An Investigation Into the Compatibility of Islamic Banking With Conventional Banks: a Study of Two Commercial Banks in Nairobi City.

Abstract

Islamic banking is based essentially on the principle that interest is strictly forbidden in Islam, whereas, interest is the main source of income in conventional banking. On one hand the banks charge interest on borrowers at a high rate while they pay the depositors at a low rate which is an issue for Muslims who adhere to their faith even in banking issues. Thus the main purpose of this study was to investigate into the compatibility of Islamic banking with conventional banks with reference of two commercial banks in Nairobi city (Chase Bank which has Chase-Iman and National Bank which has Al-Amanah). Specifically this study focused on salient features of Islamic Banking, distinction between Profit and Interest, the role of the Shariah advisory and supervisory board and the challenges facing the Islamic Windows within conventional banking environments and how they can be addressed. The study adopted case study research design and targeted account holders in Islamic windows in the two conventional banks in Nairobi. The study used a sample of 160 respondents. Quantitative data was collected using a structured questionnaire with both open-ended and closed-ended questions. In addition; an interview guide was employed to collect qualitative data whereby it was analyzed using content analysis. From the analysis of the findings it was concluded that Islamic banking possesses unique features that differentiate it with conventional banking. In addition, interest is viewed as being „haram‟ in Islam meaning and not permitted while profits and more so profit sharing is viewed as being „halal‟ meaning it is permitted in the Islamic religion and also it was concluded that there is general lack of proper understanding of the Shariah supervisory and advisory board and its roles despite its critical importance to the banks with regard to Islamic banking. Hence it was recommended that the banks should institute awareness creation programmes so as to educate their customers on the unique features of Islamic banking, the government, the banks‟ management and other stakeholders should make deliberate efforts to introduce strict checks and balances on the operation of the Islamic windows, management of the banks should appreciate and recognize the important role of Shariah supervisory and advisory board and educate the bank‟s members about the role of the board to allow them to constructively engage with the board on any matters affecting Islamic banking, and the management of the banks should develop a clear policy addressing the issues of interest and profits/loss sharing which is consistent with the provisions of the Shariah law.