factors influencing islamic banking in kenya: a case …

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FACTORS INFLUENCING ISLAMIC BANKING IN KENYA: A CASE STUDY OF NAIROBI COUNTY BY SAIDA ALI ADEN A Project Report Submitted to the Chandaria School of Business in Partial Fulfillment of the Requirement for the Degree of Masters of Business Administration UNITED STATES INTERNATIONAL UNIVERSITY, NAIROBI-KENYA SUMMER 2014

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FACTORS INFLUENCING ISLAMIC BANKING IN KENYA:

A CASE STUDY OF NAIROBI COUNTY

BY

SAIDA ALI ADEN

A Project Report Submitted to the Chandaria School of Business in

Partial Fulfillment of the Requirement for the Degree of Masters of

Business Administration

UNITED STATES INTERNATIONAL UNIVERSITY,

NAIROBI-KENYA

SUMMER 2014

i

STUDENT’S DECLARATION

I, the undersigned, declare that this is my original work and has not been submitted to any

other college, institution or university other than the United States International

University in Nairobi-Kenya for academic credit.

Signed: ________________________ Date: _________________________

Saida Ali Aden

This project report has been presented for examination with my approval as the appointed

supervisor.

Signed: ________________________ Date: _________________________

Dr. George Achoki

Signed: _________________________ Date: _________________________

Dean, Chandaria School of Business

ii

ABSTRACT

The purpose of this study was to establish what factors influence utilization of Islamic banking

and financial services in Kenya. The study sought to answer the following research questions,

“What is the level of knowledge and attitude among Kenyans about the existence of

Islamic banks and the various products and services they offer?”, “What socio-cultural

factors influence the choice of Islamic banking or financial services in Kenya?”, How

does political or government regulations affect Islamic banks in Kenya?”. Through this

study, an attempt was made to know whether customers from different age brackets, gender,

educational qualification, professional background acted differently while selecting Islamic or

Conventional banks. The research furthered examined how government policies and regulations

including infrastructural development influenced Islamic banking.

A descriptive survey design was used. One hundred and twenty five respondents were

randomly sampled from four Islamic and Conventional Banks operating in Nairobi-

Kenya. Quantitative data was analyzed using SPSS version 22.0 while the qualitative data

will be analyzed by consolidating emerging themes. The sample size was selected using

Fisher’s sampling technique and reduced to one hundred and twenty five respondents for

quality and accuracy purposes.

Data collected from the respondents suggests that there are a number of factors that

influence Islamic banking in Kenya. The study found that majority of those surveyed had

heard of Islamic banking and financial products with some of them being very

knowledgeable about them. Religious affiliation was the number one cited reason for

choice of Islamic banking and financial services for Islamic users. Other reasons given

were that: it offers cheap products, banks are conveniently located and other ethical

reasons.

The convenience of banking with an institution followed by the level of interest it offers

ranked highest among respondents in terms of differentiating services offered by different

banks. The consumers also preferred banking institutions with; high levels of

confidentiality, that could provide financial advice, that offered fast and efficient

transactions and they were least concerned with whether the institution provided Islamic

banking or financial services.

iii

The research also found that most people are aware of government regulation on banking

services in Kenya. Some of the areas regulated by the government are: consumer

protection, administration, branching and in agency banking. In Kenya, those surveyed

were mostly aware of consumer protection than the other forms of government

regulations. Despite all these regulations, respondents were still divided on whether these

regulations affect the choice of banking preferred by a consumer.

The study concluded that, both Islamic and conventional banks create competition among

banks to satisfied customers and fulfill their expectations and long-term benefits for the

economy. The conventional banks and the Islamic banks are different commonly based

on their goals, Riba and risk sharing practices. The foregoing discussion has identified a

number of factors that influence the choice of Islamic banking services over conventional

banks. It is encouraging to note that there are more new users opting to have Islamic

banking and financial services.

The study further recommends the need for Islamic institutions to market their products

and services extensively in order to reach more Kenyans and create awareness. It also

suggests that Islamic banks should tone down religious affiliation in order to appeal to

non-Muslims. Moreover, government regulations should be applied on banking services

in Kenya and be customized for the different institutions that have different services.

iv

TABLE OF CONTENTS

STUDENT’S DECLARATION ........................................................................................... i

ABSTRACT ........................................................................................................................ ii

TABLE OF CONTENTS ................................................................................................... iv

LIST OF TABLES ............................................................................................................ vii

CHAPTER ONE ..................................................................................................................1

1.0 INTRODUCTION ..................................................................................................... 1

1.1 Background of the Study ........................................................................................... 1

1.2 Statement of the Problem ........................................................................................... 3

1.3 Purpose of the Study .................................................................................................. 6

1.4 Research Questions .................................................................................................... 6

1.5 Importance of the Study ............................................................................................. 6

1.6 Scope of the Study ..................................................................................................... 6

1.7 Definition of Terms.................................................................................................... 7

1.8 Chapter Summary ...................................................................................................... 7

CHAPTER TWO .................................................................................................................9

2.0 LITERATURE REVIEW .......................................................................................... 9

2.1 Introduction ................................................................................................................ 9

2.2 Knowledge and Attitude towards Islamic banking in Kenya .................................. 10

2.2.1 Basis and Principles of Islamic Banking .......................................................... 10

2.2.2 Islamic banking in Kenya ................................................................................. 10

2.3 Socio-cultural factors and Islamic banking.............................................................. 13

2.4 Government policies and regulations and Islamic banking ..................................... 15

2.4.1 Factors considered important by customers in non-Islamic Banks .................. 19

2.4.2 Conceptual framework ...................................................................................... 21

2.5 Chapter Summary .................................................................................................... 21

