Effect of Islamic Banking on Growth of Small Medium Enterprises in Nairobi: A Case Study of First Community Bank

A Project Submitted To the Chandaria School of Business in Partial Fulfillment of the Requirement for the Degree of Global Executive Masters of Business Administration (GeMBA)Islamic banking has gained a lot of significance in the contemporary world on the basis of provision of zero interest loans coupled with sharing of profits and losses through the principle of mudharabah (profit-sharing) and musyarakah (joint-venture). Islamic banking differs from conventional banking systems in many ways; the major difference being the use of Interest or usury. Small and medium enterprises (SMEs) are commonly acknowledged as the economy drivers and the Key contributors to gross domestic product (GDP) around the globe, including those countries in Africa and East Africa region especially Kenya. The SMEs growth has also been hindered by Market inflations that keep on altering the commercial banks rates; therefore there is a demand for Islamic Shariah banking and innovations. The Kenyan banking sector has been in a stiff competition to capture the SME market; this has impacted the growth of the SME business in the country. The purpose of this study was to determine the effect of Islamic banking on SMEs in Nairobi City. The study was guided by the research questions: determine the effect of Islamic banking on SMEs in Nairobi City?; What are the effects of Islamic banking on growth of SMEs in Nairobi City? And what are the effects of Islamic banking on financial literacy of SMEs in Nairobi City? The study adopted a descriptive research design in establishing effect of Islamic banking on growth of SMEs in Nairobi which is a shariah compliant bank. The target population included 4000 SMEs that operate within Nairobi Central Business District and all the 103 employees working in different branches of the First Community Bank within Nairobi. Using cluster sampling the study used a total of 440 respondents: 360 from the SME owners and 80 First Community Bank employees. The study collected primary data using structured and closed ended questionnaires as the research instrument. The data was collected using drop and pick later method and follow up via telephone calls. The collected data was summarized, coded, tabulated and analyzed. The study derived the mean, frequencies and percentages from the data analysis for each variable. Results of the study were presented in tables, pie charts and bar graphs. The study findings of the study on the effect of Islamic banking on financial performance of SMEs indicated that the management team was able to improve the financial profitability and that Islamic banking has led to growth of my SME financially. Regarding the effect of Islamic banking on growth of SMEs, the study established that Islamic banking has offered me a different banking product from the formal banking products and that Islamic banking has ensured equitable access to credit for my business growth. On the effect of Islamic banking on credit accessibility among SMEs, the study found out that Islamic banking has customized its products for businesses. In respect to the effect of Islamic banking on financial literacy among SMEs, the findings of the study indicated that Islamic banking has improved financial decision making processes. The study concludes that Islamic banking helps SMEs to grow financially which enhances their financial performance. The study also concludes that Islamic banking affects the growth of SMEs. The study further concludes that Islamic banking despite the existence of a reasonably well-developed Islamic banking sector; (SMEs) have typically remained underfunded. Moreover, Islamic banking has affected SMEs’ financial literacy by improving on their financial decision making processes. The study recommends that the management of SMEs should seek to enhance their financial performance by increasing their uptake of the Islamic banking products. The study also recommends that SMEs should enhance their growth by actively substituting the different banking products given by Islamic banking system. The study further recommends that the management team of SMEs should seek highly customized financial products from Islamic banks to enhance credit accessibility. The study also recommends that SMEs should make prudent and rational decisions in connection to Islamic banking products as a way of enhancing their financial literacy