ARTICLE IN PRESS

Journal of Retailing and Consumer Services 12 (2005) 373–383

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Measuring service quality of banks: Scale development and validation

Osman M. Karatepea,, Ugur Yavasb, Emin Babakusc
a
School of Tourism and Hospitality Management, Eastern Mediterranean University, Gazimagusa, Turkish Republic of Northern Cyprus,
Via Mersin 10, Turkey
b
Department of Management and Marketing, College of Business, East Tennessee State University, Johnson, TN 36714, USA
c
Department of Marketing and Supply Chain Management, Fogelman College of Business and Economics, The University of Memphis,
Memphis, TN 38152, USA

Abstract

By employing a multi-stage, multi-phase, and multi-sample approach, this paper reports on the construction of a service quality
scale. Customer perceptions of service quality of retail banks in Northern Cyprus serve as the study setting. The parsimonious 20-
item four-dimensional scale consisting of service environment (four items), interaction quality (seven items), empathy (five items),
and reliability (four items) exhibits sound psychometric properties. Scale development procedures and managerial applications of
the derived scale are discussed.
r 2005 Elsevier Ltd. All rights reserved.

Keywords: Service quality; Banking; Scale development; Northern Cyprus

1. Introduction organizational performance and continues to compel the

A deliberate attempt to study services marketing and
service quality issues dates back to the mid-1960s
(Rathmell, 1966). However, interest on the topic has
gained considerable momentum within the past two
decades or so. This is not surprising. On the one hand,
delivery of high service quality to customers offers firms
an opportunity to differentiate themselves in competi-
tive markets. On the other hand, high service quality
results in customer satisfaction and loyalty, greater
willingness to recommend to someone else, reduction in
customer complaints, and improved customer retention
rates (see, for example, Bitner, 1990; Danaher, 1997;
Headley and Miller, 1993; Levesque and McDougall,
1996; Magi and Julander, 1996; Zeithaml et al., 1996).
Today, service quality is considered a critical measure of
Corresponding author. Tel.: +90 392 630 1116;
fax: +90 392 365 1584.
E-mail addresses: osman.karatepe@emu.edu.tr (O.M. Karatepe),
raxyavas@mail.etsu.edu (U. Yavas), ebabakus@memphis.edu
(E. Babakus).
attention of practitioners and academics (Lassar et al.,
2000; Yavas and Yasin, 2001).
Unlike goods quality, which can be measured with
some objectivity, service quality is abstract and elusive.
The unique features of services such as inseparability of
production and consumption, intangibility, and hetero-
geneity make measurement of quality a very complex
issue. In the absence of objective measures, firms must
rely on consumers’ perceptions of service quality to
identify their strengths and/or weaknesses, and design
appropriate strategies. This makes development of
psychometrically sound and managerially useful instru-
ments to measure service quality imperative.
The purpose of this paper is to develop and test a
service quality instrument by using the retail banking
services in Northern Cyprus as a case in point. This
objective is consistent with growing sentiments for
developing context-specific (e.g., industry and/or cul-
ture-specific) service quality measures in light of the
difficulties involved with universal/global measures
(Aldlaigan and Buttle, 2002; Babakus and Boller,
1992; Robinson, 1999; Winsted, 1997). The stages