CHAPTER THREE ...........................................................................................................23

3.0 METHODOLOGY ......................................................................................................23

3.1 Introduction .............................................................................................................. 23

3.2 Research Design....................................................................................................... 23

v

3.3 Population and Sampling Design ............................................................................. 23

3.3.1 Population ......................................................................................................... 23

3.3.2 Sampling Design ............................................................................................... 23

3.4 Data Collection Methods ......................................................................................... 25

3.5 Research Procedures ................................................................................................ 25

3.6 Data Analysis Methods ............................................................................................ 26

3.7 Chapter Summary .................................................................................................... 27

CHAPTER FOUR ..............................................................................................................28

4.0 RESULTS AND FINDINGS ................................................................................... 28

4.1 Introduction .............................................................................................................. 28

4.2 PART I: DEMOGRAPHIC AND SOCIOECONOMIC CHARACTERISTICS .... 28

4.2.1 Educational Level and Gender Cross tabulation ............................................... 29

4.2.2 Ability to Read/Write in Kiswahili and Gender Cross tabulation. ................... 30

4.2.3 Occupation and Gender Cross Tabulation ........................................................ 30

4.2.4 Age and Occupation Cross Tabulation ............................................................. 31

4.2.5 Monthly Income by Gender Tabulation ............................................................ 32

4.2.6 Monthly Income by any form of Savings Tabulation ....................................... 33

4.2.7 Monthly Income by Monthly Savings Value Tabulation. ................................ 33

4.2.8 Savings by Type ................................................................................................ 34

4.3 PART II: KNOWLEDGE AND ATTITUDE TOWARDS ISLAMIC BANKING 34

4.3.1 Owning a Cellphone ......................................................................................... 34

4.3.2 Gender by Cellphone Ownership Tabulation ................................................... 34

4.3.3 Any form of Savings by Cellphone Ownership Tabulation.............................. 35

4.3.4 Cellphone ownership by Savings Type............................................................. 35

4.3.5 Account Ownership .......................................................................................... 35

4.3.6 Account ownership by gender and age ............................................................. 36

4.3.7 Awareness of Islamic Banking and willingness to open an Islamic Bank

account ....................................................................................................................... 36

4.3.8 Reasons why one would not open an account with an Islamic Bank ............... 37

4.3.9 How much do you know about Islamic Banking and Finance?........................ 37

4.3.10 Banks that provide Islamic Banking ............................................................... 38

4.3.11 Know banks in Kenya that provide interest free services ............................... 38

4.3.12 Respondent’s source of knowledge about interest free banking ..................... 39

vi

4.3.13 Trust in Islamic Banking ................................................................................. 39

4.3.14 Existing relationship in Islamic Banking ........................................................ 40

4.3.15 Reasons for Lack of Relationship with Islamic Banking................................ 40

4.3.16 Preferred Banking Option ............................................................................... 40

4.3.17 Knowledge about charging Interest in Islam .................................................. 41

4.3.18 Interested in a Loan? ....................................................................................... 41

4.3.19 Interested in a Loan from which kind of Bank ............................................... 41

4.3.20 Respondents knowledge whether Islamic banking is costlier than non-Islamic

and knowledge on how banks invest ......................................................................... 42

4.3.21 How respondents differentiate banking services ............................................ 42

4.3.22 Ranking of Bank Facilities.............................................................................. 43

4.3.23 Overall Satisfaction ......................................................................................... 44

4.4 PART IV. ISLAMIC BANK USERS. ..................................................................... 44

4.4.1 Reason for choosing Islamic Banking .............................................................. 44

4.4.2 Duration respondent has been a consumer of Islamic banking......................... 45

4.4.3 Switching from one Islamic Bank to another ................................................... 45

4.4.4 Respondents’ reaction to an increase in price of Islamic products ................... 45

4.4.5 Satisfaction with Islamic Financial products .................................................... 46

4.5 PART V: GOVERNMENT POLICIES AND REGULATIONS ............................ 46

4.5.1 Knowledge on government regulation by frameworks on banking regulation in

Kenya ......................................................................................................................... 46

4.5.2 Cross tabulation of whether government should regulated Islamic banking and

whether this regulation will affect the choice of banking services ............................ 47

4.5.3 Respondents’ awareness of consumer protection in Kenya .............................. 47

CHAPTER FIVE ...............................................................................................................48

5.0 DISCUSSION, RECOMMENDATIONS AND CONCLUSION ...............................48

5.1 Introduction .............................................................................................................. 48

5.2 Summary of findings................................................................................................ 48

5.3 Recommendations .................................................................................................... 52

REFERENCES ..................................................................................................................53

ANNEX..............................................................................................................................56

vii

LIST OF TABLES

Table 1: Demographic and socioeconomic characteristics ................................................ 29 Table 2: Educational Level and Gender Cross tabulation ................................................. 30 Table 3: Ability to Read/Write in Kiswahili and Gender Cross tabulation ....................... 30 Table 4: Occupation and Gender Cross Tabulation ........................................................... 31 Table 5: Age and Occupation Cross Tabulation ................................................................ 32

Table 6: Monthly Income by Gender Tabulation .............................................................. 32 Table 7: Monthly Income by any form of Savings Tabulation .......................................... 33 Table 8: Monthly Income by Monthly Savings Value Tabulation .................................... 33 Table 9: Savings by Type .................................................................................................. 34 Table 10: Cellphone ownership ......................................................................................... 34

Table 11: Cellphone ownership by gender tabulation ....................................................... 34 Table 12: Cellphone ownership and having any form of saving cross tabulation ............. 35

