Effect of Islamic banking on financial performance of commercial banks in Kenya

Abstract

Shari’ah compliant banking is viewed by many as the fastest growing segment of the banking sector in the world. The uptake of Islamic banking is projected to grow exponentially in sub-Saharan Africa (Ndung’u, 2011). The study sought to establish the effect of Islamic banking on financial performance of commercial banks in Kenya. This research was conducted through a descriptive survey design. The descriptive survey design was considered appropriate as it enables description of the characteristics of certain groups, estimation of the proportion of people who have certain characteristics and making of predictions. This study collected quantitative data. Secondary data was used in this study. The secondary data sources were obtained from the published annual reports of the 13 commercial banks under study over a period of 5 years (2009-2013). The data was collected based on the information about the variables. Quantitative data was analyzed by descriptive analysis while qualitative data through content analysis. The study may provide information to policy makers, managers of Islamic banks, scholars and academicians and investors on effect of Islamic banking on financial performance of commercial banks in Kenya. From the findings, the study found out that the banks’ capital ratio, liquidity ratio, bank size and Islamic banking ratio had a positive influence on the commercial banks’ financial performance. The study further established that the banks’ efficiency ratio and the expenses management ratio had a negative influence on the commercial banks’ financial performance. Thus, the study concludes that Islamic banking positively influenced the financial performance of the commercial banks in Kenya. The study recommends that the management of the commercial banks should strive to achieve an optimal capital structure, enhance their banks’ liquidity, efficiency and expenses management levels as well as expand their market reach in order to enhance the financial performance of their commercial banks.