CHAPTER ONE

1.0 overview of the chapter This chapter gives an overview of the research, background of commercial banking in general and Standard Chartered Bank in particular; it also identifies the problem leading to the research and the resulting objectives, research significance and limitations. 1.2 introductions Customer retention in the banking service industry plays a more important role due to unique features in the services offered by banks compared to other service industry. It is an accepted fact that customer retention is among the value generators in the banking industry (Berry, 2005). The banking industry in Tanzania is evolving as a result of the increasing number of banks and market experience using financial products. As a result, developing customer retention strategies has become a priority for financial institutions. Improving customer service is a way to gain a competitive advantage. A comprehensive understanding of customer retention is required to develop an effective retention strategy (Gordon, 1999). As the market evolves, retention becomes a key component in the strategy of banks. Retention is important not only because retaining customers costs less than acquiring new ones, but also because it is a value generation.

Research done by Venkataraman and Low (1991) indicate that for every three new banks formed two have customer problems. The problem then is the poor relationship between local banks and customers. If this problem is not well addressed, many local banks will definitely fail as others have already failed. Failures of these local banks result in a negative effect on people whose livelihood depends on the local banks. In order to solve this problem, banks have to develop good and profitable relationships with their customers. Such relationships can be cultivated by identifying, understanding and satisfying their customers needs and wants which are the elements of customer retention (Cowan, 1992).

The above insights show that many local banks today are facing new marketing realities, one is the presence of sophisticated competitors in the market, and as a result local banks remain with only few customers to rely on. This situation has led many banks fighting for shares of flat or expanding markets. Such struggles for survival on the part of the local banks inevitably lead to escalating costs as far as running the business is concerned (Cowan, 1992).

This is due to the fact that the cost of advertising or running a campaign in order to draw new customers is rising. It should also be taken into consideration that it costs five times as much to fight for a new customer than it does to keep an existing customer satisfied (Jones and Sasser, 1995). For example, consider and compare the cost incurred for researching, developing, and implementing new marketing plans and strategies to the cost incurred to maintain an existing customer. One of the ways to address the problem of increasing costs of running a business is to develop good customer-business relationships that will keep the current customers happy so that they will not turn away from the business. Local banks are also realizing that losing a customer entails more than losing a single sale; it means losing the stream of purchases that the customer would have made over a lifetime patronage (Estell, 1999).

Background of Commercial Banking in Tanzania The banking and financial sector in Tanzania, as a result of the Arusha Declaration (1967), came under the control of the government. The commercial banking sub-sector was as a result monopolized by the National Bank of Commerce NBC (with 92% of all bank deposits, and 189 branches)1. At this time the only other players in the commercial banking sector were CRDB (1.8% 0f Deposits, 11 branches) and Peoples Bank of Zanzibar PBZ (2.1% of deposits and 4 branches)2. The Arusha Declaration nullified the role of the market in determining the prosperity of a firm and eliminated competition altogether. As a result the banking sectors orientation was primarily social with a focus on the products economic features. NBC was not prompted to think about customer retention, as there were no
1 2

Financial Sector Restructuring in Tanzania 1990 Financial Sector Restructuring in Tanzania 1990

alternatives to services it was providing inside the country. It can be equally argued that for these same reasons customer attraction was not much of aconcern for the monopoly either, as neglect of commercial considerations, decline in professional standards and quality became rampant. This state resulted largely from both internal and external pressure. That is to say, pressure exerted on NBC from outside to expand without adequate planning and preparation and pressure resulting from internal weaknesses such as indiscipline and low moral of staff and inadequate internal controls The Banking and Financial Institution Act of 1991 paved the way for liberalization of the commercial banking sector in Tanzania. In the years that have followed NBC (with 23% of total deposits and 35 branches)3 has lost its monopolistic hegemony and the sector now hosts more than 17banks including Standard Chartered Bank, Barclays Bank, Stanbic Bank, National Micro finance Bank and CRDB Bank to name a few. The liberalized banking business spawns stiffening competition among the financial intermediaries operating inside Tanzania. These changes have come with opportunities and threats which forcibly compel these banks to formulate strategies that would favorably place them in a competitive advantage and consequently achieve shareholders wealth i.e. wealth maximization.