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doi:10.1016/j.jretconser.2005.01.001
 ARTICLE IN PRESS
374 O.M. Karatepe et al. / Journal of Retailing and Consumer Services 12 (2005) 373–383
outlined in Churchill’s (1979) now-classic paradigm for
developing better measures of marketing constructs are
employed in accomplishing this objective. In the past,
Churchill’s (1979) paradigm has been used to develop
not only measures of other marketing constructs
(Webster, 1990, 1993) but service quality measures as
well (Aldlaigan and Buttle, 2002; Parasuraman et al.,
1988).
In the next section, we provide a review of the relevant
literature. This is followed by the method and results of
an empirical study. We conclude the paper with a
discussion of the implications of the results and
suggestions for future research.
2. Relevant literature
A canvassing of the growing body of literature on
service quality suggests that two schools of thought
dominate the extant thinking. One is the Nordic school
of thought based on Grönroos’s (1984) two-dimensional
model. And the other is the North American school of
thought based on Parasuraman et al.’s (1988) five-
dimensional SERVQUAL model. Considering other
significant conceptual and empirical works in the area,
it appears that service quality encompasses (1) custo-
mers’ experiences with the tangibles, reliability, respon-
siveness, assurance, and empathy aspects of the services
delivered by a firm (Parasuraman et al., 1988); (2)
technical and functional quality (Grönroos, 1984); (3)
service product, service environment, and service
delivery (Rust and Oliver, 1994); and (4) interaction
quality, physical environment quality, and outcome
quality (Brady and Cronin, 2001).
Our review of this body of literature points out two
major limitations. First, as noted by Babakus and Boller
(1992), there is a need to develop industry-specific
measures of service quality. This is particularly im-
portant from a managerial perspective (Shemwell and
Yavas, 1999). Because many of the questions in existing
instruments (notably SERVQUAL batteries) intended
to be applied across situations/services just do not apply
in a specific context and force researchers to drastically
alter the items (Babakus and Boller, 1992; Babakus and
Mangold, 1992; Carman, 1990; McAlexander et al.,
1994). However, as Shemwell and Yavas (1999) cogently
argue, the more specific the scale items are in a service
quality instrument and the more applicable they are to a
manager’s own contextual circumstance, the better s/he
will be able to use the information. Thus, instead of
taking an existing instrument and trying to fit it to the
context, a better approach is to develop an instrument
specifically for the focal service. While many studies in
banking measure service quality by replicating or
adopting Parasuraman et al.’s (1988) SERVQUAL
model (see, for example, Angur et al., 1999; Athanasso-
poulos, 1997; Blanchard and Galloway, 1994; Donthu
and Yoo, 1998; Lloyd-Walker and Cheung, 1998;
Marshall and Smith, 1999; McDougall and Levesque,
1994; Newman and Cowling, 1996; Yavas and Benken-
stein, 2001), a few studies address this weakness and
present new models or approaches to the measurement
of service quality in general and in banking in particular.
For instance, Mersha and Adlaka (1992) applied the
Delphi technique to a sample of MBA students to
generate attributes of poor and good service quality.
They then converted the 12 attributes thus identified
into scales and analyzed students’ perceptions of service
quality in five services, one of which was retail banking.
The authors concluded that the list of attributes they
generated was similar to the five dimensions of
SERVQUAL (i.e., tangibles, reliability, responsiveness,
assurance, and empathy). In another study, Avkiran
(1994) developed a multi-dimensional instrument for
measuring customer-perceived quality in retail branch
banking. Using SERVQUAL as a starting point and
then adding items that he extracted from a qualitative
study commissioned to establish quality service stan-
dards, Avkiran (1994) followed an iterative process and
identified staff conduct, credibility, communication, and
access to teller services as the final dimensions of service
quality. The scale developed by Bahia and Nantel (2000)
based on expert opinions revealed six dimensions of
service quality. These were termed: effectiveness and
assurance, access, price, tangibles, service portfolio, and
reliability.
More recently, Aldlaigan and Buttle (2002), based on
the technical and functional service quality schema
proposed by Grönroos (1984), developed a scale to
measure service quality perceptions of bank customers.
Their study resulted in SYSTRA-SQ, which consists of
service system quality, behavioral service quality, service
transactional accuracy, and machine service quality.
As can be inferred from the statement of its purpose,
our study builds upon these works and, by applying an
iterative procedure, develops a service quality instru-
ment specifically for retail banking in Northern Cyprus.
Such a comprehensive effort to develop a new scale to
measure service quality in the particular setting was also
encouraged by a number of bank managers in Northern
Cyprus whom we contacted during the initial phases of
the current study. After examining the copies of existing
instruments we provided them, the managers clearly
indicated the need for a tailor-made measure for the
Northern Cyprus context.
Second, there is a need to develop service quality
measures that are country/culture specific. This is
because, as is the case with other marketing and
management constructs and measures (Benkhoff, 1997;
Hofstede, 1990; Yavas, 1997), quality constructs/mea-
sures in general (Yavas and Konyar, 2002), and service
quality constructs/measures in particular (Mattila,
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1999a) that are developed in one culture (notably a
western culture) may not be applicable in a different
cultural setting. Drawing attention to this limitation of
extant research, Mattila (1999b) argues that the defini-
tion of service quality depends on consumers’ cultural
heritage, particularly on variations along power distance
and communication context. Malhotra et al. (1994)
share this view and posit that the cultural differences
(e.g., individualism/collectivism, power distance) be-
tween countries are likely to have varying effects on
the definition of service quality. This is shown to be true
in a research by Winsted (1997) who compared Japanese
and US consumers. Focusing on provider behaviors as
indicators of service encounter quality, Winsted (1997)
not only identified new quality dimensions that had not
been a part of service quality concept until then, but also
demonstrated that the number and meanings of service
quality dimensions varied between US and Japanese
consumers. For instance, the ‘‘authenticity’’ dimension,
which refers to genuineness of service providers’
behaviors, was an important component of service
quality for Japanese consumers while this dimension
did not surface in the case of the US consumers. Despite
some cross-cultural commonalities (Espinoza, 1999), the
weight of evidence suggests that culture plays a
significant role on the definition of the service quality
construct (Kettinger et al., 1995). In recognition of this,
calls are made to develop culture-specific measures of
service quality (Winsted, 1997). Indeed, Imrie et al.
(2002) recently stated that managers should avoid
employing the SERVQUAL scale globally and instead
they should develop ‘‘a new, culturally bounded
measure of service quality’’ (p. 17).
Our study develops a service quality measure speci-
fically for the Turkish (Northern Cyprus) setting. It
should be noted that this is not the first study dealing
with service quality measurement issues in Turkey and
Northern Cyprus. Yet it differs from previous studies in
one very important respect. While all previous studies
took an existing instrument as is (or translated it into
Turkish) (Akan, 1995; Johns et al., 2004; Karatepe and
Avci, 2002; Kozak et al., 2003; Yavas and Bilgin, 1996;
Yavas and Arsan, 1995), the present study develops a
measure that represents the first comprehensive effort to
understand how service quality assumes meaning in this
cultural context. It should also be added that several
previous studies dealing with service quality in banking
(Yavas and Bilgin, 1996) and other service industries
(Johns et al., 2004; Karatepe and Avci, 2002) in the
Turkish/Northern Cyprus setting failed to replicate the
five-dimensional structure purported in the SERVQ-
UAL scale. Even those few studies which were able to
replicate the five-dimensional structure reported other
psychometric problems. For instance, while Kozak et
al.’s (2003) study which examined service quality of
airlines in Northern Cyprus was able to partially
375
support the five-dimensional structure of SERVQUAL,
their study failed to provide evidence for discriminant
validity. Likewise, Yavas and Arsan (1995) tested the
dimensionality of the SERVQUAL scale in banking and
found a five-factor solution. Yet, most of the items did
not load on their underlying dimensions. At a time when
service quality becomes a pressing issue in Turkish
banking (Babakus et al., 2003), our study can provide
managers with a much needed specific instrument. Also,
our study addresses the voids in the literature and adds
to the compendium of knowledge in the area.
3. Study
3.1. Step 1: qualitative study (item generation)
To generate items that comprise the domain of service
quality in retail banking services, a team of interviewers
conducted one-on-one interviews with a judgmental
sample of 86 bank customers. The interviews were audio
tape-recorded. In these interviews, based on their
experiences and prior dealings with banks, participants
were asked to talk about their expectations from bank
services.
To code the qualitative data thus obtained, similar to
prior studies (Brady and Cronin, 2001; Richins, 1997), a
content analytic approach was employed. In the first
stage, after listening to the tapes, three independent
coders prepared paragraphs/field notes. All three coders
agreed on the overall content of each paragraph/field
note. In the second stage, the same coders generated a
total of 56 items and agreed on 43 of these items yielding
an inter-judge reliability coefficient of .91. After a closer
scrutiny, three coders agreed that 12 of the 43 items
highly overlapped. After elimination of highly redun-
dant items, this reexamination resulted in a total of 31
items. In the final stage, three coders were asked to
categorize the 31 items into groups based on content
similarities of items. The three coders, working indivi-
dually and then as a group, identified five distinct
categories. Transcripts and items in each category were
further examined by a team of researchers to assign a
higher-level meaning to each category. This exercise led
to the identification and labeling of the following
dimensions of service quality: service environment (four
items), interaction quality (eight items), reliability (five
items), empathy (10 items), and technology (four items).
Table 1 presents a listing of these items.
Service environment refers to the appearance of the
service providers and appearance of the interior and
exterior of the bank facilities. Interaction quality
encompasses attitudes and behaviors of the service
providers and their interaction style with customers.
Empathy is defined as individualized attention given to
customers and willingness of the bank personnel to help
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376 O.M. Karatepe et al. / Journal of Retailing and Consumer Services 12 (2005) 373–383

