An empirical study of factors influencing financial performance of Islamic versus conventional Banks in Kenya
Abstract
Today’s international and domestic environments in which commercial banks operates in are getting more challenging due to structural reforms of early 1980’s resulting to globalization and deregulation of financial markets among others. All these changes led to stiff competition among banks both at domestic and international market for customer’s funds mobilization and utilization. The determinants of bank performance have long been a major focus of banking research world over. The literature divides the determinants into internal and external factors. This study examines empirically the factors influencing the financial performance of Islamic versus conventional banks in Kenya (2009 – 2012). The specific objectives of this study was to analyze how bank’s specific; industry characteristics and macroeconomic variables affects the performance commercial banks in the country and also to establish whether Islamic banks as new concept are as profitable as conventional banks. The study employed causal comparative research design as the main approach to guide the study. A simple random sampling technique was used to select sample of two Islamic and eight conventional banks from a stratified groups, based on CBK weighted composite index of small and large banks. Data was analyzed using correlation and regression analysis and the results presented in graphs and tables. The study findings showed that bank characteristic variables such as interest spread, capital adequacy, size, and liquidity have positive and strong influence in the performance of commercial banks, while management efficiency and asset quality recorded strong and negative association to profitability. Furthermore, costs and profits have inverse relationship. On the impacts of the industry specific factors, the results was mixed; whereas the banking sector development variable proxy as credit to private sector have a positive and insignificant influence on bank performance, the stock market capitalization indicator recorded negative and insignificant influence on banks profitability. More importantly, the study found that the macroeconomic determinants such as real GDP growth rate showed positive and strong association to banks profitability, while Inflation have negative and insignificant impacts on profitability. Overall the study revealed that banks specific factors plays significant roles in performance of the banks as they accounted for 80.6 percent of changes in bank profitability. Additionally, on the matter of whether Islamic bank is as profitable as large and small size conventional banks, the study concluded that large banks are far much profitable than other banks categories, followed by small size conventional; while Islamic banks was found to be the least profitable banks in the groups. This confirms the assumption of relative market power theory. The reasons for significant differences in the performance between bank types are due several advantages accruing to conventional banks over Islamic banks. These include; strong capital base and economies of scale that conventional banks specifically large banks enjoys compared to Islamic banks, which is still young and evolving model. The study concluded that Islamic banks though barely six years old in the country, are very promising as they are catching up with small size conventional banks, if the performance trend exhibited in table 4.1 would be sustained in future.
Citation
A Research Project Submitted In Partial Fulfillment Of The Requirement For The Award Of The Degree Of Master Of Business Administration School Of Business, University Of NairobiPublisher
University of Nairobi School of Business