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Beffrie Kayalo Mulama - Masters Student, Kenyatta University, Kenya

Samuel Maina - Lecturer, Kenyatta University, Kenya

Muathe S.M. - Lecturer, Kenyatta University, Kenya


The study examined the strategies and performance of Islamic banking in selected commercial banks in Nairobi County. These strategies include Operations, Funds separation and Lending strategies in relation to the performance of these banks in terms of Customer base, Assets, Financial Viability and Relevance. The study employed descriptive research design and used structured questionnaires to gather data from the managers in the banks. A sample of 6 banks was selected with 8 managers from each bank, from a population of 43 commercial banks using proportionate stratified random sampling method. The study revealed that operational strategies have a positive impact in the performance of the commercial banks, although the government has not established a fully operational legal and supervisory framework to govern the Islamic banking. The study concludes that lack of these legal frameworks is a drawback to the progress in Islamic banking in Kenya. Funds separation was the major distinguishing factor in Islamic and conventional banking by having a reserve fund that absorbs losses in Islamic banking. The study concluded that conventional banks had not set up a reserve fund account but were in the process of setting up although the fully fledged already have. The study further concludes that most customers in Islamic banking have a high intake in the loans offered under the musharaka and mudaraba basis where the banks have a partnership with the clients thus sharing the risk. These aspects encourage the customers to have a high interest in loans and the accounts provided by the banks thus encouraging investors and improving the banks performance. The study recommends that serious marketing should be done to create awareness of Islamic products in the different banks to fill the knowledge gap in the market. Staff training was observed as a necessity since most of the employees in the conventional banks didn’t have knowledge on Islamic products. The study raised the agency problem in mudaraba and musharaka contracts. The study concludes that to some extent, the agency problem in musharaka and mudaraba can be reduced by carefully specifying the sharing of profit and performance bonuses between the entrepreneur and the bank.

Full Length Research (PDF Format)