The Effect of Islamic Microfinance Products on Performance of Islamic Small and Medium Enterprises in Nairobi County, Kenya

Abstract

By bringing previously unreached groups into the realm of formal financial activity, Islamic microfinance is well positioned to boost the total market share of Islamic banking and finance. Due to the various political, religious, economic, and legal settings in which Islamic microfinance products operate, these products each have a unique goal as well as a unique set of goods and services to provide their customers. To further the cause of social justice within Islam, each incorporates a set of guiding principles (whose ways of interpretation and application may be found throughout a spectrum). Risk sharing, mutual help, and asset- or equity-backed rather than debt-backed transactions are all encouraged, as well as the ban of riba and the reduction or elimination of undue uncertainty and gambling. Further, contracts based on mutual understanding are deemed crucial by these guidelines. This study's goal is to analyze the effect that Islamic microfinance products have on the growth of Islamic SMEs in Nairobi County. The study was organized as a descriptive survey from start to finish. The statements of Islamic financial institutions were mined for secondary data including specific information on Islamic financing throughout the course of a five-year period, covering the years 2017-2022 specifically. The SPSS computer software analysis tool was used in order to do data analysis, which resulted in the generation of both inferential and descriptive statistics. The data was then presented using averages, variances, percentages, and tables. We utilized the F test to establish overall model significance, and the T tests to check whether or not each coefficient was statistically significant. To do so, a comparative examination of financial performance shifts across the study period was carried out. Study results showed a positive correlation between using Islamic microfinance products and the growth of Islamic SMEs (ISMEs). The performance of Islamic microfinance products was analyzed and explored using a regression model. The study's results suggest that those who use microfinance programs grounded on Islamic principles have higher rates of economic success. The independent variables that were investigated accounted for a significant 57.4% of the variance in financial performance, while other factors that were not taken into account for the research accounted for the remaining 42.6% of the variance. The research suggests that Kenyan Islamic banking should be developed further, which would be beneficial to the economy of Kenya. In addition, the report recommends a legal framework be established to enhance the industry's regulations. This indicates that both the Banking Act and the Central Bank Act need to be changed in order to combine Islamic banking ideas.