The Effect of Islamic Finance on Economic Growth in Kenya

Abstract

The purpose of the investigation was to verify the effect of Islamic finance on economic growth in Kenya. This investigation employed a descriptive research. The study utilized secondary data. Annual data on Islamic finance was sourced from the financial accounts of the fully-fledged Islamic banks for and while data on economic growth was sourced from Kenya National Bureau of Statistics. The gathered covered a period of 7 years that is, 2010 – 2017. Data analysis was done using Statistical Package for Social Sciences (SPSS) to create quantitative reports that were exhibited through tabulations, percentages, mean as well as standard deviation in presenting a clear picture of the influence of Islamic finance on economic growth in Kenya. To test the statistical significance the F test was performed to examine the overall importance of the model in its entirety while the t – test was used to examine the importance of the coefficients at 5% significance level. To ascertain this chi-square test and a comparative analysis of the trends in economic growth for the seven-year average of the economic growth using. This was done using changes growth rate and total changes in average annual growth rate in Islamic Finance. Findings in the table above indicate that a strong positive link existed between GDP growth rate in Kenya and growth in Mishawaka financing /partnership. There was a powerful positive link between GDP growth rate in Kenya and Mudaraba financing /Cost plus financing. There was a strong positive correlation between GDP growth rate in Kenya and Murabaha financing /finance by way of trust. There was a powerful positive link between GDP growth rate in Kenya and Ijara financing /Leasing. This is an indication of a strong correlation an indication that Islamic finance lead to improved economic growth. A regression model was applied to determine the link between Islamic finance and Economic growth. From the regression model, the investigation ascertained that Islamic finance adoption boosts economic Growth. The independent variables that were investigated point out a considerable 17.45% of the changes in GDP growth rate in Kenya of as exemplified by adjusted R2 (0.1745). This for that reason implies that the independent variables contribute 17.45% of the GDP growth rate in Kenya whereas other elements as well as random differences not investigated in study make up 82.55% of the GDP growth rate in Kenya. The study therefore recommends that a legislative framework should be put in place to enhance the regulation of the industry as well as amendment of the Banking Act to incorporate Islamic Banking concepts