Table 13: Cellphone ownership by savings type cross tabulation ..................................... 35 Table 14: Account ownership of respondents .................................................................... 36 Table 15: Account ownership of the respondents by gender and age ................................ 36 Table 16: Awareness of Islamic Banking and willingness to open an Islamic Bank

account ............................................................................................................... 37 Table 17: Reasons by respondents as to why they would not open an account with an

Islamic Bank ...................................................................................................... 37 Table 18: Level of knowledge about Islamic Banking and Finance among respondents .. 38 Table 19: Banks that provide Islamic Banking .................................................................. 38

Table 20: Knowledge by respondents of Kenyan banks that provide interest free services

........................................................................................................................... 39

Table 21: Respondent’s source of knowledge about interest free banking ....................... 39 Table 22: Respondent’s trust in Islamic banking ............................................................... 39

Table 23: Existing relationship of respondents in Islamic banking ................................... 40 Table 24: Respondents reasons for lack of a relationship with Islamic banking ............... 40

Table 25: Preferred banking option for the respondents .................................................... 41 Table 26: Knowledge of respondents on whether they know it is Haram to charge interest

in Islam .............................................................................................................. 41

Table 27: Respondents interest in taking loan ................................................................... 41 Table 28: Preferred bank respondents can take loan from ................................................. 42 Table 29: Respondents knowledge whether Islamic banking is costlier than non-Islamic

and knowledge on how banks invest ................................................................. 42 Table 30: How respondents differentiate banking services ............................................... 43

Table 31: Respondents ranking of bank facilities .............................................................. 43 Table 32: Satisfaction with banking services..................................................................... 44 Table 33: Reasons for respondents’ choice of Islamic banking ........................................ 44

Table 34: Duration respondent has been a consumer of Islamic banking ......................... 45 Table 35: Whether respondents switched from one Islamic bank to another .................... 45

Table 36: Respondents’ reaction to an increase in price of Islamic products .................... 45 Table 37: Respondents satisfaction with Islamic financial products ................................. 46 Table 38: Cross tabulation of respondents’ knowledge on government regulation by

frameworks on banking in Kenya ..................................................................... 46 Table 39: Cross tabulation of whether government should regulated Islamic banking and

whether this regulation will affect the choice of banking services ................... 47 Table 40: Respondents’ awareness of consumer protection in Kenya .............................. 47

1

CHAPTER ONE

1.0 INTRODUCTION

1.1 Background of the Study

The study examined factors that influence Islamic banking among Kenyans with specific

focus on Islamic and Conventional Banks operating within Nairobi, Kenya’s capital city.

The basic practices and principles of Islamic banking date back to the early part of the

seventh century. The origin of the modern Islamic bank can be traced back to the very birth

of Islam when the Prophet himself acted as an agent for his wife's trading operations.

(Islamic Finance, 1997)

Western commercial banks date from about two and a quarter centuries ago, when the

western world was dispensing with moral and ethical considerations in economics.

The first Islamic financial institution was a mutual savings bank formed in Egypt in 1963.

Since then, Islamic finance has evolved into adaptive system of international practices and

regulations capable of harmonizing classical religious precepts, social responsibility, and

traditionalism with the modern experiences of globalized banking. Today according to

International Monetary Fund (IFM), there are over 300 Islamic financial institutions in more

than 75 countries with total assets worldwide exceeding $700 billion and growths exceeding

15 percent a year.

Recent surveys have shown that 37 per cent of Muslims in the United States and 67 per cent

of Muslims in the Kingdom of Saudi Arabia prefer to deal with Islamic banks and financial

product providers. However, in many countries modern Islamic finance has little or no

presence; indeed, it is only now establishing itself as a competitive force in the countries

where it does have a presence. (Jaffer, 2006)

While most Muslims view Shari'a compliance as the most important factor in modern Islamic

finance, not all of them are free of doubts. In some instances, this may be attributed to the

popular view that Islamic finance is more about semantics and cosmetics than it is about

substance. There are issues of trust to be resolved, both in regard to the products and services

of Islamic finance and in regard to those who offer them. Thus beyond the need to make its

2

presence known to the general Muslim populace, Islamic retail finance must also work to

overcome doubts and misconceptions. (Jaffer, 2006)

The demand for Shari'a-compliant financial products and services differs little from the

demand for the conventional equivalents they are designed to replace as Muslims throughout

the world are currently using conventional financial products. It is clear that the opportunity

for the Islamic financial industry is huge. The migration of consumers from conventional to

Islamic has already begun and in many countries conventional banks are beginning to feel

pressure to offer Shari'a-compliant products. (Jaffer, 2006)

Despite this scope and imprint on the global economy, Islamic finance remains poorly

understood at both theoretical and practical level. Moreover, despite a number of recent

optimistic trends, Islamic finance faces several ideological and structural challenges to full

integration in the globalized economy.(Karasik, Wehrey, & Strom, 2005)

The history of banking in Kenya traces its roots to early European trade on the East African

coast, chiefly Zanzibar, in the later part of the 19th century. Despite political upheavals such

as World War II and the subsequent Mau Mau uprising, banking in Kenya experienced

considerable growth.

The banks expanded but banking access and employment opportunities for Africans in the

banking industry took time to materialize. It was only until 1910 that banking services

became available to Africans. This was made possible when the Post Office Savings Bank as

a department within the colonial postal service opened its doors. By March 1911 Post Office

Savings Bank boasted 1,231 accounts, of which 684 belonged to Africans. Even then, the

service was only available in places where officials of the colonial postal service were

stationed and therefore did not reach the majority of Africans who resided in rural areas.

Decades would pass, and with each the industry saw increased Africanization – on both sides

(bankers and customers).

3

Kenya’s first fully locally owned commercial bank came in June 1965 when the Co-operative

Bank of Kenya was registered as a co-operative society initially to serve the growing farming

community.

