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.