Table 1
Item-to-total correlations and varimax-rotated factor loadings (First stage, n ¼ 115)

Items Item-to-total correlations Factor loadings

F1 F2 F3 F4 F5

Q01. The exterior of this bank is visually appealing 0.48 — 0.66 — — —

Q02. The interior of this bank is visually attractive 0.56 — 0.69 — 0.32 —
Q03. Employees of this bank have neat appearances 0.49 — 0.68 — — —
Q04. The interior of this bank is spacious 0.36 — 0.42 — — —
Q05. The ATMs of this bank are technologically well-equipped 0.36 — 0.33 — — 0.61
Q06. There is an adequate number of employees in this bank 0.28 — — — — 0.65
Q07. There is an adequate number of ATMs in this bank 0.34 — — 0.40 — 0.61
Q08. The computerized system in this bank functions properly 0.42 0.30 — — 0.57 0.42
Q09. Employees of this bank have the knowledge to respond to problems 0.61 0.55 0.39 — — —
Q10. Employees of this bank are polite to customers 0.49 0.81 — — — —
Q11. Employees of this bank are experienced 0.65 0.62 0.31 — — —
Q12. Employees of this bank instill confidence in customers 0.70 0.67 0.34 — — 0.31
Q13. Employees of this bank are understanding of customers 0.58 0.84 — — — —
Q14. Employees of this bank serve customers in good manner 0.59 0.82 — — — —
Q15. There is a warm relationship between employees of this bank and customers 0.60 0.86 — — — —