The first fully government owned bank, the National Bank of Kenya, was established in June

1968. The formation of the government-owned banks had the desired effect of speeding up

the provision of affordable banking services to the majority of the population. It also

prompted foreign owned banks to take measures to remain relevant in the Kenyan market and

beyond.

In Kenya, there are fully-fledged Islamic banks that solely offer Shari’ah-compliant products;

and main stream banks that provide products that are tailored to be in compliance with

Islamic law. Examples of such banks targeting lower income and special customers are Jamii

Bora Bank, which has carved a niche for itself not only by tailoring its banking services

mainly to low-income customers but by also venturing into mortgage financing for low-

income housing, and two fully-fledged Islamic banks; First Community Bank and Gulf

African Bank, that have succeeded in bringing Sharia-compliant banking services to Kenya.

(KBA, 2013)

1.2 Statement of the Problem

Despite this scope and imprint on the global economy, Islamic finance remains poorly

understood at both theoretical and practical level. Moreover, despite a number of recent

optimistic trends, Islamic finance faces several ideological and structural challenges to full

integration in the globalized economy. (Karasik et al., 2005)

Islamic banks come in all shapes and forms: banks and non-banks, large and small,

specialized and diversified, traditional and innovative, national and multi-national, successful

and unsuccessful, prudent and reckless, strictly regulated and free-wheeling, etc. Some,

particularly the “Islamic windows” of conventional banks, are virtually identical to their

conventional counterparts, while others are markedly different. Some are driven by real

religious considerations, while others use religion only as a way of attracting customers.

4

There are considerable disagreements among scholars as to which institutions and

instruments are religiously acceptable. For some, their legal structure does not allow them to

carry out real Islamic business such as trading, leasing or construction activities and hence

they end up doing only conventional financial operations with slight changes to appear

Islamic.

There is a risk that Islamic banking ideals may get diluted with conventional banking unless

Islamic banks do something to establish their distinctness as “Islamic banks”. Non-sharing

Islamic modes such as murabaha, salam, istisna'a and ijarah also provide a link between

financial transactions and real economic activities, such as trading in tangible assets. But

there have to be some underlying goods and services to be the objects of such modes of

financing. (Institute of Islamic Banking and Insurance, n.d.)

In addition, convectional banks which tend to offer Islamic banking have failed to hold to

certain prescribed ideals and principles of Islamic Banking as provided for by the Shari’a in

the Qor’an.

Recent studies in the Arabian Gulf, for example, have shown that deposits in Islamic banks

are rising steeply, and that in the coming decade conventional banks are at risk of losing 30-

40per cent of their Muslim clientele to Islamic banks or at least to conventional banks that

offer Shari'a-compliant banking products. In most of the modern world, however, Muslims

remain unaware of the options now, or soon to be, open to them in the arena of Islamic or

Shari'a-compliant financial products and services.(Jaffer, 2006)While conventional, interest-

based finance is essentially incompatible with Shari'a norms, many if not most Muslims

today have become inured to it.

Kenya Bankers Association (KBA) is committed to ensuring that customers make informed

choices of different products and services offered by banks and which meet the diverse base

of customers’ needs. It also ensures that banks give customers general information about the

bank and the products and services they offer to meet the needs of the customers. Moreover,

it ensures that banks offer niche services and products to meet the needs of a diverse

customer base such as the Muslim community. For example, KBA is keen to ensure that

5

Shari’a-compliant banking (Islamic banking) is available to the Muslim community and other

persons who may be interested. (Mugambi, 2012). Although this is the case, Islamic banks

need to give special ca1re to their integrity and credibility. Some critics are disappointed that

Islamic banks have deviate to a great extent from the philosophic and idealistic basis that

inspired their originators in the 1970s.

Article 46 of the Constitution of Kenya (2010) sets out laws and acceptable practices that the

providers of goods and services should adopt when engaging their consumers. In addition to

the Constitution, the Consumer Protection Bill was enacted in 2012 with clauses pertaining to

the provision of financial services. Therefore both banks as well as their customers should

familiarize themselves with these laws.(Mugambi, 2012)

Lastly, there has been serious lack in researches in Islamic banking, especially in the area of

customer preference and satisfaction around the world and even in Kenya. (Rashid and

Hassan, 2008)

Islamic banking is no longer a novel experiment. When the concept of Islamic banking with

its ethical values was propagated, financial circles the world over treated it as a utopian

dream. Having lived for centuries under the ‘valueless’ capitalist economic system, they

asked what ethics had to do with finance?

Besides their range of equity, trade-financing and lending operations, Islamic banks also

offer a full spectrum of fee-paid retail services that do not involve interest payments,

including checking accounts, spot foreign exchange transactions, fund transfers, letters of

credit, travelers’ checks, safe-deposit boxes, securities safekeeping investment management

and advice, and other normal services of modern banking. Islamic banking because of its

value-orientated ethos enables it to draw finances from both Muslims and non-Muslims alike.

Islamic banks are evolving financial and investment instruments that are not only profitable

but are also ethically motivated. The ever-increasing application and innovation of the

methodologies associated with derivative instruments that revolutionized the global financial

industry have also led to a global financial crisis because of the excess greed for profit and

the immense uncertainty and risk associated with these types of transactions. There are

6

doubts associated with the permissibility of derivative instruments under Islamic finance

generally.

1.3 Purpose of the Study

The purpose of this study was to provide knowledge by establishing factors influencing

Islamic banking in Kenya.

1.4 Research Questions

The study sought to answer the following key questions:

i. What is the level of knowledge and attitude among Kenyans about the existence of

Islamic banks and the various products and services they offer?

ii. What socio-cultural factors influence the choice of Islamic banking or financial

services in Kenya?

iii. How does political or government regulations affect Islamic banks in Kenya?

