank employees
are willing to help customers and to provide quick services (responsiveness) and Bank services are
consistent (reliability) were found to have higher values than the table value of 9.488 at 4
degrees of freedom and 7.815 at 3 degrees of freedom, respectively with levels of
significant of 0.000 for all indicators, which are less than the critical value of 0.05
(p<0.05). This shows that these indicators have a significant net impact on latent
variable Customer Service.
The calculated Chi-square values for indicator Bank has the ability or willingness
to change the services according to circumstances (flexibility) is 1.002, which is lower than the
table value of 9.488 at 4 degrees of freedom. This indicator has no net impact on
latent variable Customer Service.
By using the enter method through the multiple regression analysis, results
showed a significant model (F3, 196=54.501, p<0.05). Adjusted R square=0.446. Bank
employees are willing to help customers and to provide quick services (responsiveness) was
significant with Beta=0.250 and p=0.000 (p<0.05). Bank services are consistent (reliability)
was significant with Beta=0.287 and p=0.000 (p<0.05).

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Bank has the ability or willingness to change the services according to circumstances
(flexibility) was significant with Beta=0.293 and p=0.000 (p<0.05). It can be concluded
that customer service have influence on banks customer satisfaction. Therefore, the null
hypothesis is rejected and alternative hypothesis is accepted that Customer service on products and
services have significant influence on customer satisfaction.
The result of this study is in line with Radomir colleagues (2010) who found
that customer service determines customer satisfaction. Mller (2007) found also that
customer service is significant on satisfaction of a customer when deciding to remain
with a particular bank. But this research study found two indicators of responsiveness
and reliability to be very strong in explaining influence of customer service and one
indicator of flexibility not significant in explaining the influence of customer service.
Responsiveness is very crucial because it gives an opportunity to serve customers
better by giving them what they want in an efficient way (Meehan and Dawson, 2002).
Respondents complained on the issue of failure of Automated Teller Machines
without supervision which causes longer queues in the banks. Moreover, local banks
need to have better plans in helping customers and provide quick as well as consistent
services so as to outperform foreign banks in the era of globalization. There are some
factors contributing to flexibility not being significant in explaining customer service
in this study. Among them there is a fact that the banks under study have many retail
customers with low income levels, which makes it difficult and costly for them to
customize the services to individuals for most of the time rather than giving them the
same services (Lwiza and Nwankwo, 2002).
4.1.2 Hypothesis Two
The main objective of this hypothesis was to test if quality of the products
developed by banks has an influence on customer satisfaction in commercial banks.

H0: Quality of the products developed by banks does not have a significant influence
on customer satisfaction.
H1: Quality of the products developed by banks has a significant influence on
customer satisfaction.

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Table 4. 2: Summary of Chi-square Values on Quality Products Indicators

Latent Variable Indicators
i.

Method of obtaining banks

products is easy and convenient.
ii. The banks services are delivered
in a timely manner (speed).

Chi-square
values
106.120

DF

Status

Asymp.
Sig.
0.000

1.533

0.000

Not sign

Sign

Source: Field Data (2013)

Note: = 0.05, critical value from table at 4 degrees of freedom (DF) = 9.488 and at
3 degrees of freedom (DF) = 7.815.
As shown in Table 4.2, the calculated Chi-square value for indicator of the
latent variable Quality Products, which is Method of obtaining bank products is easy and
convenient was found to have higher value than the table value of 7.815 at 3 degrees of
freedom with level of significant of 0.000 for the indicator, which is less than the
critical value of 0.05 (p<0.05). The calculated Chi-square value for indicator The bank
services are delivered in a timely manner (speed) is 1.533, which is lower than the table value
of 9.488 at 4 degrees of freedom. This indicator has no net impact on latent variable
Quality Products.
By using the enter method through the multiple regression analysis, the results
showed a significant model (F2, 197=65.943, p<0.05). Adjusted R square=0.395. Since
Method of obtaining bank products is easy and convenient was significant with Beta=0.215
and p=0.001 (p<0.05) and The bank services are delivered in a timely manner (speed) was
significant with Beta=0.501 and p=0.000 (p<0.05). It can be concluded that quality
products have an influence on customer satisfaction in commercial banks. Therefore, the
null hypothesis is rejected and alternative hypothesis is accepted that Quality of the products developed
by banks has significant influence on customer satisfaction.
The study findings are in line with Kanojia and Yadav (2012) who emphasized
on accuracy and speed of services provided by the banks and their influence on
customer satisfaction. The method of obtaining bank products being easy and
convenient as indicator was found to be significant, which means there are convenient
services from the commercial banks while it was not significant for the speed
indicator. Speed in a way of loans processing and getting services was an issue.

