Effect of Internal Factors on the Financial Performance of Commercial Banks Offering Islamic Banking Services in Kenya

Abstract

Any financial institution aims at making good returns to its shareholders. They need to maintain their financial stability and continuous growth in order to experience continuous profitability. Therefore, understanding factors influencing performance of these banks is very crucial in mitigating any eventualities of economic stability. Different researches reveal that a commercial bank’s financial performance is affected by both internal and external variables. The study aimed to look at variables that influence the financial performance of commercial banks offering Islamic banking services in Kenya between the years 2013 and 2017. The ROA represented the dependent variable of the study. The CAMEL framework model proxied the independent variables under the study. The research looked at six commercial banks offering Islamic banking services. The study employed descriptive statistics like the mean, the maximum and minimum values and the standard deviation to summarize the collected data into meaningful form. The study also employed correlation to establish the strength of interdependence among the study variables. The findings were presented in tabular form. The study found out that there was a strong positive relationship that existed between earnings ability and profitability of commercial banks offering Islamic banking services with a correlation coefficient of 0.968. The study showed an R square of 0.943 meaning that the ROA (dependent variable) was determined 94.3% by the independent variables with the remaining 5.7% being determined by other factors not covered within the study. The study concludes that earnings ability had the highest influence on ROA of commercial banks offering Islamic banking services. Therefore, the study recommends that, any financial institution offering Islamic banking services or intends to offer, must adopt strategies that will significantly increase their earnings ability.