Product Innovation in Islamic Banking and Growth of SMEs in Nairobi

Abstract

The Islamic finance industry is a relatively new entrant to the world of finance because its operating principles differ from the conventional finance modes of operation. It operates in compliance with Islamic Sharia. This raises the need for developing appropriate financial product and services for the industry. The study sought to analyze the product innovations in Islamic banking and the contribution of product innovation on growth of SMES in Nairobi. The study used an exploratory research design. The target population was all banks in Kenya that offer Islamic products. The respondents were senior management, middle level managers and low level managers. The study use primary data collected through the use of questionnaires. Statistical Package for the Social Sciences (SPSS) was used to generate the main statistics including mean, standard deviations with aid of factor analysis. The study found out that there was improvement in response time to customer queries, research and development expenses were included in budget, use of flexible regulations had developed Islamic banking, banks uses Sharia‟h advisory board to supervise transactions according to Islamic, the banks had a Sharia advisory committees/consultants to advise clients and that the growth indicators that affect SMEs were mainly government regulations investments, information networking, turn over, ICT adoption and Return on equity. The study concludes that the various financial innovations were indeed significant and have positively affected the growth of SMEs and financial innovations and Shariah compliant financial services should focus their efforts on financial innovations, Islamic banks should broaden product and service offerings by providing non-borrowing services, such as cash management, payroll management, payments, collections and trade finance solutions and the government should develop effective policies that will help the growth of Islamic banks in Kenya.