Q16. This bank does not make its customers stand in a queue for a long time 0.48 — — 0.75 — —
Q17. Employees of this bank enact transactions on a timely manner 0.68 0.33 — 0.76 — —
Q18. Employees of this bank always help customers 0.68 0.64 — 0.45 — —
Q19. Employees of this bank provide individualized attention to customers 0.69 0.58 0.40 0.41 — —
Q20. Employees of this bank are willing to solve customer problems 0.64 0.59 — 0.43 — —

Q21. Employees of this bank provide error-free service 0.56 0.53 0.41 — — —
Q22. This bank is financially dependable 0.19 — — — 0.59 —
Q23. Employees of this bank carry out customer transactions confidentially 0.48 — 0.36 — 0.44 —
Q24. Employees of this bank provide customers with precise information 0.64 0.46 0.47 — 0.51 —
Q25. This bank informs customers about its financial operation accurately 0.48 — — — 0.56 —
Q26. This bank has convenient working hours 0.15 — 0.43 0.35 0.51 —
Q27. Employees of this bank provide equal treatment to all customers 0.45 — 0.63 — — —
Q28. Employees of this bank know customers’ needs. 0.56 0.32 0.58 — — —
Q29. Employees of this bank are sensitive to customers’ needs 0.74 0.57 0.43 0.33 — —
Q30. Employees of this bank meet customer requests quickly 0.69 0.59 0.50 — — —
Q31. The internet banking services of this bank are widespread 0.06 — — — — —
Eigenvalue 10.50 2.48 1.78 1.70 1.57
% of variance explained 35.01 8.28 5.95 5.66 5.22
Coefficient alpha 0.91 0.73 0.82 0.73 0.44

Note: Items 1–4 represent ‘service environment’. Items 5, 7, 8, and 31 refer to ‘technology’. Items 9–15 and 30 represent ‘interaction quality’. Items 6,
16–20, and 26–29 represent ‘empathy’. Items 21–25 refer to ‘reliability’. The factor loadings less than .30 are not shown. Reliability coefficients
(coefficient alpha) are based on the a priori designation (as designated by coders) of the items to their respective dimensions.