This transition from a dormant, monopolistic market that lacked in alternatives, to a highly competitive market where the target customers are more demanding and informed, and are approached by competitors with equal or better offerings poses a challenge to all the banks involved to examine indicators of customer retention such as customer satisfaction, which have a direct bearing on customer retention (Ross 1995). Apart from this truth the concept of customer retention and its indicators is undermined in top management decision making when compared to result oriented attributes like profit and productivity. 1.2 Background of CRDB bank PLC

BOT unpublished statistics September 2001

The history of CRDB BANK PLC dates back to 1947 when the Government established the Land Bank of Tanganyika (LBT). The main objectives of LTB were to provide long term loan not exceeding 70% of land value or 0.3 millions with maturity of up to 3030 years and also to provide short and medium terms loans with maturity of up to 5 years. Following independent in 1961 and different financial sector reforms Land bank of Tanganyika undergoes a different restructuring session which goes in hand with changing it names from Land Bank of Tanganyika to Agricultural Credit Agency (ACA) in 1961, then National Development Credit Agency (NDCA) in 1964 before being Tanzania Rural Development Bank (TRDB) in 1971. The problem of declining agricultural output eventually stimulated the government into reconsidering the issue of the re- establishment of the Cooperative Unions as well as looking into the issue of a declining flow of credit to agriculture. The share reserved to the Government and 49% of the share to Cooperatives. The TRDB was therefore, reconstituted into the Cooperative and Rural Development Bank (CRDB) on July 1st 1984 The problem of declining agricultural output eventually stimulated the government into reconsidering the issue of the re- establishment of the Cooperative Unions as well as looking into the issue of a declining flow of credit to agriculture. The share reserved to the Government and 49% of the share to Cooperatives. The TRDB was therefore, reconstituted into the Cooperative and Rural Development Bank (CRDB) on July 1st 1984 The registration of CRDB (1996) Limited under the companies ordinance followed on 28th JUNE 1996. And in order to improve its performance and by considering the amount of shares in 2007 the bank changed its name to CRDB BANK PRIVATE COMPANY LIMITED (CRDB BANK PLC). Recently the bank has almost 60 branches all over the Tanzania Due to this growing and intensifying competition between banks, be it local or foreign, for customers, a simple profit maximizing objective becomes mediocre and nave. It then becomes critical for companies to properly examine the drivers of this profit, less they risk loosing it. This is true for CRDB Bank, which strives to be the bank of preference for its target customers, as other up and coming banks are also targeting for these same customers.

Apart from this, CRDB bank has launched a new brand and bank values that being trickled to down to its subsidiaries,. As a result it is relevant that CRDB Bank understand why its customers continue to be or cease to be its customers by examining the critical indicators of customers retain-ability, that is the level of satisfaction of customer with specific attributes of the services it offers (in this case interpersonal communication, service performance and complaint handling).

1.2 Statement of the problem Liberalization of the banking sector in Tanzania has resulted in stiff competition among commercial banks in Tanzania. Stiff competition for customers has forced banks to put more emphasis in retaining their existing customers since, it costs five times to get a new customer than to retain an existing one. However, for customer retention to be achieved, the customer retention strategies used must be effective.

Since late 1990s CRDB Bank had tried to initiate different measures in build further on its position as a progressive, secure and stable bank, improving services and offering

customers convenient, innovative, alternative delivery channels that meet their needs, are some of the efforts done by the bank Furthermore, service excellence, meeting client needs, and providing innovative products have become essential in making sure it satsfay its customer and hence retaining them (CRDB Banks 2009)

Despite all these efforts done s, but still, the bank continue to lose customers to competitors. Not only has that, but also the banks incurred huge costs in implementing customer retention strategies with no tangible results, hence affecting the bottom-line. This raises questions

whether the customer retention strategies used by the banks are effective (CRDB Banks 2009)

It is thus the objective of this research study to assess the effectiveness of customer retention strategies used by commercial banks in Tanzania and in doing, so identify weaknesses in their customer retention strategies and suggest measures to be taken to improve the effectiveness of such strategies by focusing on CRDB Bank as the case study.