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Banks hold database for customers information but still follow long
procedures when a loan is applied by a customer. This is because local banks have
many customers to serve with fewer employees (Lwiza and Nwankwo, 2002).
So it is very easy to find one employee dealing with many customers rather
than the particular customer base to serve compared to other banks with high net
worth customers (Lwiza and Nwankwo, 2002).
4.1.3 Hypothesis Three
The main objective of this hypothesis was to test if pricing of bank products
and services has influence on customer satisfaction.
H0: Pricing of bank products and services do not have a significant influence on
customer satisfaction.
H1: Pricing of bank products and services has a significant influence on customer
satisfaction.
As shown in Table 4.3, the calculated Chi-square values for all indicators for
the latent variable Pricing of banks products and services were found to have higher
values than the table value of 9.488 at 4 degrees of freedom with levels of significance
of 0.000 for all indicators, which are less than the critical value 0.005 (p<0.05).
Table 4.3: Summary of Chi-square Values on Pricing of Products and Services Indicators

Latent Variable Indicators

i.

Chi-square
values
75.400

DF

Asymp. Sig.

Status

The interest rates on the banks

4
0.000
Sign
products are affordable.
ii. The bank charges including
68.400
4
0.000
Sign
monthly fees are proportionate
with the services offered.
Source: Field Data (2013)
Note: = 0.05, critical value from table at 4 degrees of freedom (DF) = 9.488.
This shows that both indicators are very strong in explaining influence of
pricing on banks products and services on customer satisfaction. Also the coefficient
of latent variable pricing of banks products and services is 0.726 is very effective.

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Journal of Finance and Bank Management , Vol. 2(1), March 2014

By using the enter method through the multiple regression analysis, the results
showed a significant model (F2, 197=109.704, p<0.05). Adjusted R square=0.522. The
interest rates on the banks products are affordable was significant with Beta=0.229 and
p=0.001 (p<0.05). The bank charges including monthly fees are proportionate with the services
offered was significant with Beta=0.554 and p=0.000 (p<0.05). It can be concluded that
pricing of banks products and services have an influence on customer satisfaction.
Therefore, the null hypothesis is rejected and alternative hypothesis is accepted that Pricing of bank
products and services have significant influence on customer satisfaction.
The findings of this study agree with Kaura (2012) who revealed that
satisfaction in banking environment is influenced by price fairness and service
charges. Furthermore, Rootman and co-workers (2011) found that customers were
more concerned with the bank charges than other factors.
In this research, both indicators of interest rates and bank charges were found
to have a strong influence on customer satisfaction because the banks under study
have low charges to its customers. Also they offer loans at low interest rates and this
is because they have local advantage and low operation cost as they get assistance
from the Government. For example, NMB Bank has most of its customers who are
Government employees and their salaries are deposited in NMB. Furthermore, NMB
has branches almost in all regions in Tanzania. Pricing is important in satisfaction
because most of the customers are retail customers with low level of income, so they
need bank services at low costs.
4.1.4 Hypothesis Four
The aim of this hypothesis was to test if customer satisfaction has an influence
on customer retention.
H0: Customer satisfaction does not have a significant influence on customer retention.
H1: Customer satisfaction has a significant influence on customer retention.

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Table 4.4: Summary of Chi-square Values on Customer Satisfaction Indicators

i.

i.
ii.

v.
v.
vi.

Latent Variable Indicators

Kindness of bank staff makes you
continue trusting the bank.
Clarity of banks procedures has
made you to remain with the bank.
Adequate and timely
information gives you confidence to
continue using the services offered
by the bank.
Complaints are handled well and on
time thus made you to continue
using the same bank.
Better services offered by the bank
have made you to remain with it.
Better prices of banks products and
services make you to continue using
the services from the same bank.