1.5 Importance of the Study

The results of this study will primarily be beneficial to academics and practitioners in Kenya

by offering an insight into choice criteria for Islamic Banking in general. This study will

provide new results about different kinds of customer preferences with regards to decision to

choose Islamic Banking.

1.5.1 Islamic Bank Managers

Islamic bank managers will learn and plan to offer attractive schemes for their target clients.

1.5.2 Researchers

For the researcher, this study will contribute to existing body of knowledge by providing an

investigation of the factors which influence the choice and decision in Islamic Banking.

Indeed, this study is considered an “eye-opener” for Islamic Banking choice criteria which

has limited previous studies.

1.6 Scope of the Study

The study will be conducted in Nairobi among clients banking with selected conventional

and Islamic banks for ease of reach and convenience to the researcher. Moreover, this is an

7

ideal population to target for banking since the utilization of banking services is highest in

Nairobi than other regions of Kenya. The exercise is expected to conclude in a span of three

months from the time of approval of the research proposal.

1.7 Definition of Terms

a) Islamic banking refers to a system of banking or banking activity that is consistent

with the principles of the Shari'a (Islamic rulings) and its practical application

through the development of Islamic economics. The principles which emphasizes

moral and ethical values in all dealings have wide universal appeal. The principle

source of the Shari’a is the Qur’an followed by the recorded sayings and actions of

Prophet Muhammad (pbuh) – the Hadith.(Institute of Islamic Banking and Insurance,

2014)

b) Banks with 'Islamic windows' are conventional banks that are not Shari'a-compliant

banks. As conventional banks, they establish units or departments charged with the

task of creating, promoting and operating Shari'a-complaint financial products and

related services. The target market is, of course, the Muslim believer. A bank that

professes to have an Islamic window is better that one that does not. A bank that is

run entirely along Shari'a-compliant lines is better that one that professes to have an

Islamic window. Those are the steps on the ladder that matter to the Muslim believer.

(Institute of Islamic Banking and Insurance, n.d.)

1.8 Chapter Summary

This chapter gives the basis and the aim of this study. It was aimed at giving a

comprehensive background and the problem the study intended to fill. It is hoped that the

study will be of much assistance to a wide spectrum of stakeholders in this field and of

specific use to those working in Banking sector especially those with great interest in Islamic

banking.

The following section, Chapter Two, is the literature review which provides background

information and related literature. Chapter Three will presents the methodology to be used in

data collection, storage, analysis and interpretation. Chapter Four will present the research

findings and analysis. Chapter Five will be the heart of this study as it will present the

8

discussion of the study findings, the conclusions drawn from these and the recommendations

proposed by the researcher relevant to this undertaking.

9

CHAPTER TWO

2.0 LITERATURE REVIEW

2.1 Introduction

This Chapter provides literature related to Islamic Banking in Kenya and around the world.

The flow of the literature is guided by the three key research questions – knowledge and

attitude towards Islamic Banking, Socio-cultural influence the choice of Islamic banking and

how government regulates banking sector and how this regulation impact on general

utilization of banking and financial services.

Islamic banking and finance is an emerging global industry founded on Islamic ethical

precepts. Just as in the case of conventional banks, Islamic banks are expected to offer

products that consider the needs of their customers. (Amin, Rahman, Sondoh Jr, & Hwa,

2011)

This chapter therefore discusses the basis and principles of Islamic banking and how it differs

from conventional banks. It also examines factors that influence customers’ choice to utilize

Islamic financial services. It ends by describing a conceptual framework on how the

perceived factors i.e. social, economic and political factors interplay and eventually influence

Islamic banking.

Islamic Banks hold well over US $700 billion in assets and are growing at over 15% yearly.

Islamic Banking and Finance (IBF) involves wider ethical and moral issues than simply

‘interest-free’ transactions. (Khan, Feisal, 2010) Its advocates argue that these make it more

economically efficient than conventional banking and promote greater economic equity and

justice. To what extent, then, do actual Islamic Banking practices live up to the ideal, and

how different are they from conventional banking? A preliminary investigation shows that,

three decades after its introduction, there remain substantial divergences between IBF''s

ideals and its practices, and much of IBF still remains functionally indistinguishable from

conventional banking. (Khan, Feisal, 2010)

10

2.2 Knowledge and Attitude towards Islamic banking in Kenya

2.2.1 Basis and Principles of Islamic Banking

Islam is a total way of life. Its system of laws permeates social, economic, political and

cultural life. Islamic banks are thus one of the direct consequences of the resurgence of

interest in Islam.

The primary source of all Islamic jurisprudence, the body of which is known as the Shari'a, is

the Qur'an and Sunnah. Thus it is the Quranic scholars to whom the leaders of Islamic

economics and banking turn for guidance in setting up their internal compliance systems and

processes. Therefore, in order to be Islamic, the banking system has to avoid interest because

the Shari’a prohibits the payment of charges for the renting of money (riba) for specific

terms, as well as investing in businesses that provide goods or services considered contrary to

its principles (Haram, forbidden). Another Islamic principle is that there should be no reward

without risk bearing; a principle which is applicable to both labor and capital. Modern

Islamic banking is based on the principle of mudarabah i.e. Islamic partnerships.(Institute of

Islamic Banking and Insurance, 2014)

Islamic banking has the same purpose as conventional banking except that it operates in

accordance with the rules of Shari’ah, known as Fiqh al-Muamalat (Islamic rules on

transactions). The basic principle of Islamic banking is the sharing of profit and loss and the

prohibition of riba (usury/interest). Common terms used in Islamic banking include; profit

sharing (Mudharabah), safekeeping (Wadiah), joint venture (Musharakah), cost plus

(Murabahah), and leasing (Ijarah). (Shamim Njeri Kinyanjui, 2013)The fundamental

differences between Islamic banking and conventional banking, is not only in the way it

practices its businesses, but above all the values which guide Islamic banking whole

operation and outlook. These values prevailed within the ambit of Shariah (Islamic law) are

expressed not only in its transactions, but in the breadth of its role in society as a whole.

