Factors Influencing the Growth of Islamic Banks In Kenya

A Project Report Submitted to the Chandaria School of Business in Partial Fulfillment of the Requirement for the Degree of Masters of Business Administration (MBA)At the time this study was being conducted, Kenya had two fully fledged Islamic banks namely the First Community Bank and Gulf African Bank (GAB). The purpose of this study was to determine the factors influencing growth of Islamic banks. The study’s research questions were: What are the factors influencing growth of Islamic banks in Kenya?, What are the strategies adopted by Islamic banks to penetrate into the Kenyan market?, What are the challenges faced by Islamic banks in Kenya? To achieve the above, the research was conducted in the form of a descriptive study. This design was adopted as the suitable research design because it identifies patterns or trends in a situation. The target population were existing customers of GAB.A simple random sampling technique was used to identify the 100 sample size elements. Questionnaires were used to collect the primary data from.The questionnaire was given to 100 customers drawn from the bank’s Westlands branch in Nairobi. The collected data was first coded statistically and then analyzed using the Statistical Package for Social Scientists (SPSS). SPSS and Microsoft Excel enabled the researcher to compute descriptive statistics such as percentages, frequencies, and ranges. Finally, the presentation of the results was done by use of graphs, charts, tables, cross-tabulations and pie charts for clarity and ease of understanding of the findings. The results of the research were mostly in line with previous studies and existing literature on the topic of Islamic banking. The first section of the questionnaire addressed the factors contributing to the growth of Islamic banking. According to the study, religious considerations represented one of the main reasons the respondents offered for opening an account with an Islamic bank. Muslims constitute the majority of the bank’s customers with non-Muslims appearing to be underrepresented. The majority of the respondents were self-employed which is in line with contemporary thinking within the Islamic banking sector. Better product portfolio was another reason offered by the respondents for opening an account with GAB. More than 50% of the respondents rated the services they receive from the bank as excellent reflecting high levels of customer satisfaction among the bank’s customers. The findings of the study in relation to the strategies used by Islamic banks showed that in addition to product innovation, the main strategies used by GAB to penetrate the Kenyan market are advocacy and civic education. Civic education which includes raising awareness on Islamic banking and advocacy including increasing political and financial commitment and sensitisation of policy makers at all levels including the Kenyan government. The study found that the main challenges faced by Islamic banks in Kenya include stiff competition in what is a very competitive sector. A significant number of the respondents held parallel accounts with other banks. Some respondents felt that GAB staffs were not fully conversant with the concept of Islamic banking and that there was a shortage of professionals in the Islamic banking sector. The study concluded that Islamic banks have made a remarkably successful entrance into the Kenyan financial market. People from different religions appreciate this form of banking that isfree from the uncertainty of interest rate fluctuations, that is transparent, and offers caring partnership. The study also concluded that because a large majority of GAB customers were Muslims, this may prove that Islamic banking is still largely attracting customers on religion basis instead of its own features and simultaneously, it is being offered majorly to Muslims only. The study highlighted concerns about the familiarity of bank staff with the concept of Islamic banking. In addition to the training of personal qualified in Islamic finance, Sharia compliant banks will need to conduct promotion and marketing activities. The study recommended the implementation by Islamic banks in Kenya of clear growth strategy, the establishment of a National Sharia Board and positive publicity for Islamic banks through corporate responsibility activities. For a future research activity, the study recommends the investigation of the quality of services available in fully fledged Islamic banks and in banks that only offer Islamic banking windows