The relationship between financing contracts and financial performance of Islamic banking in Kenya
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Date
2015-08Author
Gitongu, Sarah W
Type
ThesisLanguage
enMetadata
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The objective of this research study was to establish whether a relationship exists between
financing contracts and financial performance of Islamic banking in Kenya. The study targeted
seven (7) commercial banks that operate Islamic banking in Kenya. It covered the period
between 2010 and 2014. Specifically, the study sought to establish the relationship between
Islamic financing contracts and banking financial performance. The return on Assets (ROA) was
used to measure financial performance. The financing contracts discussed in the study include;
Murabaha (cost plus mark up), Mudharaba (profit sharing), Musharaka (profit-loss sharing/joint
venture), Ijara (leasing), and Tawaruq (reverse Murabaha). The data for this study was collected
using questionnaires for primary data study and secondary data was obtained from the Central
Bank of Kenya annual reports and individual bank statements for unlisted banks. Out of the
seven banks targeted, six responded which represented a response rate of 85.7%. A regression
analysis was performed. From the results it was noted that there is a relationship between the
financing contracts and performance of Islamic banking. The key indicator supporting this theory
is the p value being < 0.05. The analysis on the financing contracts produced a coefficient of
determination of 85.9% which shows how well the model used fits the data available. This
coefficient of determination also shows the percentage of variations in bank financial
performance explained by financing contracts. Based on the summary of the findings, the study
concluded that if Islamic banking is to have meaningful contribution to profits such banks should
adopt a larger proportion of murabaha and musharaka in their financing portfolio. Given that the
relationship of the model is positive, increasing proportion of financing contracts offered would
affect a bank’s financial performance positively. Similarly, a decline would decrease a bank’s
performance. The moderate relationship (moderate correlation) between financing contracts and
financial performance implies that there are other factors which affect a bank’s financial
performance and not only the financing contracts. The study recommended that banks offering
Shariah compliant financial services should pay key attention to the contracts they offer and
capitalize on those with greater yields. This would significantly improve financial performance.
Publisher
University of Nairobi