(Guyo & Adan, 2013)

2.2.2 Islamic banking in Kenya

Kenya was the first country in the East and Central African region to introduce Islamic

banking in the year 2007. In this short period, two banks were licensed to exclusively offer

11

Shari’ah-compliant products with many other conventional banks establishing a window

specifically for Shari’ah-compliant products. Records show that for the short period of

existence, Islamic banking in Kenya has shown very commendable performance

commanding combined market share of the banking sector in terms of gross assets of 0.8%.

Currently, there are two Islamic banks operating in Kenya i.e. Gulf African and First

Community Bank with a loan portfolio of over 4.9 billion shillings, deposits totaling 7.5

billion shillings and 27270 deposit accounts. Other banks which offer shari’ah complaint

products and services include Dubai Bank, Kenya Commercial Bank Ltd and Barclays Bank

Ltd. (Kinyanjui, 2013)

The phenomenal growth of Islamic finance has resulted into customization of products and

service by conventional banks in addition to the rapid growth by the fully fledged Islamic

banks (KBA, 2011). While this necessitates the critical need for the potential customers to

have adequate information to make decisions on whether to invest in Islamic finance,

empirical evidences on Islamic banking and finance in Kenyan context is limited. (Guyo &

Adan, 2013)

Islamic banking industry has been trying for the last over two decades to extend its outreach

to bring it at least to the level of conventional banking. But the absence of Shariah-compliant

legal framework — needed to make interest-free banking acceptable (and create sound

financial institutions) — is the major snag behind its low penetration in the financial market.

(Kinyanjui, 2013)

Literature shows that the main factors influencing the choice of bank are: the pricing

structure of services, friends’ referrals on banks, switching costs and service quality. In a

South African study by Abratt and Russell (1999) on the criteria used by consumers in the

selection of a private bank, it was found that price was an important criterion, modified by

trust, service quality and the availability of the bank. The bank selection criteria are expected

to affect a customer’s overall satisfaction towards his or her bank (Levesque and McDougall,

1996). Many studies have investigated the bank selection criteria or the reasons on the basis

of which customers choose to bank with specific banks (Anderson et al., 1976; Denton and

Chan, 1991; Erol and El-Bdour, 1989; Erol et al., 1990; Khazeh and Decker, 1992; Kaynak et

12

al., 1991; Laroche and Taylor, 1988; Levesque and McDougall, 1996; Tan and Chua, 1986).

These studies have identified a number of such factors: convenience (i.e. the location),

friends’ recommendations, reputation of a bank, availability of credit, competitive interest

rates, friendliness of bank staffs, service charges, adequate banking hours, availability of

ATM, special services and the quality of services of checking accounts. (Guyo & Adan,

2013)

A study by Dr. Wario Guyo on factors influencing selection of banks operating in a dual

banking environment like Kenya concluded that the most important fact is that customers of

Islamic banks view the industry much more favorably by the social and ethical goals that it

serves, rather than the mechanics of its operationalization and functions. And that one of the

most important reflections of customers’ attitude is that social-welfare factors are evidenced

as more important objectives than commercial factors in their perceptions towards Islamic

banking. (Guyo & Adan, 2013)

Other studies have shown that many individual characteristics such as place of residence,

gender, age, level of education, numeracy, employment status etc. are associated with the use

of financial services. According to 2011 World Bank report, about 42 per cent of Kenyan

aged 15 years and above held accounts with formal financial institutions. Though above most

sub-Sahara African countries and other low income countries, formal account usage differ by

gender (female = 39.18%; males = 45.65%), by education (primary or less = 19.44%;

secondary or above = 62.82%), by age (young adults = 40.27%; older adults = 43.53%); and

by residence (rural = 37.9%; urban = 75.95%).(The World Bank, 2011)Inhabitants of rural

areas are typically poorer and less likely to work in formal jobs hence rural Kenyans, are less

likely to use formal banking and other formal financial services, but not informal services.

By controlling for other characteristics, women are not less likely to use formal banking or

other formal financial services, but they are more likely to use informal services than men

and are less likely to be excluded.

Income is one of the strongest predictors of usage of both formal and informal financial

services – more Kenyans are likely to use formal banks as their income brackets increases.

13

Literature also reveals that education is a strong predictor of the use of formal banking and

other formal financial services. Kenyans with tertiary education are more likely to use formal

banking and other formal financial services (any of the four service types) than Kenyans with

secondary education who in turn are more likely to use these services than Kenyans with

only a primary education who in turn are more likely to use these services than Kenyans

without any formal education.

Older Kenyans are more likely to use financial services than younger citizens. In addition,

salaried employees are more likely to use formal financial services and are less likely to be

excluded. Compared to Kenyans dependent on pensions or remittances, employed, self-

employed and agricultural workers are more likely to use bank and other formal financial

services and are less likely to be excluded. They are also more likely to use informal

financial services. While cell phone users typically have higher incomes, the ownership of a

cell phone has an additional positive effect on the likelihood of using financial services,

while it is negatively associated with the likelihood of being excluded.

Numeracy is associated with greater use of formal bank services, but is not significantly

associated with the use of other formal or informal financial services or with being excluded.

Finally, more risk-averse people are more likely to use informal financial services and are

less likely to be excluded.

