Factors Affecting the Growth of Islamic Banks in Kenya

Abstract

Market demand and response to a worldwide trend are some of the factors perceived to have led to the introduction of Islamic Banking in Kenya. On a global scale, Islamic banking is growing at a faster rate as compare to the convectional banking. Despite the global growth trend, the Islamic banks in Kenya have reported declining profits. This study therefore sought to assess the factors that influence the growth of Islamic banks in Kenya. The study was guided by the following objectives; to assess factors that contributed to the introduction of Islamic Banking in Kenya, to determine the challenges facing Islamic banking growth and to determine the solutions or strategies that can support the growth of Islamic Banking in Kenya. The study adopted descriptive research design, a population of 40 top and middle level managers from Gulf African Bank and First Community Bank was studied. Since the population of study was small, a census was carried out. Questionnaires were used as the instruments for data collection. The questionnaires comprised of both closed and open ended, a five point likert scale was used for the closed questions. Data collected was analyzed using SPSS to generate descriptive statistics which were presented informs of tables, figures and explanations given in prose form. The study achieved a response rate of 85% which was excellent for analysis. On the factors that contributed to the introduction of Islamic banking the study established that emergence of Islamic banks in Kenya had been an outcome of the demand by mainstream banking clients for Sharia-compliant products. It was also established that that there was a large unbanked population which could be harnessed by Islamic banking and that the demand for Islamic finance had been increasing due to the growing Muslim population which the Islamic banks could target for growth. On the challenges that hindered the growth of Islamic banking, the study revealed that Islamic banks and Islamic banking products remain largely unknown and misunderstood in the Kenyan market. There was lack of education on Islamic bank and not all Muslims are convinced that Sharia compliant banks in Kenya are truly fully fledged Islamic banks. The study also found out that there was no Sharia-compliant legal framework needed to make interest-free banking acceptable and that there was the perception that the Islamic Banks did not fully adhere to Sharia guidelines which led to low uptake. On solutions that can support the growth of Islamic banking, the study revealed that high customer service quality was a solution that could support the growth of Islamic banking in Kenya, innovative product portfolio, strategic marketing and strong perception of Shariah. The respondents agreed on strong corporate governance and corporate social responsibility as solutions to the growth challenge. The study further revealed that offering high financial returns for depositors could be a solution to the growth challenges experienced. The study recommends that the banks should be keen in providing Sharia compliant solutions that are meant to fill the gap that exists in the convectional banks. Islamic banks should continually innovate to offer new products that meet the customer needs and also to keep up with competition in the market place. Islamic banks should position themselves strategically so as to take advantage of the growing Muslim population to increase their customer base and also their presence in the country. The study recommends that the administration of Islamic banks ought to put in place structures that ensure compliance with the Sharia law. The management of Islamic banks ought to additionally conduct intensive campaign to teach the populace on Sharia compliant banking product which might attract customers that were unaware of such product and also clarify the concept of Islamic banking to the people that might have misconceptions on the Islamic banking system. The study recommends that Islamic banks should focus on service quality by equipping staff with knowledge and right tools to deliver excellent service.