Comparative Financial Performance of Islamic Banks and Conventional Banks in Kenya

Abstract

Banks as financial institutions play an important role in the development of an economy. It functions as intermediary linking surplus and deficit units; facilitate funds for productive purpose and thereby contributes to economic development. Therefore, their financial performances are of concern to decision makers such as investors,borrowers and savers.In Kenya, both Islamic (interest free) banks and Coventional (interest based) banks operates offering various products and services.The study evaluated and compared financial performance of Islamic banks and conventional banks in Kenya during year 2010 to 2012 to establish whether there are significant differences between the financial performances of the two banking category. Data for the study were mainly extracted from financial statements of the sampled banks where Gulf African Bank and First Community represented the Islamic Banks while Giro Bank and K-Rep Bank represented the conventional Banks. CAMEL model, a financial ratio based model, representing Capital adequacy, Asset quality, Management quality, Earnings and Liquidity was employed in analysis of the financial performances and mean ratios of each category were compared through inter-bank analysis. Finally, T-test was carried out to establish whether there are significant differences between the financial performances of the two banking category. Ms-Excel was mainly used in carrying out the data analysis. The study revealed that Conventional banks outperformed Islamic banks in overall financial performances during the study period though there was no significant difference between the financial performances of the two banking categories.