Risk Management Techniques and Financial Performance of Islamic Banks in Kenya
Adannur, Ibrahim Abdi
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Islamic banks are financial institutions that rely totally in their operations on Shari'ah legislations which prohibit all kinds of interest, uncertainty, and gambling. The establishment of Islamic banks has been considered as an alternative solution for Muslims who want to liberate themselves from interest. This research work sought to bring to light the need for financial institutions to pay attention to the management of risk. An assessment of First Islamic Bank’s risk management framework provides the state of the bank‘s ability to handle the inherent risks in its operations. The Islamic banks do not have well established risk management practices as compared to conventional banks. This was observed by the disparities in monitoring of the credit risk levels. The aim of this study was to investigate the effects of risk management techniques on financial performance of Islamic banks in Kenya. A descriptive research design was used in this study. The target population was senior management employees of the Gulf African Bank and First Community Bank, two Islamic banks operating in Kenya. The study employed purposive sampling technique. A questionnaire was used to collect mainly quantitative data. Secondary data involved the collection and analysis of published material and information from other sources such as annual reports, published data. The data was analyzed using the statistical packages for social sciences (SPSS version 21). Data was presented in the form of frequency distribution tables, graphs and pie charts that facilitated description and explanation of the study findings. The study found out that market risk management, liquidity risk management, and operational risk management influence financial performance of Islamic banks in Kenya. The study also found that Islamic banks had highly adopted risk management practices to manage risk and as a result the risk management practices comprising of; understanding risk, risk identification, risk analysis and assessment as well as risk monitoring had a positive correlation to the financial performance of Islamic banks in Kenya. The study recommends that that risk management techniques should be emphasized and utilized more effectively by Islamic banks in Kenya.