Chi-square values
137.150

DF
4

Asymp. Sig.
0.000

Status
Sign

1.624

0.000

178.200

0.000

Not
sign
Sign

0.000

Sign

Not
sign
Sign

102.200

1.424

0.000

67.400

0.000

Source: Field Data (2013)

Note: = 0.05, critical value from table at 4 degrees of freedom (DF) = 9.488.
As shown in Table 4.4, the second and fifth calculated Chi-square values for
the indicators of the latent variable Customer Satisfaction, which are Clarity of bank
procedures has made you to remain with the bank and Better services offered by the bank have
made you to remain with it were found to have lower values than the table value of 9.488
at 4 degrees of freedom. These indicators have no net impact on latent variable
Customer Satisfaction.
The calculated Chi-square values for the indicators of the latent variable
Customer Satisfaction, which are Kindness of bank staff makes you continue trusting the
bank, Adequate and timely information gives you confidence to continue using the services offered by
the bank, Complaints are handled well and on time thus made you to continue using the same
bank and Better prices of bank products and services make you to continue using the services from
the same bank were found to have higher values than the table value of 9.488 at 4
degrees of freedom, with levels of significance of 0.000 for all indicators, which are
less than the critical value 0.05 (p<0.05). This shows that these indicators have a
significant net impact on latent variable Customer Satisfaction.

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Journal of Finance and Bank Management , Vol. 2(1), March 2014

By using the enter method through the multiple regression analysis, results
showed a significant model (F6, 193=75.939, p<0.05). Adjusted R square=0.693 and the
coefficient of latent variable customer satisfaction is 0.838 is very effective. It can be
concluded that customer satisfaction has an influence on banks customer retention
(See appendix 2, data tables). Therefore, the null hypothesis is rejected and alternative hypothesis
is accepted that Customer satisfaction has significant influence on customer retention.
This study revealed that customer satisfaction has a significant influence on
customer retention. The findings are similar to Afsar and co-workers (2010) who
revealed that customers should be satisfied for them to remain loyal with a particular
bank. Banks in Tanzania offer similar services to their customers and the only thing
which can differentiate them is the way they satisfy their customers on the expectation
and what is delivered. Also once a customer is satisfied, it is not easy for him/her to
switch between banks and probably refer the bank to his/her family and friends
thereby increase in profit for the concerned bank. The local banks have been
considered by customers to have kind staffs who offer a helping hand to customers,
adequate information, timely information, handled complaints properly and have
better prices in their products including services (Ouma et al., 2013). On the other
hand, customers rated them low in the aspect of clear procedures and better services.
These banks did not have better services and they did not view customer as a
centre of their services because most of their customers were retail customers with
low incomes, especially for NMB and NBC Banks. In addition, there is no best way
for customers to give their views and for the banks to work on customers
suggestions. Moreover, there is no proper education to customers on the products
and services. Also, culture contributes a lot in bad services from bank employees
(James, 2012). This is in line with the study from Lwiza and Nwankwo (2002) who
reported the same results. Furthermore, customers remain with the banks because
they are satisfied.
5.0 Conclusion
The aim of the study was to examine the determinants of customer retention
in commercial banks in Tanzania. From the main objective four specific objectives
were developed from which four hypotheses were synthesized that guided the study.
The first objective of the study was to analyze the influence of customer service on
satisfaction of a customer in a bank.

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25

The result of this objective revealed that, customer service indicators of

responsiveness and reliability were found to be strong in explaining the influence of
customer service on customer satisfaction. Only the indicator flexibility was found to
have no net effect on this latent variable. Through the use of multiple regression
analysis the latent variable of customer service was found to be significant in
influencing customer satisfaction.
Examining the effect of quality of the products developed by banks and its
significant influence on customer satisfaction was the second objective. Convenience
and speed were the indicators of latent variable product quality. One indicator of
convenience was found to be effective while the other indicator of speed was found
to have no net effect on this latent variable of product quality. Multiple regression
analysis found the latent variable products quality to have significance influence on
customer satisfaction.
The third objective was to examine the influence of pricing of bank products
and services in customer satisfaction. The indicators of products and service pricing
were interest rates and bank charges and both were found to be strong in explaining
the influence of pricing of bank products and services in customer satisfaction.
In this case, multiple regression analysis found the latent variable products and
service pricing to have significance influence on customer satisfaction.
The fourth and last objective was to analyze the influence of customer
satisfaction on customer retention. The indicators of staff kindness, adequate and
timely information, complaints handling and better prices of banks products and
services were found to be strong in explaining the influence of customer satisfaction
on customer retention while the indicators of clarity of banks procedures and better
services offered by the bank were found to have no net effect on this latent variable
of customer satisfaction. Multiple regression analysis found the latent variable
customer satisfaction to have significance influence on customer retention.
This study makes the following important recommendations in relation to the
observations made during the study; Banks should establish minimum standards that
will become point of reference on level of responsiveness and reliability based on
customer expectation to be attained through customers survey and the banking
industry performance.