2.3 Socio-cultural factors and Islamic banking

Islam is the primary reason behind choosing Islamic banking. Customers in Islamic banks

seriously consider whether the bank complies with Islamic Shari’ah rules in all stages of

banking activities (Kader, 1993; Metawa and Almossawi, 1998; Naser et al, 1999; Haron et

al, 1994; Ahmad and Haron, 2002; Erol et al, 1990). The variables deemed important under

religious (Islamic) construct include compliance to Shari’a rules, offering of Shari’a-

compliant services, offering interest free loans etc. However, studies have showed that

Islamic belief is neither the only reason, sometimes, nor the primary reason behind choosing

Islamic banking. Although the idea of Islamic banking comes from the desire of conducting

financial activities in accordance with Islamic Sharia principles (Naser and Moutinho, 1997),

14

the popularity of Islamic banks is spreading widely with increasingly large international

conventional banks by establishing Islamic window services.

Unlike conventional banks, the purpose of Islamic banks is to work in harmony with the

Islamic law and principles towards economic development. Due to its profit-risk sharing

principles, Islamic banks, compared to non-Islamic banks, seek for a just and an equitable

distribution of resources (Siddiqui, 1985). This is the reason why non-Muslims are also

adopting Islamic banking in different parts of the world. The consequence of this is that

Islamic banks face competition from both other Islamic banks and non-Islamic banks. When

competition intensifies and when banks start to offer more or less similar products and

services, it is the customer satisfaction that can influence the performance of an Islamic bank

and determines whether its competitiveness and success are vulnerable (Naser et al, 1999).

Hence, effective market positioning to identify influential factors affecting customer

satisfaction is of paramount importance for Islamic banks.(Rashid & Hassan, 2009)

A study by Hanudin Amin et al 2011 on Determinants of customers' intention to use Islamic

personal financing: The case of Malaysian Islamic banks showed that the three determinants

that influence the intention to use Islamic personal financing include attitude, social influence

and pricing of Islamic personal financing. Religious obligation and government support are

mostly insignificant predictors.(Amin et al., 2011)

De Mooji (2004) identified that culture is also an important factor that affect the consumer

standards for selection of a financial institution. The attitude of customer in Malaysia is

different from the Pakistani customers that affect the decision of customer to use the Islamic

banking products and services. Dusuki and Abdullah (2007) also find that for Muslims

religious views are the important and main factor that stimulates the individuals to go on

Islamic banking system instead of conventional banking. Al Ajmi (2009) show that religious

factor may or may not important the main thing is potential profit taken by the investor.

A study conducted in Jordan has also found that religion does not play significant role to

select an Islamic bank but profit motivated criteria is an important factor to choose a bank

opening new branches. However, other major findings are that peer group influence plays an

15

important role in selecting Islamic banks as depository institution. The study explored that

the demographic factors such as religion & knowledge are playing a significant role to select

a bank. Researcher found that customers do not have so much knowledge about the Islamic

banking products such as Muderaba, Mushaaraka, Murabaha etc., but they buy these

products for the reason of religion. Study also revealed that bank’s name and reputation also

strongly effect on selecting a bank. In the same study, the researchers explored that

reputation and image factor are evidenced as one of the important criteria in the banking

selection decision. The study concluded that availability of service and social, as well as

religious perspective at higher level could make Islamic Banking easier and comfortable.

(Haque, Osman and Ismail, 2009).

Banks with 'Islamic windows' are conventional banks (i.e. they are not Shari'a-compliant

banks). As conventional banks, they establish units or departments charged with the task of

creating, promoting and operating Shari'a-complaint financial products and related services.

The target market is, of course, the Muslim believer. A bank that professes to have an Islamic

window is better than one that does not. A bank that is run entirely along Shari'a-compliant

lines is better than one that professes to have an Islamic window. Those are the steps on the

ladder that matter to the Muslim believer.(Jaffer, 2006)

2.4 Government policies and regulations and Islamic banking

Banking sector is one of the most regulated institutions around the world and a number of

reasons can be given for this heavy and costly burden of government supervision. For

instance, it protects the safety of the public’s savings, controls the supply of money and

credit in order to achieve a nation’s broad economic goals (such as high employment and low

inflation), ensures equal opportunity and fairness in the public’s access to credit and other

vital financial services, promotes public confidence in the financial system so that savings

flow smoothly into productive investment and payments for goods and services are made

speedily and efficiently, avoids concentrations of financial power in the hands of a few

individuals and institutions, provides the government with credit, tax revenues, and other

services; and to help sectors of the economy that have special credit needs (such as housing,

small business, and agriculture).

16

However, regulation must be balanced and limited so that, financial firms can develop new

services the public demands and competition in financial services remains strong to ensure

reasonable prices and an adequate quantity and quality of service to the public and private-

sector. decisions are not distorted in ways that waste scarce resources (such as by

governments propping up financial firms that should be allowed to fail). (“The Impact of

Government Policy and Regulation on the Financial-Services Industry,” n.d.)

The banking industry in Kenya is primarily governed by the Banking Act (Chapter 488,

Laws of Kenya) (the “Banking Act”), and by the Central Bank of Kenya Act (Chapter 491,

Laws of Kenya)(the “CBK Act”).(Central Bank of Kenya, 2013)

Any person who undertakes “banking business”, “financial business” or the business of a

“mortgage finance company” must be licensed by the Central Bank of Kenya (“CBK”).

