The Effect of Islamic Banking Contracts on the Financial Performance of Islamic Commercial Banks in Kenya

Abstract

This study was carried out to examine the effect of Islamic banking contracts on finanncial peformance of Islamic commercial banks.The purpose of the study was therefore to examine the extent to which Islamic contracts affected finanncial performance with the aim of establishing the extent to which islamic contracts related with financial performance of Islamic commerical banks. The study relied on secondary data to adress the research objective.The study findings was expected to provide recommendation on the possible challenges facing Islamic commercial banks as well as possible policy recommendations. A descriptive and diagonistic survey design was used. The target population for the study was two Islamic banks. A five year data for five Islamic products as well as financial performance based on these products was used. Both descriptive and inferential statitistics was used for data analysis. Descriptive statistics generated the amount of various Islamic products and trends in financial performance while inferential statistics provided a correlation and regression analysis between Islamic contracts and financial performance of Islamic commercial banks.The study findings indicated a notabale offer of Islamic contracts within the periods 2009-2013. The amount of Islamic contracts fluctuated from one year to to another with murabaha contract being the highest and showing steady levels of uptake among the customers. Uptake of Islamic contract was based on the nature of the product and extent of compliance with shariah. Strong postive correlation coefficients of 0.617 was obtained between financial performance and murabaha while, Tawarruq showed a weak positive correlation of 0.159, Mudaraba had a weak correlation of 0.038 while injara showed a moderately weak correlation of 0.397. A variation of 73.6 % on financial performance due to changes in Islamic contracts murabaha, musharaka, Tawarruq, mudaraha and ijara at 95% confidence level was obtained. A strong positive correlation of 0.858 exists between Islamic contracts and financial performance. A unit increase in the amount of Islamic contracts would lead to an increase in financial performance by coefficient factors 1.442, 0.739, 0.656, 0.56 and 0.114 respectively. The study recommended an uptake of Islamic products by all other banks as a financial innovation in the sector, suitable policy to profile Islamic contracts based on their uptake and the government to ease licensing process for Islamic banking. The study was limited to the few Islamic products available among Islamic commerial banks. Further study should be carried out on the factors affecting uptake of Islamic contracts in Kenya and regulatory procedures and their effect of ease of doing business for Kenya’s Islamic banks.