customers and resolve their problems in a timely
manner. Reliability refers to dependability of service
and accuracy of records and information. Finally,
technology dimension was defined as the quality of
ATMs and the proper functioning of computerized
systems.
3.2. Step 2: quantitative study: first stage
Data for the initial refinement of the 31-item
instrument were obtained from a sample of 115
customers of a large bank as they exited the bank after
completing a transaction there. Every third customer
leaving the premises was approached to collect the data.
This sample size, relative to the number of initial scale
items, compares favorably with sample sizes used by
other studies in the early stages of scale development
(Parasuraman et al., 1988; Webster, 1990). The majority
of the respondents (75 percent) were between the ages of
17–46 and male (65 percent). Little over one-half had
college and 35 percent high school degrees. The sample
profile, in terms of age and education composition, was
representative of the bank’s customer population.
The questionnaire administered to the respondents
consisted of two parts. The first part was designed to
measure customers’ assessments of their bank’s service
quality with respect to the items identified during the
qualitative phase of the study. There is a debate in
literature on whether the expectations, or the percep-
tions, or the gap between the two constitute a better
 ARTICLE IN PRESS
O.M. Karatepe et al. / Journal of Retailing and Consumer Services 12 (2005) 373–383
measure of service quality. In this study, service quality
was measured using ‘‘perceptions-only’’ approach.
Specifically, service quality items were transformed into
Likert-scales and the respondents were asked to indicate
their perceptions of their bank on each item using a five-
point scale ranging from ‘‘5 ¼ strongly agree’’ to
‘‘1 ¼ strongly disagree’’.
The choice of performance-only scores was based on
the widely discussed methodological and theoretical
concerns associated with the use of expectations scores
(Babakus and Boller, 1992; Cronin and Taylor, 1992,
1994; Parasuraman et al., 1994; Robinson, 1999) as well
as the difference (gap) scores (Brown et al., 1993; Teas,
1993, 1994). Indeed, after a thorough review of the prior
literature and evidence from three new studies they
conducted, Brady et al. (2002) authoritatively declared
that the ‘‘performance-only’’ measures of service quality
are superior to other approaches.
The second part of the survey included three single-
item measures relating to overall service quality, overall
customer satisfaction, and purchase intention. Re-
sponses to overall service quality item were elicited on
a five-point scale ranging from ‘‘5 ¼ very good’’ to
‘‘1 ¼ very poor’’. Responses to customer satisfaction
item were elicited on a five-point scale ranging from
‘‘5 ¼ extremely satisfied’’ to ‘‘1 ¼ extremely dissatis-
fied’’. Finally, responses to purchase intention item
were elicited on a five-point scale ranging from
‘‘5 ¼ very high’’ to ‘‘1 ¼ very low’’.
Churchill (1979) suggests that purification of an
instrument should start with the computation of
coefficient alphas. This was done for the five dimensions
identified by the coders. The coefficient alphas ranged
from .44 to .91 across the five dimensions (Table 1).
Following reliability analysis, exploratory factor analy-
sis (principal components with varimax rotation) was
applied to the data. As shown in Table 1, this analysis
resulted in a five-factor solution. However, items
representing technology dimension did not emerge as a
viable factor as indicated by low factor loadings and/or
high cross-loadings. In light of factor analysis results
and poor reliability (.44), the technology dimension was
discarded altogether. In addition, one item each from
interaction quality and reliability dimensions and five
items from empathy dimension were deleted due to high
cross-loadings or factor loadings below .50. The four
factors thus retained were: service environment (four
items), interaction quality (seven items), empathy (five
items), and reliability (four items).
Confirmatory factor analysis using LISREL (Jöres-
kog and Sörbom, 1993) was then applied to the four-
factor measurement model to further test dimensionality
as well as convergent and discriminant validity. As
shown in Table 2, the results of the confirmatory factor
analysis demonstrated a moderate fit of the four-factor
measurement model to the data on the basis of a number
377
of fit statistics (w2 ¼ 391.65, df ¼ 164, GFI ¼ .74,
AGFI ¼ .67, NFI ¼ .73, NNFI ¼ .78, CFI ¼ .81,
IFI ¼ .81, SRMR ¼ .092, RMSEA ¼ .11). Further-
more, the magnitudes of the factor loading estimates
ranged from .37 to .92 where a majority of the factor
loadings were higher than .70. And all t-values were
greater than 2.00. Pairwise confirmatory factor analyses
and w2 difference tests revealed that the dimensions are
distinct. Hence, confirmatory factor analyses results
provide evidence regarding convergent and discriminant
validity of the measure (Anderson and Gerbing, 1988).
Also, as reported in Table 2, internal consistency
reliability estimates exceeded the .70 cut-off value
recommended by Nunnally (1978).
Additional assessment of the scale was undertaken
using composite scores for each dimension, which were
calculated by averaging scores across items representing
that dimension. The correlations among the four
dimensions of the scale ranged from .37 (service
environment and interaction quality) to .62 (empathy
and interaction quality). The correlations between
service quality composite dimension scores and the
overall service quality (range between .50 and .60),
customer satisfaction (range between .49 and .60), and
purchase intention (range between .40 and .58) provided
further evidence for the viability of the scale. Collec-
tively, the results from the initial sample are highly
encouraging regarding the reliability, convergent, and
discriminant validity of the scale. Hence, the entire scale
was used without further alteration during the second
stage of the quantitative study.
3.3. Step 3: quantitative study: second stage
To further evaluate the 20-item scale and its psycho-
metric properties, a large-scale study was undertaken.
Prior to data collection, managements of 10 banks were
contacted and permission was sought to interview their
customers on the premises right after completing a
transaction. Eight banks granted permission to the
research team. The number of respondents to be drawn
from each bank was determined proportional to the
number of customers of each of the banks. And, again
every third customer leaving the premises was ap-
proached to collect the data. To get a representative
sample of customers, data collection took place during
all operating hours. After a 3-month period, usable
responses were obtained from a total of 1220 customers.
This sample size is much larger than the sample sizes
used in similar scale development studies (Parasuraman
et al., 1988, 1991; Webster, 1990) and well exceeds the
1000 observations sample size guideline recommended
for factor analysis (Tabachnick and Fidell, 1996) as well
as the 10 to 1 ratio of sample size to number of scale
items guidelines suggested by Nunnally (1978). Eighty-
four percent of the respondents were between the ages of
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Table 2
Scale items, reliabilities and confirmatory factor analysis results (first stage, n ¼ 115)

Scale items Standardized loadings T-values Coefficient alpha

Service environment (SERENV) 0.73

The exterior of this bank is visually appealing 0.80 9.31
The interior of this bank is visually attractive 0.92 11.18
Employees of this bank have neat appearances 0.44 4.67
The interior of this bank is spacious 0.37 3.91
Interaction quality (INTQUAL) 0.91
Employees of this bank have the knowledge to respond to problems 0.59 6.78
Employees of this bank are polite to customers 0.78 9.69
Employees of this bank are experienced 0.67 7.84
Employees of this bank instill confidence in customers 0.73 8.86
Employees of this bank are understanding of customers 0.84 10.89
Employees of this bank serve customers in good manner 0.84 10.83
There is a warm relationship between employees of this bank and 0.87 11.42
customers
Empathy (EMP) 0.85
This bank does not make its customers stand in a queue for a long 0.52 5.76
time
Employees of this bank enact transactions on a timely manner 0.76 9.22
Employees of this bank always help customers 0.88 11.55
Employees of this bank provide individualized attention to customers 0.78 9.67
Employees of this bank are willing to solve customer problems 0.83 10.59
Reliability (REL) 0.76
Employees of this bank provide error-free service 0.67 7.70
Employees of this bank carry out customer transactions confidentially 0.57 6.24
Employees of this bank provide customers with precise information 0.89 11.23
This bank informs customers about its financial operation accurately 0.64 7.17
Model fit statistics w2 ¼ 391.65, df ¼ 164, GFI ¼ 0.74, AGFI ¼ 0.67, NFI ¼ 0.73,
NNFI ¼ 0.78, CFI ¼ 0.81, IFI ¼ 0.81, SRMR ¼ 0.092, RMSEA ¼ 0.11

Note: Each item is measured on a five-point scale ranging from ‘‘5 ¼ strongly agree’’ to ‘‘1 ¼ strongly disagree’’. All loadings are significant at the .01
level.

