Response strategies by islamic banks to competition in the commercial banking sector in Kenya

Abstract

The entry of both Gulf African Bank and the First Community Bank into the Kenyan commercial banking sector ushered the first 100% Shari'ah complaint financial institutions with an array of products for their customers. There is currently a lot of expectation from both Muslims and non Muslims for this alternative form of banking that has brought in a new form of partnership and interest free banking. This is because the public has suffered for too long from high interest rates and volatile fluctuation of interest rates by conventional banks.

A large section of the Muslim community remains untapped by the banking industry due to non availability of riba-free banking on low incomes. The business community in Nairobi, Mombasa and other towns with sizeable Muslim communities is currently the potential lucrative market for Islamic banking. This study sought to find out the challenges of competition faced by Islamic banks and to identify the response strategies by Islamic banks to competition in the Kenyan commercial banking sector. The study used primary data collected from various heads of departments of the two Islamic banks by way of personal interviews.

The study found out that in order for these banks to survive and even prosper in such a competitive business environment its was very crucial for these banks to adopt strategies that matched the market dynamics and enable them respond to market needs as and when they arise. It is worth noting that the two fully fledged Islamic banks do not perceive convectional banks to be a threat to their survival, they are therefore each others competitor as they both strive to gain a bigger market share of the Muslim community in Kenya.

Islamic banking being a new concept in Kenya we would all have expected the Islamic banks to face a considerable number of challenges as a result of competition but on the contrary these banks have had a very positive reception from the Muslim community in Kenya and the general public at large. These banks have so far managed to gamer large numbers of very loyal customers in the short period they have been in operation. The rapid expansions of Islamic banks in less than three years of being in operation have therefore demonstrated the viability and feasibility of non-interest-based operations in the Kenya banking sector