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James Maina Kamotho - Master of Business Administration (Finance Option), School Of Business, Kenyatta University, Kenya

Charity Njoka - Lecturer, School of Business, Kenyatta University, Kenya


Globally, banks play a critical role in mobilization of resources for economic development of their economies. In Kenya, the fully fledged Islamic banks have suffered poor financial performance over the last five years as they adhere to Sharia Law that does not allow them to charge interests instead, they charge profits. However, Some Islamic banks like Dubai Islamic Bank posted negative returns on asset of -32.15%, -16.6%, -8.8% and -5.22% for the periods 2017 to 2020 respectively. This study main objective was to determine the effect of credit lending policies on financial performance of Islamic banks in Kenya. Specifically, it looked at credit standards, loan processing procedures, credit collection policy and their effect on financial outcome measurement. Theories included: Agency theory, Power theory of Credit, Credit Risk Theory, and Information Theory of Credit. It adopted a descriptive design targeting three banks operating on exclusive Islamic principles in Kenya. The population was made up of 96 managers who included: credit managers, the analysts, debt collectors and legal advisors who make up credit departments in their respective banks. A Census study was used as the population was small. Primary data was collected and supported with secondary data drawn from published financials and other reports at the Central Bank of Kenya covering the period from 2010 all through to 2019. A pilot testing on the instruments was done to ensure they were valid and reliable. Cronbach Alpha was applied in determination of reliability. Means and standard deviation together with inferential statistics were used in the analysis. The study established that credit standards (β=.104, p<0.05), loan processing procedure (β=.119, p<0.05) and credit collection policy (β=.464, p<0.05) all had significant and positive effect on financial performance. In recommendation, debt collection managers and officers need to simplify the terms of the credit collection policy so as to significantly enhance financial performance. Loan managers and officers of the Islamic banks in Kenya should simplify the loan processing procedures so as to improve on financial performance. The credit managers need to work on improving the credit standards in place so as to enhance financial performance. The findings of the study are expected to be of value to a number of stakeholders including the management at the Islamic bank, the policy makers like the Kenya Bankers Association and academic fraternity.

Full Length Research (PDF Format)