Assessing Bank Specific Factors Influencing the Profitability of Sharia Compliant Commercial Banks in Kenya
Abstract
The financial capability of a bank is directly related to its profitability, hence, the main goal of
the leadership and management of any bank is to be able to generate profits continuously
because this assure the going concern of the banks. The factors that affect the profitability of
banks are generally categorized into either internal or external. Those factors that a bank
manager is able to control are considered internal whereas factors other than those beyond the
banks managers control are considered external. The objective of the study was to assess the
bank specific factors that influence the profitability of sharia compliant commercial banks in
Kenya. The study specific objectives were to establish the effect of credit risk management,
capital adequacy, liquidity, management efficiency, bank size on the profitability of sharia
compliant commercial banks in Kenya. It also aimed at reviewing the increasing body of
theoretical and empirical studies that have endeavoured to examine the range of magnitude and
effects of the bank specific factors on the financial performance of commercial banks. The
target population was all the 42 licensed commercial banks, the sub target population was the
13 banks offering sharia banking services. Secondary sources of data were employed. Panel
data was utilized, data was collected for several units of analysis over a varying time periods.
The research employed inferential statistics, which included correlation analysis and panel
multiple linear regression equation with the technique of estimation being Ordinary Least
Squares (OLS) and robust regression so as to establish the relationship of the bank specific
factors and sharia compliance, and the financial performance of commercial banks and also to
establish the effect of the bank specific factors and the financial performance of sharia
compliant commercial banks. The study findings were that capital adequacy, management
efficiency, and bank size have a significant association with financial performance of
commercial banks. However, only management efficiency and bank size had a significant
relationship with financial performance of commercial banks. The relationships were both
positive. Further findings were that sharia compliance has neither a significant association nor
relationship with financial performance of commercial banks. Additional findings were that
there is no significant difference in the financial performance of the commercial banks that are
sheria compliant and those that are not. The study also established that capital adequacy,
management efficiency, and bank size had a significant relationship with financial performance
of sharia compliant commercial banks. The bank specific factors had a significant effect on
both all the commercial banks and the sharia compliant banks. The study recommended that
bank practitioners and in extension, sharia compliant banks, and the policy makers should
direct commercial banks, and by extension other financial institutions, to gauge and monitor
the bank specific factors so as to enhance loan quality and consequently financial performance
of the financial institutions. The regulator, the CBK, can utilize the CAMEL framework, which
mainly entails the bank specific factors, to gauge the performance and going concern status of
the individual banks. Further recommendations were that commercial bank practitioners, and
by extension other financial institutions practitioners and consultants should not focus entirely
on credit risk management, capital adequacy, and liquidity when augmenting the financial
institutions’ financial performance and not to focus on sharia compliance when crafting their
strategies on business diversification in order to augment financial performance. The study also
calls for the recommendation that sharia compliant commercial bank practitioners, and by
extension other sharia compliant financial institutions practitioners and consultants to enhance
capital adequacy and management efficiency and also increase bank size in order to augment
the sharia compliant financial institutions’ financial performance and not to focus entirely on
credit risk management and liquidity when augmenting the sharia compliant financial
institutions’ financial performance.
Publisher
university of Nairobi
Rights
Attribution-NonCommercial-NoDerivs 3.0 United StatesUsage Rights
http://creativecommons.org/licenses/by-nc-nd/3.0/us/Collections
- School of Business [1432]
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