The Effect Of Financial Structure On The Financial Performance Of Conventional And Islamic Banks In Kenya

Abstract

This study is set out to find the effect that financial structure has on the financial performance of conventional banks as well as that of Islamic banks. The study used secondary data with information obtained from the banks‟ financial statements as well as the central bank of Kenya‟s “Bank supervision annual report”. The study adopted a descriptive research design which involved a study of sampled conventional banks and Islamic banks. Secondary data was collected from five conventional banks and the two Islamic banks in Kenya. CBK classifies banks into large, medium and small. Since the two Islamic banks in Kenya fall under the small category, the study did a random sampling out of the twenty banks falling under the small category and sampled five for purposes of comparison. This is similar to Halkano (2012) who carried out a comparative case study on the performance of two Islamic banks and five conventional banks in Kenya. The study found out that conventional banks displayed a clear relationship between all the financial structure variables and financial performance whereas for Islamic banks only the assets had a relationship with the financial performance. The study revealed that Islamic banks did not have debt to equity ratio in their financial structures mix, unlike conventional banks. This exposes Islamic banks to more risks compared to conventional banks. This study recommends that the government should introduce policies that would: provide interest free investment opportunities to Islamic banks, provide fair competition grounds to both Islamic and conventional banks as well as introduce measures that would reduce risks to new Islamic banks such as interest free lending rates from CBK.