The effect of offering Sharia compliant products on financial performance of commercial banks in Kenya

Abstract

The banking industry is a key sector in the Kenyan economy. As profit seekers, commercial banks are inclined to formulate policies that aim at diversifying their portfolio and thus guaranteeing some minimum rate of return. To achieve this objective of profit maximization, banks make decisions to invest excess cash in varying portfolios, involving not only the amount to invest but also the types of portfolios in which to invest. It is estimated 38% of Kenya‘s population is unbanked. Further, the financial exclusion afflicting Kenya‘s Muslim population who have preference for Shariah compliant financial products could be significant, hence the likelihood that Shariah compliant financial services could contribute towards greatly reducing Kenya‘s unbanked population. It is this motivation that led to the introduction of Shariah compliant products in the banking industry Kenya. This study adopted a descriptive survey. The population of the study consisted of all the 43 commercial banks in Kenya. The study used primary data which were collected using a structured questionnaire. Data presentation was done using pie charts, bar chart and percentages. The study therefore concluded that indeed offering new products such as Shariah compliant products really has a positive effect on financial performance of the bank. It has also broadened investment/innovation opportunities for the banking sector in Kenya.