Capital structure and financial performance of Islamic Banks in Kenya
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Date
2018-07
Authors
Salim, Ahmed Shariff
Journal Title
Journal ISSN
Volume Title
Publisher
Kenyatta University
Abstract
The banking sector primarily differing from the other section of the market vast quandary for administration and financiers comparable is whether or not a most favorable capital structure exists and the way numerous capital structure choices each immediate and lasting persuade business level of performance. The choice on which capital structure to select is among the foremost important and decisive choices within the banks as a result they have an influence on the financial performance of the banks. Totally different writers have different view over the weight of capital structure on the financial performance of commercial banks. The meager studies during this field, on effects of capital structure generated a data gap that galvanized this study. This project aspired to review effect of capital structure on Islamic banks‟ (IBs) financial performance as from 2011-2015 because during this era of study, Kenya encountered political anxiety, resulting in insecurity within the stock exchange and the general elections held in 2013 were the first under the Constitution of Kenya 2010 and ushered in a major transformative devolved governance system of 47 county governments. Since then, the government has been putting in place various legal, regulatory frameworks and the relevant supporting institutions aimed at implementing the constitutional provisions for successful implementation of devolution. As tenderfeet to the souks, IBs face a trade-off. They will either create use of high capital proportions that amplify the reliableness and security of the bank and worsen the specified take by investors or depend upon deposits and Islamic bonds that are deemed as economical sources of funds because of their tax recompense. In recent times in Kenya, there has been a big swell within the variety of recent creativity to expand and progress the concept of Islamic financing. Commercial banks are reformatting their growth strategies to focus more on the speedy growing Islamic banking business as they aim bigger client numbers and more revenues. Although still looked upon as a budding notion in Kenya‟s banking business, shariah-compliant products have gradually achieved recognition over the last diminutive years and banks‟ top cream now have their arsenals ready to fight for a piece of the pie. There are forty two commissioned commercial banks in Kenya. Among them, only two, the Gulf African bank and first Community bank are fully-fledged Islamic banks. Using secondary panel data contained within the yearly reports of the 2 Islamic banks in Kenya covering the years 2011 to 2015 the study used return on equity (ROE) and return on assets (ROA) as dependent variable and 5 capital structure measures (including Firm‟s age, asset tangibility, Growth opportunities, financial leverage and Size of the firm) as experimental variable. This study employed an explanatory non- experimental research design and the gathered facts were then entered into the Statistical Program for Social Sciences (SPSS) and multiple regression analysis method was used to analyze. Pearson's correlation coefficient was determined and Kolmogorov-Smirnov goodness of fit test was done. The findings showed that the growth opportunities and size of the firm have an affirmative and large impact on financial performance of the Islamic banks of Kenya, whereas the age of the firm and the asset tangibility encompasses a negative and weighty impact on financial performance of the Islamic banks. Hence, this study complete that size of the Islamic banks and the growth opportunities of Islamic banks in Kenya enhance financial performance, whereas the age of the firm and conjointly the asset tangibility reduces financial performance of Islamic banks while the financial leverage of the Islamic banks has no impact to the financial performance of Islamic banks in Kenya.
Description
A research project submitted to the school of business in partial fulfilment for the award of degree in master of business administration (finance option) of Kenyatta University. July, 2018