17 and 46. The majority of the respondents (66 percent)
were male. Forty-two percent of the respondents had
college and 45 percent high school degrees. The
demographic breakdown of the sample is representative
of retail bank customers in Northern Cyprus.
Similar to the process employed in the first stage, we
first computed coefficient alphas. As shown in Table 3,
these coefficients ranged from .81 to .92. In addition, all
corrected item-to-total correlations ranged from .46 to
.75. In light of these results, there was no compelling
reason to delete any items. Confirmatory factor analysis
was employed to examine dimensionality, convergent,
and discriminant validity. The results of the confirma-
tory factor analysis demonstrated a reasonable fit of the
four-factor measurement model to the data on the basis
of a number of fit statistics (w2 ¼ 1354.60, df ¼ 164,
GFI ¼ .90, AGFI ¼ .87, NFI ¼ .92, NNFI ¼ .92,
CFI ¼ .93, IFI ¼ .93, SRMR ¼ .047, RMSEA ¼ .077).
The magnitudes of the standardized loadings ranged
from .50 to .83 and all t-values were higher than 2.00,
indicating convergence of items with their respective
underlying dimensions. As can be seen from Table 3, the
overwhelming majority of the standardized loadings
were above .70. Pairwise confirmatory factor analyses of
the dimensions provided support for discriminant
validity of the scale (Anderson and Gerbing, 1988).
The scale was subjected to further validity assessment
using composite scores for each dimension, which were
calculated by averaging scores across items representing
that dimension. As can be seen from Table 4, the
correlations among the underlying dimensions ranged
from .52 (service environment and reliability) to .76
(interaction quality and empathy). The correlations
among the dimensions (intra-construct correlations) of
the scale are consistently higher than their correlations
with customer satisfaction and purchase intention (inter-
construct correlations). Hence, the scale meets a
fundamental requirement for convergence and discrimi-
nation in measurement (Bagozzi, 1981).
Fig. 1 provides a partial nomological network and the
results of additional analysis to address nomological
validity issues. The literature suggests that perceived
quality has a direct influence on purchase intention
(Zeithaml et al., 1996) as well as an indirect effect via the
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O.M. Karatepe et al. / Journal of Retailing and Consumer Services 12 (2005) 373–383 379

Table 3
Scale items, reliabilities and confirmatory factor analysis results (second stage, n ¼ 1220)

Scale items Standardized loadings T-values Coefficient alpha

Service environment (SERENV) 0.81

The exterior of this bank is visually appealing 0.72 26.78
The interior of this bank is visually attractive 0.80 31.08
Employees of this bank have neat appearances 0.67 24.30
The interior of this bank is spacious 0.71 26.25
Interaction quality (INTQUAL) 0.92
Employees of this bank have the knowledge to respond to problems 0.70 27.60
Employees of this bank are polite to customers 0.81 33.92
Employees of this bank are experienced 0.72 28.58
Employees of this bank instill confidence in customers 0.79 32.28
Employees of this bank are understanding of customers 0.82 34.68
Employees of this bank serve customers in good manner 0.83 34.78
There is a warm relationship between employees of this bank and 0.80 33.32
customers
Empathy (EMP) 0.83
This bank does not make its customers stand in a queue for a long time 0.50 17.80
Employees of this bank enact transactions on a timely manner 0.69 26.44
Employees of this bank always help customers 0.83 34.69
Employees of this bank provide individualized attention to customers 0.81 33.62
Employees of this bank are willing to solve customer problems 0.77 30.65

Reliability (REL) 0.81

Employees of this bank provide error-free service 0.73 27.93
Employees of this bank carry out customer transactions confidentially 0.69 26.25
Employees of this bank provide customers with precise information 0.82 33.00
This bank informs customers about its financial operation accurately 0.68 25.36

Model fit statistcis w2 ¼ 1354.60, df ¼ 164, GFI ¼ 0.90, AGFI ¼ 0.87, NFI ¼ 0.92,
NNFI ¼ 0.92, CFI ¼ 0.93, IFI ¼ 0.93, SRMR ¼ 0.047,
RMSEA ¼ 0.077

Note: Each item is measured on a five-point scale ranging from ‘‘5 ¼ strongly agree’’ to ‘‘1 ¼ strongly disagree’’. All loadings are significant at the .01
level.

