A comparative analysis of the risk in Islamic and conventional banks in Kenya
Dhidha, Barissa A
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Islamic Banking has grown rapidly throughout the world and has been introduced in more than 60 countries of the world so far. However, scepticism still surrounds Islamic Banking keeping into view the earlier demise of other banks. Since, Islamic banks can not charge a fixed return unrelated with their client's operations, it may seem that Islamic banks face more risk and hence, will have more volatile returns on their assets as they have to own the asset before they sale or lease it to their clients and take on subject matter risk which conventional banks do not take. This study probes into whether Islamic banks are riskier than conventional banks or not. The objective of this study is to establish whether Islamic banks in Kenya are riskier than the conventional banks. This was a correlational study. The population was 43 commercial banks in Kenya. Two purely Islamic banks and two other conventional banks were selected for the study. Secondary data was used in this study. Data was analysed using descriptive analysis, t- tests, correlation analysis, and regression analysis. The descriptive statistics showed that Islamic banks were riskier than conventional banks in terms of ROE and operational risk while conventional banks were riskier than the Islamic banks in terms of credit risk and liquidity risk. The one-way sample test showed that the overall risk (ROE) was not significantly different across the banks but the differences in credit risk, liquidity risk and operational risks were statistically significant across the banks. The regression results showed that bank type has a negative influence on ROE, credit risk and operational risk while a positive effect on liquidity risk. None of these relationships was however significant at 5% level of confidence. The study concludes that overall, Islamic banks in the sample were riskier than the conventional banks. The study also concludes that risk profiles of banks especially credit risk, liquidity risk, and operational risk is different between conventional and Islamic banks in Kenya. The study recommends that Islamic banks in Kenya need to manage their risks as they arc generally riskier than the conventional banks contrary to other findings. The study further recommends that Islamic banks should devise strategies that will help them lend out the cash as they are too liquid.
University of Nairobi, Kenya