Effect Of Islamic Financial Services On The Financial Performance Of Selected Banks In Kenya

Abstract

The financial system is the main driver of economic growth and development of a nation. It facilitates the flow and allocation of funds in an economy. For the longest time, the conventional financial system has dominated the market. However, the introduction of Islamic financing is tipping the scales. Islamic finance refers to financial institutions which operate under Islamic Shari’ah law. Over time, there has been a continued expansion and uptake of Islamic financial services. This necessitated a study in this field. Islamic financing offer the same services as conventional financing, but, operate on the principles of Shari’ah law (Islamic law) which prohibits secured returns, fees, uncertainty caused by speculations and fluctuations in interest rates during the financing repayment period on an investment. Islamic finance offers services to all of its customers regardless of their faiths. Some of the challenges facing Islamic banks are social justice, lack of cooperation, divided social interest and liquidity constraints which have contributed to unfavourable financial performance. These challenges have affected the quality and quantity of financial services provided by Islamic banks hence affecting their performance. The purpose of this study was to find out the effect of Islamic financial services on the financial performance of selected banks in Kenya. The study was anchored on three theories; the shareholder theory, the theory of interest and Islam, and the agency theory. The study adopted a descriptive methodology in which eight banks offering Islamic financial services in Kenya were targeted, namely ABC Bank Kenya, Barclays Bank of Kenya, Diamond Trust Bank, First Community Bank, Gulf African Bank, Kenya Commercial Bank, National Bank of Kenya, and Standard Chartered Bank. Secondary data was obtained from published financial statements from respective bank websites and self-administered data collection forms. Data was analysed using descriptive statistics. Regression analysis was used to measure the relationship between dependent variable and independent variables. The study established that equity sharing and financial training had a positive effect on financial performance of selected banks in Kenya. The study however established that cost-plus financing had a negative effect on financial performance of selected banks in Kenya. The study recommended that increased awareness of Islamic products should be undertaken through development of effective marketing policies, Islamic banks should also invest in operational cost cutting measures like staff training to equip them with knowledge and competence and save on time and material wastages, and also the government should develop policies that encourage Islamic banking and growth in Kenya. The study recommended a further study on challenges facing uptake of Islamic financial services in Kenya with a view of recommending solutions to those challenges and also on the same topic using GARCH model as a way of validating this study.