Table 4 composite dimension scores as indicators of service

Means, standard deviations and correlations of study variables quality. The results in Fig. 1 show that the model fits the
(Second stage, n ¼ 1220)
data rather well (w2 ¼ 18.66, df ¼ 8, p ¼ :017;
Variables: 1 2 3 4 5 6 SRMR ¼ .011, GFI ¼ .99, AGFI ¼ .99, NFI ¼ 1.00,
NNFI ¼ 1.00, CFI ¼ 1.00, RMSEA ¼ .033), and both
Service environment (SERENV) 1.00
the direct and indirect effects of service quality on
Interaction quality (INTQUAL) 0.60 1.00
Empathy (EMP) 0.54 0.76 1.00 purchase intentions are significant. That is, the standar-
Reliability (REL) 0.52 0.71 0.70 1.00 dized regression coefficients from: (1) service quality to
Customer satisfaction (CSAT) 0.51 0.65 0.62 0.61 1.00 customer satisfaction (g1 ¼ :74; t ¼ 22:5); (2) service
Purchase intention (PINTENT) 0.50 0.65 0.65 0.62 0.71 1.00 quality to purchase intention (g2 ¼ :45; t ¼ 13:5); and (3)
Mean 3.54 3.94 3.70 3.91 3.95 3.84 customer satisfaction to purchase intention (b ¼ :41;
Standard deviation 0.87 0.77 0.80 0.71 0.69 0.79 t ¼ 14:6) are all statistically significant. Furthermore, it
makes theoretical sense that service quality has its
Note: Composite scores for each measure were obtained by averaging
scores across items representing that measure, except for customer strongest effect on customer satisfaction since satisfac-
satisfaction and purchase intention. The scores range from 1 to 5. A tion is a mediator between service quality and purchase
higher score indicates a more favorable response. All correlations are intention. In addition, 55 percent of the variance in
significant at the .01 level. customer satisfaction is accounted for by service quality,
and 64 percent of the variance in purchase intention is
explained by service quality and customer satisfaction
mediating role of customer satisfaction (Brady and jointly. Finally, an examination of standardized load-
Robertson, 2001). Using this simple nomological net- ings in Fig. 1 suggests that interaction quality is the
work, we tested a structural model with the four most important indicator of service quality (l2 ¼ :88),
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380 O.M. Karatepe et al. / Journal of Retailing and Consumer Services 12 (2005) 373–383

CSAT PINTENT
SERENV
λ 1=.66***

γ1= 0.74 (t=22.5) β = 0.41 (t=14.6)

INTQUAL λ 2=0.88 (t=25.9) SQUAL CUSTSAT PURCINT

λ 3=0.85 (t=25.2)

γ2 = 0.45 (t=13.5)
EMP
λ 4=0.81 (t=24.2)

REL Proportion of variance explained (R2) in:

Customer satisfaction (CUSTSAT): 0.55
Purchase intention (PURCINT): 0.64
Model fit statistics:
χ =18.66 (df=8, p=0.017)
2

SRMR=0.011
GFI=0.99
AGFI=0.99
NFI=1.00
NNFI=1.00
CFI=1.00
RMSEA=0.033

Fig. 1. Assessing nomological validity of the service quality measure: the relationships among service quality (SQUAL), customer satisfaction
(CUSTSAT), and purchase intention (PURCINT) constructs. Note: Since customer satisfaction and purchase intention were measured using single
items, their error variances were set to zero in the structural model. Hence, their standardized loadings on their respective latent constructs were 1.00
by definition. T-values are shown in parentheses except for the loading of service environment (SERENV), which was initially fixed to 1.00 to set the
metric for the underlying service quality construct.