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Journal of Finance and Bank Management , Vol. 2(1), March 2014

The reference points should base on what customers want and not what the
bank thinks on what customers want, and they should be updated periodically since
customers expectations change over time.
Banks should control their networks to ensure reliability and in case of
emergence, they should have another plan to carter for the networks failure especially
on ATMs. Withdrawal charges over the counter are higher than ATM charges.
Furthermore, bank employees should be willing to help customers and provide quick
services to them. Lastly, bank supervisors need to monitor their subordinates when
providing services to customers and should have feedback plans from customers on
the services. The audit can be done by periodic questioning of some customers on the
services they receive from the banks.
Banks should use the quality products as a tool to satisfy and retain their
customers through periodic surveys on what constitutes convenience to customers in
their products. Also before developing their products, they should at least consider
customers for their inputs on what they really want so that the products and services
should be easily obtainable and convenient. Banks should review their database to
update customers information and the financial status for easy monitoring of
customers transactions.
It is imperative for the banks to do Know Your Customer (KYC) check
regularly to avoid the redundant of data when a customer fills in a loan application
and it helps in speeding up loan procedures. Moreover, on the issue of speed, banks
need to emphasize on fast delivery of services by recruiting young and energetic staffs
who can cope with the speed of delivering services and motivate them when they
outperform their normal works.
Likewise, more staffs should be allocated on the front office more specifically
to cashiers so as to reduce the workload and long queue. In addition, on staff side,
more incentives should be introduced like teller incentives to the tellers with high
number of transactions to increase the number of customers served by an employee
in a short period of time. Moreover, Bank of Tanzania (BOT) through Banking and
Financial Institution Act (BAFIA) should incorporate quality of the products
provided by the banks in the regulations of the banks and make sure that the banks
follow the standard set by BOT.

Caroline & Elizabeth

27

Banks are recommended to provide affordable interest rates and charges

according to the services and cost incurred in offering those services. Since customers
are very sensitive in the interest rates and charges, banks can use this as the
satisfaction and retaining factor in the competitive banking environment. Also banks
can decide to customize their services to get revenue by differentiating the services
and cost of acquiring those services. For example, for the customers with high deposit
levels, they can be given some priorities with a cost like having designated cashiers to
serve them faster. But when deciding to customize their services they should not leave
out other customers as they will be offended just because they have small deposits
and may decide to leave the bank. Likewise, banks should not deviate further away
from the minimum rate set by BOT of 9 percent rather they should add small mark
up to carter for their cost. Moreover, pricing should be incorporated in the theories of
customer retention through satisfaction.
From the study, it has been shown that satisfaction is vital in making
customers remain and continue to use the services of the same bank. The study
revealed that customers are satisfied through staff kindness, adequate information,
timely information, well handled complaints and better prices in banks products and
services.
The best way that the banks can use is to have enough Customer Relationship
Managers (CRMs) to serve for the large customer base of the local banks of CRDB,
NBC and NMB. CRMs are the people closer to customers and they can easily know
what customers expect and serve them better at the same time give feedback to the
banks authority regarding service levels of their staffs. They can be sure that
customers complaints are solved in time, information delivered in timely manner and
when a customer is dormant CRM can find the reason as to why a customer is not
using bank services for the long period of time.
Acknowledgements
We express our greatest gratitude to Dr. George M. Lindi, for his guidance,
knowledge, patience and support. We also express our deepest gratitude to our
parents, Mr. and Mrs. Msoka for their encouragement, prayers, care and sacrifices.
Their support has been invaluable and we are extremely gratefully.

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Journal of Finance and Bank Management , Vol. 2(1), March 2014

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Appendix
Reliability Tests
Reliability Test for each Hypothesis
Items to be measured
Customer service on products and services
Quality of the products developed by
banks
Pricing of bank products and services
Customer satisfaction
Source: Researcher (2013)

No. of items
3
2

No. of cases
200
200

Cronbach Alpha
0.735
0.741

2
6

200
200

0.794
0.812

Using SPSS, the Cronbach's coefficient alpha was calculated for each hypothesis. As
shown in Table above, values of the measured variables range from 0.735 to 0.812, which fall
in the range 0.7 0.8, indicating an acceptable reliability for all the hypotheses.