Financial Banking Risks, Bank Size and Financial Performance of Fully Fledged Islamic Banks in Kenya
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Date
2024-05
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Kenyatta University
Abstract
Islamic banks must carefully analyze the loans granted in order for them to get back the loans as per the agreements. The aim of this study was to assess how Islamic banking financial risks affect financial performance of fully fledged Islamic banks in Kenya. The key focus of the inquiry was on credit risk, liquidity risk, transactional risk and operational risk as well as bank size and financial performance. The agency theory, the profit-and-loss sharing theory, shift ability theory and the modern portfolio theory guided the inquiry. Descriptive research design was embraced targeting 3 commercial banks offering Islamic products in Kenya and census was used. Secondary cross sectional quarterly data on total liquid assets, total deposits, loan loss provisions, total loans, exchange rates fluctuation, total employee expenses, number of employees and net income was collected for the period 2017 all through to 2021. Three regression models were used to estimate the link between Islamic banking risk, bank size and financial performance. Prior to inferential analysis, diagnostic tests covering Heteroscedasticity test, normality and autocorrelation. Statistical Packages for Social Sciences guided processing of views. The findings were that credit risk, liquidity risk, transaction risk and operational risk significantly affected financial performance of Islamic banks in Kenya. It was wrapped up that Islamic financial banking risks significantly affect financial performance of Islamic banks in Kenya. It was recommend that the credit managers of the Islamic banks in Kenya should review the existing credit risk management framework and mechanisms to manage the increasing trend in NPLs. Islamic financial banks need to ensure they are adequately capitalized to maintain an optimal liquidity position that can allow them to effectively realize their financial intermediation role in the economy. The policy makers at CBK should effectively leverage on existing monetary policy instrumental to control volatility in exchange rate which in turn increase exposure of Islamic bank to transactional risk. The operations managers of the Islamic banks in Kenya review the existing infrastructures regularly and recommend continuous repair and maintenance to avoid possible non-performance of internal processes and the system. The product development managers and the marketing managers of the Islamic banks in Kenya should grow the size of their institutions by researching and recommending viable markets for expansion of the operations to grow the asset base.
Description
A Research Project Submitted to the School of Business, Economics and Tourism in Partial Fulfillment of the Requirement for the Award of the Master Degree in Masters of Science in Finance at Kenyatta University, May 2024