Effects of Financial Instruments on Performance of Islamic Banks in Kenya

Abstract

This study sought to investigate the effect of Islamic financial instruments on the performance of Islamic banks in Kenya. Correlation analysis was carried out to investigate the strength of the relationship between the dependent variable and independent variables. Multiple regression analysis was carried out to investigate the nature of the relationship between the dependent and independent variables. Analyzing the variables collectively; it was found out that  there is  a  strong  positive  significant  relationship  between  an  Islamic  banks  performance and different financial instruments. The study found that musharaka, Ijara and murabaha had a positive effect on return on assets. The overall regression was found to be statistically significant. The F ratio for the regression was 21.796 with a p-value of 0.0028. The independent variables reasonably explained variation in return on assets. From this it can be concluded that an increase in either of the variables of interest is associated with an increase in Islamic bank performance. This implied that the diversification and introduction of more financial instruments will enhance Islamic banks performance.The study recommends that Islamic banks in Kenya should increase their funding on musharaka, Ijara and murabaha in order to maximize return on assets for the banks.