1.3 Objective of the study The main objective of this study is to assess the effectiveness of customer retention strategies among commercial banks in Tanzania 1.3.1 Specific Objectives The study has the following specific objectives: 1. To evaluate the areas within the bank service provision systems that have a bearing on the customer retention and checking on whether are higly considered 2. To examine the level of customer satisfaction at the bank and evaluating its impacts on the customer retention. 3. To evaluate on weather what the customers expect s before joining CRDB bank is the same as what they are experiencing within the bank. 4. To evaluate the main measure taken by the bank to ensure highly level of customer satisfactions and to check on appropriateness of this 1.4 Research question The study will be guided by the following research questions; 1. what are the main areas within the banks service provision that have bearing on the customer retention and are they highly considered by the bank?

2. What are the level of customer satisfactions at the bank and had this have impacts on customers retention? 3. Are the post joint to CRDB expectations by customers the same as what customers experiencing after joining the bank? 4. What are the main measures taken by the bank to ensure high level of customer satisfaction and are these measures appropriate? 1.5 Significance of the study From the introduction and problem statement above, it is evident that if this problem of customer dissertation is not addressed, many banks will cease to exist. The termination of such local banks will have a negative effect on people whose livelihood depends on them. These negative effects may include loss of revenue/income to individual employees, business owners, and government in the form of taxes. The significance of this study will lie in the urgent need to address this problem.

The significance of this study also will lie in its goal of investigating efficient and effective ways of implementing customer retention as a tool to success in business. These tools will enable local banks to survive competition, hence achieve long-term survival, profitability, and growth. Through long-term survival, employees will be sure of long-term employment and long-term income opportunities.

Profitability will lead to more wealth creation for local banks (as well as individual shareholders or business partners). The growth of local banks will lead to more profit and more tax to government. Moreover, more employment opportunities will be created, as local banks will seek more employees to fill the new job opportunities created by the growth of these local banks. In other words, this study will have a positive snowball effect on society at large. The findings of the study will also act as a stepping stone to future researchers on the same or similar topics by suggesting areas that need further studies to be conducted. Successful completion of the study will also enable the researcher to fulfil partial requirements for the

award of a Masters degree in Business Administration (MBA) offered by University of Dar es Salaam Business School (UDBS). 1.6 Scope and limitations of the study The scope of this study geographically will base on the local banks in Tanzania, specifically in Dar es Salaam and the topical scope is customer retention in commercial banks. 1.7 LIMITATIONS OF THE STUDY In doing this study, the researcher expects to encounter the following limitations: 1. Time constraints This study will be carried out for a short period of time because the requirement is to do so as to follow the deadline of the academic calendar of UDBS. Time constraint affected both, the quality and quantity of the research study because the researcher had to use fewer respondents and only one bank as a case study.

2. Financial limitations Lack of adequate finances affected the quality and quantity of data collected during the study. This may hamper the researcher to conduct the study effectively because the researcher was not able to interview as many respondents as compared to if funds were sufficient for conducting the study. 3. Lack of local empirical literature Local empirical literature on customer retention in Tanzanian banks is lacking, and as a result, the researcher will have to use literature from other sources. 1.7 Study delimitations To address the issue of lack of adequate time, the researcher intends to conduct the study on weekends and public holidays so as to be able to finish the study in time. To deal with the issue of financial constraints, the researcher will try to minimize expenses as much as 8

possible. To address the problem of infrastructure, the researcher will focus on only two banks, CRDB Bank PLC and NBC.