An assessment of the determinants of financial performance of Islamic banks and conventional banks in Kenya

Abstract

Islamic banking is banking business whose aims and operations do not involve any element which is not approved by the religion of Islam. While the aim of both conventional and Islamic banks is profitability, the former heavily relies on interest for profits while the latter does not charge interest. The general objective of this study therefore was to evaluate the determinants of financial performance of conventional and Islamic banks in Kenya. This study adopted an explanatory research design. From the population of 43, a sample of 20 was selected comprising the commercial banks listed as small by the CBK bank supervision; this comprised the 2 fully Shari‟ah compliant banks (Gulf African Bank and First Community Bank) and 18 other conventional banks. Secondary data was used for this study by reviewing both empirical and theoretical data from books, journals, dissertations, magazines and the internet. Data analysis involved multi-variate analysis using Statistical Package for Social Sciences (SPSS). The study findings indicated that capital adequacy and asset quality were high in most of the banks as indicated by their average means. The findings further show that conventional banks showed high means in all financial performance determinants as compared to Islamic banks. For instance; First community bank limited and Gulf African bank had the lowest Return on Assets as compared to other banks.The study recommends that Islamic banks should manage risks involved during their operation to minimize potential risks and loses involved. The study also recommends that dividends paid to shareholders should be well managed to maximize the profits, and that banks should maximize lending to customers and scrutinize their financial ability to repay before advancing loans to them to avoid default loans in order for them to maximize profits especially in the case of Islamic banks.