Determinants Of Islamic Banks Profitability In Kenya
Islamic banking has achieved considerable global growth over the past few decades. In Kenya, there are two-fully fledged Islamic banks: Gulf African Bank and First Community Bank. While investigating the determinants of profitability has been one of the more popular topics among researchers in banking studies, most of these studies have been on conventional banks and until now there are only few studies on Islamic banks. This study investigated the internal and external determinants of profitability and established the relationship between internal and external determinants and profitability among Islamic banks in Kenya. A descriptive research design was used to investigate the two fully fledged banks in Kenya. Data on the internal bank characteristics was collected from balance sheets and income statements of individual banks, while data on macroeconomic variables were collected from the Central Bank of Kenya. ROA was used as a proxy for profitability. The independent variables were LIQ (Total financing as a percentage of total deposits), CRTA (Total capital and reserves as a percentage of total assets), TITA (Total income as a percentage of total assets), BTTA (Net profit before tax as a percentage of total assets), BTCR (Net profit before tax as a percentage of capital and reserves) and ATCR (Net profit after tax as a percentage of capital and reserves), Gross Domestic Product (GDP), and Inflation (INF). The relationships were computed using bivariate correlations and linear regression. The regression results show that all the variables in the model can be used as predictors of profitability, except one. For instance, in all the variables, the p-value (significance level) at α 0.05 for the determinants were LIQ (0.907), CRTA (0.829), TITA (0.339), BTTA (0.009), BTCR (0.021), INF (0.566) and GDP (0.643). For ATCR, the p-value was 0 at α 0.05. Therefore, according to the findings, the net profit after tax as a percentage of capital and reserves is not a determinant of profitability. According to the Pearson correlation computations, there is a negative but insignificant correlation between ROA and LIQ (r=-0.062) and a positive insignificant correlation between ROA and CRTA (r= 0.829). Various income ratios (TITA, BTTA, BTCR, and ATCR) were also correlated with ROA. The findings showed that there was positive but insignificant correlation between ROA and TITA (r= 0.339). There was a positive and significant correlation between ROA and BTTA (r=0.920 at α = 0.01), BTCR (r= 0.879 AT α =0.05) and ATCR (0.984 at α 0.01). With regard to the macroeconomic variables, the findings demonstrate that there is a negative but insignificant correlation between ROA and INF (r=-0.298), and a positive but insignificant correlation with GDP (r=0.242). From the findings, the study concludes that with the exception of ATCR, all the other variables are determinants of profitability in Islamic banks.