followed by empathy (l3 ¼ :85), reliability (l4 ¼ :81),
and service environment (l1 ¼ :66).
4. Discussion
This study developed a 20-item survey instrument to
measure bank customer perceptions of service quality in
Northern Cyprus. The results showed that service
quality could be conceptualized and measured as a
four-dimensional construct consisting of service envir-
onment, interaction quality, empathy, and reliability.
The scale exhibited high internal consistency reliability
and met rigorous conceptual and empirical criteria for
construct validity including content, convergent, dis-
criminant, and nomological validity.
Our results showed that interaction quality is the most
important dimension of service quality followed by
empathy, reliability, and service environment. The
number of distinct dimensions, their meaning, and their
order of importance show some similarities and
differences with prior conceptualizations including
Grönroos (1984), Parasuraman et al. (1991), Brady
and Cronin (2001), Rust and Oliver (1994), and
Aldlaigan and Buttle (2002). There is a clear conver-
gence in terms of conceptual meaning between our
service environment dimension and the ‘tangibles’
dimension of SERVQUAL. This dimension is the least
important indicator of service quality in this study as
well as previous studies using SERVQUAL (e.g.
Parasuraman et al., 1991). Empathy and reliability
dimensions in the current and SERVQUAL scales are
also conceptually similar. In the present study, empathy
was found slightly more important than the reliability
dimension whereas SERVQUAL studies consistently
identified reliability as the most important indicator of
service quality. Interaction quality appears to overlap
with the combined SERVQUAL dimensions of ‘respon-
siveness’ and ‘assurance’.
Additionally, interaction quality identified in the
current study is similar to that of Grönroos’s (1984)
functional quality. Several dimensions reported in our
study are similar to those of Aldlaigan and Buttle
(2002). For example, their behavioral service quality is
similar to our interaction quality, and our reliability is
similar to their service transactional accuracy. Finally,
service environment dimension in Rust and Oliver
(1994) and physical environment quality in Brady and
Cronin (2001) are conceptually similar to our service
environment dimension.
A common theme emerging from these comparisons is
that the meaning of service quality may have some
universal aspects as demonstrated by the similarities in
the underlying dimensions. However, significant varia-
tions may exist regarding the complexity (i.e., the
number of underlying dimensions) of service quality
concept and the importance attached to each dimension
from one context to another. A comparison of the
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O.M. Karatepe et al. / Journal of Retailing and Consumer Services 12 (2005) 373–383
current study with those that were conducted in the
banking sector in Turkey (a very similar culture and
similar customer demographics) using SERVQUAL
(Yavas and Arsan, 1995; Yavas and Bilgin, 1996)
reveals that the service quality measure developed in
this study provides a more specific view since it was
guided by items suggested by bank customers in the first
place. The items in Yavas and Bilgin (1996) produced a
three-dimensional depiction of service quality with no
apparent identification with the presumed SERVQUAL
dimensions. While Yavas and Arsan (1995) found a five-
dimensional structure, the items did not load on the
appropriate factors designated in SERVQUAL. Our
study produced a viable measure of retail banking
service quality within the cultural context of Northern
Cyprus.
The technology dimension of service quality was
initially considered based on the qualitative stage of the
study. However, it did not emerge as a viable dimension
in the later stages when subjected to empirical criteria.
This result is potentially due to the fact that technology-
based services (e.g., video-banking, internet-banking,
telephone-banking) are not widely available and, wher-
ever available, internet sites are not easy to navigate.
Furthermore, the use of technology in this sector is
hampered by poor electrical infrastructure. Frequent
power outages render ATMs useless and cause frustra-
tion among customers. Also down-times and other
‘‘glitches’’ in computer systems are common occurrences
in Northern Cyprus. However, bank consumers are
aware of the benefits that technology can provide and
this dimension of service quality will assume a more
distinct meaning in the future as technology infrastruc-
ture improves in the country. Hence, future studies
should pay attention to technology as a potentially
critical dimension of service quality.
The current study provides some useful insights for
managerial action. First, bank managers can rely on this
industry-specific scale in order to measure service
quality delivered to their customers. By examining
performance scores on each attribute within and across
dimensions, improvement needs can be identified.
Second, from a strategic standpoint, bank managers
can determine the relative importance of the four service
quality dimensions in predicting customer satisfaction
and customer loyalty. By doing so, bank managers can
determine which service quality dimension(s) they
should pay most attention to. Third, multi-branch bank
organizations can use the current scale to evaluate
service quality delivered to customers in different
branches and track the relative performance of various
branches over time. Fourth, bank managers can employ
the service quality scale to identify distinct customer
clusters or segments with varying perceptions about
service quality. Cluster profiles can provide valuable
information on how to approach each segment for
381
quality improvement initiatives. Focusing marketing
efforts on the most unhappy cluster(s), for instance, may
provide immediate relief for reducing defection rates
(Brady and Cronin, 2001). Fifth, the service quality scale
can also be administered to frontline employees and
their customers simultaneously to compare customer
perceptions of service quality with frontline employee
perceptions. Finally, from a competitive standpoint,
bank managers can use the existing scale to assess their
strengths/weaknesses relative to competitors across
service quality dimensions.
5. Concluding comments
It should be underscored that given the premise that
replication research is the mainstay of the scientific
method and that empirical generalizations are central to
knowledge development, our results can hardly be
considered conclusive. Certainly more studies are
needed to further validate the four-factor service quality
measure derived in this study. In addition, while we
followed well-established procedures throughout our
study, at the qualitative stage, employment of the
approach advocated by Zimmer and Golden (1988)
might have been better. It is conceivable that using the
same coders also as judges during the coding process in
selecting and developing the items may have partially
confounded our item pool.
This study provides full support for neither the North
American nor the Nordic school of thought regarding
the dimensionality of service quality or the meanings of
quality dimensions. However, the dimensions identified
in this study show similarities to other service quality
measures such as SERVQUAL and SYSTRA-SQ. This
suggests that there may be some potentially universal
facets of service quality and that perhaps we may not
need to develop specific measures from scratch for each
context. Instead, existing knowledge base may provide a
useful starting point for adaptations to new contexts.
Future research can shed further light on these issues.
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