EXTERNAL FINANCIAL ENVIRONMENT DRIVERS AND FINANCIAL PERFORMANCE OF ISLAMIC BANKS IN KENYA
Hassan Nasra Haret - Master of Business Administration in Finance, Kenyatta University, Kenya
Dr. Eddie Simiyu - Department of Accounting and Finance, Kenyatta University, Kenya
ABSTRACT
External financial environment is a major factor that affects the financial performance of Islamic banks. Making money in today’s highly regulated and competitive markets is a lot harder and Islamic banks should be more customers centric in their propositions, delivery and service. Doing so will be challenging, especially since Islamic banks will need to focus on innovation and on improving their cost efficiency relative to their conventional counterparts. The risks in Islamic banking are not the same as other financial intermediaries therefore the absence of Shariah compliant legal framework needed to create sound financial institutions to reinforce bank’s operating environment, internal governance, market discipline and the risks in the market.The objectives of the study was to investigate the effects of regulatory drivers, technological drivers, demographic drivers and economic drivers on financial performance of Islamic banks in Kenya. The study was anchored on economic theory of regulation, Schumpeter theory of innovation, and Mohsin theory. The study was conducted through the use of descriptive research design since it is concerned with finding out what, where and how financial external environment affects financial performance of Islamic banks. A census of all the Islamic banks was done the unit of analysis were top and middle level managers of 2 fully fledged Islamic banks. The unit of observation were top and middle level managers of Islamic banks and stratified random sampling was employed. A population of 110 was used for this study. A sample of 30% of 100 was applied which gives a total of 33 respondents. A questionnaire was constructed and used to collect data for this study. The instrument was validated through the use of professionals or experts, while split half method was applied to determine instrument reliability. Quantitative data was analysed using descriptive statistics, correlation coefficient and multiple linear regressions. The study realized that regulatory drivers, economic, technological, demographic and economic drivers significantly contributed to the financial performance of Islamic Banks in Kenya as indicated by a R2 of 0.915. The study concluded that the drivers are both challenges and opportunities to be exploited by the banks in their favour. It was recommended that the banks need to be compliant with Shariah banking and capitalize on the opportunities in the sector.
