Investment Financing And Performance Of Islamic Commercial Banks In Kenya

ABSTRACT

Investment financing is very important for good performance of Islamic commercial banks. Unlike conventional banks which depend heavily on the crutches of collateral and of non-participation in risk, Islamic commercial banks would have to rely heavily on project evaluation, especially for equity-oriented financing. Islamic commercial banks have continued to record decline in performance. For example performance of Gulf African banking reduced by 12 % in the year 2016 from the previous year 2015. This has greatly affected the saving rate of their customers. Most customers have also lost confidence in banking with those banks. The decline in saving affects the economic growth of the Kenyan economy. Islamic commercial banks’ choice of financing instruments are not consistent with Islamic principles. Bulk of the financing operations of Islamic commercial banks in Kenya does not conform to the principle of profit-and-loss sharing (for example equity contracts). Instead, most of the financing is based on the markup principle, and is very debt-like in nature. The purpose of this study was to analyze the effect of investment financing on performance of Islamic commercial banks in Kenya. The specific objects were; to determine the effect of mortgage financing on performance of Islamic commercial banks in Kenya, to examine the influence of equity financing on performance of Islamic commercial banks in Kenya and to access the influence of trade financing on performance of Islamic commercial banks in Kenya. The study employed a descriptive survey research design and incorporated elements of both qualitative and quantitative approaches in terms of instruments and data analysis. The study population was the two fully fledged Islamic commercial banks which are First Community Bank Limited and Gulf African bank and five conventional banks that offer partial Islamic commercial banking (Barclays banks of Kenya, National Bank of Kenya, Diamond Trust Bank of Kenya, Kenya Commercial Bank and Standard Chartered Bank of Kenya). The specific respondents were185 senior and junior staff working in the headquarters of these banks. The sample size was 63 employees at Barclays banks of Kenya, National Bank of Kenya, Diamond Trust Bank of Kenya, Kenya Commercial Bank and Standard Chartered Bank of Kenya headquarters. The study used stratified random sampling to select the sample. This method is appropriate because the sample represents the target population and eliminates sampling bias. The study used primary data. The study used mean and percentages in this study. The study used Statistical Package for Social Sciences (SPSS) to generate the descriptive statistics and also to generate inferential results. Inferential included both correlations and regression. The study found that mortgage financing, equity financing and trade financing have a positive and significant relationship with performance of Islamic commercial banks. The study concluded that affordable interest rates for mortgages help to improve the performance of the bank. In addition, high mortgage prices are associated with declining sales. In addition mortgages that amortize faster are preferred by most customers. In addition, the study concluded that angel investors are major source of finance in islamic commercial banks. Friend contributions are also a source of finance in most Islamic Commercial Banks. Most islamic commercial banks also borrows loans from investors in case of financial crisis and repays it back in good time. Fees income from sells of mutual funds to financial markets have been increasing in Islamic commercial banks in Kenya. The study recommends that banks should make the interest rates for mortgages affordable so as to boost their performance. In addition banks should make the process of getting a mortgage in their bank is simple and short. The repayment period given to customers for the mortgage should be favorable. This will encourage customers to take the mortgage thus improving the banks performance