The Effect of Operational Risk Management Practices on the Financial Performance in Islamic Banks in Kenya

Abstract

The Islamic banking system has gained momentum worldwide. The Islam banks risks are normally viewed from the perspective of the uncertainty. The Islamic laws are very clear on any element of providing information asymmetry or speculative behavior which leads to dishonest profits which is haram according to Islam doctrines. The Islamic religion provides that any financial activity which may lead to an investment earning interests on the invested amount is unlawful. The study aimed at evaluating the effects of Islamic banking profitability covering 5 years. SPSSv21 was used in the study to aid in data analysis in order to establish the association linking the variables under study. The ANOVA shows an F value of 3.776 and a P value < 0.05 indicating that the overall regression model for the control variables is significant hence it has some explanatory value. Hence, an existence of strong association linking ROA to different financing modes. At 95 percent confidence interval P–value (p<0.05) implying that the variables combined do influence Islamic banks performance. In the full model constituting of predictors and the control variables, Ijarahad the most statistically significant coefficient as indicated by the t-ratio of 2.353 (β=7.58E-10, t=2.353, p value =0.04). thus, the available Islamic products available in Kenyan commercial banks had a strong direct association to ROA implying that the diversification and introduction of more financing modes will enhance commercial banks performance offering Islamic financial services. instruments such as Sukuk since Islamic banks are locked out of treasury bills and bonds which are