When the CBK reviews an application for a license, the criteria it must consider include the

financial condition and history of the institution, the professional and moral suitability of the

persons proposed to manage or control the institution, and the public interest which will be

served by granting the license. The CBK has the right, when granting a license, to endorse

such conditions as it considers necessary, and may from time to time add, vary or substitute

such conditions as it deems appropriate. (Kent, 2013)

According to Wako, Kamaria and Kimani (2014), Islamic banks in most countries are put

under the supervision of the central bank of the country and are given the same treatment

given to conventional banks. With only a few instances where special Islamic banking

legislation are approved to define a new relationship between Islamic banks and the central

bank. This position is supported by Azizul, (1999) who believes that most Islamic banks in

the contemporary world operate in a mixed environment in which interest based banks

function side by side with Islamic banks. The central banks subject Islamic banks to the same

controls, conditions, and regulations that they apply to interest-based banks. Azizul, (1999)

notes that there are certain factors such as lack of understanding of the correct nature of

Islamic financing techniques, however, that requires that Islamic banks be treated on a

different footing. For instance, Central banks usually pay interest on deposits which Islamic

banks cannot accept, Central banks function as lenders of last resort to

17

conventional/commercial banks providing loans at times of liquidity crunch. (Wako,

Kamaria, & Kimani, 2014)

Although the concept of Islamic Finance and Banking has generated a lot of interest and

overwhelming support from both Muslim and non-Muslim population in Kenya, as a

regulator, CBK has faced by certain challenges which need to be addressed. Wako et al

(2014), in their literature review pointed Qadeeruddin (Qadeeruddin, A., 2005)having noted

CBK cautioning of possibility of Islamic Banks operating within the existing legal and

regulatory framework, which posed a great challenge, after all.(Wako et al., 2014) In part, all

banks offering Islamic banking have established their own separate Shari’ah Board to

supervise and offer guidance to their respective banks on Islamic banking system.

(Kinyanjui, 2013)The Prudential Guidelines significantly cover most aspects of governance

and internal controls of banks in Kenya. It provides that: “The board should possess, both as

individual board members and collectively, appropriate experience, competencies and

personal qualities, including professionalism and personal integrity.” Furthermore,

professionals such as lawyers, accountants and valuers involved in the provision of

professional services to a licensed institution are not eligible to be appointed as directors, and

senior officers and non-executive directors of a government regulatory body are similarly not

allowed to be appointed as directors of an institution where there may be a conflict of

interest. (Kent, 2013)The Prudential Guidelines further provide that the board must have an

appropriate number of directors that is commensurate with an institution’s complexity, size,

scope and operations.

In addition, the Prudential Guidelines introduce comprehensive provisions on consumer

protection which did not exist under the previous guidelines. The Prudential Guidelines

provide that the relationship between an institution and a customer should be guided by five

key principles: fairness, reliability, transparency, equity and responsiveness. (Kent, 2013)

Currently, there are two fully-fledged Shariah-compliant banks in Kenya, i.e. Gulf African

and First Community Banks, and a growing number of conventional banks have an Islamic

banking division. The challenge for Kenyan banks offering Islamic financing has been the

lack of a proper legal framework, which prevented them from providing certain products. In

18

addition, there is ambiguity in respect of the tax treatment of Shariah-compliant financial

instruments. The regulatory bodies have identified the challenges and when proper legal

framework and policies are in place, the country is expected to see a significant growth in

Islamic financing. (Kent, 2013)

The key areas of current regulatory focus in the banking sector include licensing of new

institutions that wish to be licensed to conduct banking, mortgage or financial business in

Kenya. The Prudential Guidelines have introduced some stringent requirements with regard

to licensing of new institutions. The CBK has also sought to govern agency banking, because

of the increased interest by banks in that sector.(Central Bank of Kenya, 2013)

The Kenyan banking sector has recently experienced some significant changes, especially

following the banking crisis that started in 2008. The Kenya Deposit Insurance Act, 2012

(the “KDI Act”), which has been assented to but is yet to commence, provides for the

establishment of an autonomous body called the Kenya Deposit Insurance Corporation which

will replace the current Deposit Protection Fund Board, a department of the CBK. The KDI

Act provides for the setting up of a deposit insurance system, and the receivership and

liquidation of deposit-taking institutions.(Kent, 2013)

The CBK has been conducting a comprehensive review of the banking sector, legal and

regulatory framework. There have been a number of proposed laws and regulations relevant

to the sector put forward by the CBK. For instance, the Banking (Amendment) Bill, 2011

(the “Bill”) has been published to amend the Banking Act so as to put a cap on the rate of

interest charged by banks and financial institutions for loans or monetary advances. The Bill

also proposes to fi x the minimum rate of interest that banks or financial institutions must pay

on deposits held in interest-earning accounts. The Bill passed through its first reading on 10th

November, 2011.(Kent, 2013)

The government and government-influenced banks represent about a fifth of total branches in

urban districts, over half in rural districts, three-quarters in semi-arid districts, and almost

ninety percent in arid districts. This suggests that government influence has a positive impact

in promoting access to financial services but, in the absence of an analysis to assess the costs

19

of government-influenced banks’ poor lending practices, it should not be concluded that

government ownership is either the best or the cheapest way in which to maintain rural

access to the banking system.

The depth of outreach remains a serious problem for the Kenyan financial sector. The banks

best positioned to maintain or extend outreach are government-owned banks that are also in

most in need of efficiency improvement. (Beck, Cull, & Fuchs, 2010)

2.4.1 Factors considered important by customers in non-Islamic Banks

Islamic banks and conventional banks both create competition among banks to satisfied

customers and fulfill their expectations and long term benefits for the economy. The

conventional banks and the Islamic banks are differentiated commonly on the basis of their

goals, Riba and risk sharing practices.

Though this will not be one of research objectives, for a better outlook, the study will

contrast the bank selection factors important to Islamic and non-Islamic customers. As

proved by numerous theories, beside religion, there are non-religious factors such as cost-

benefit trade off, convenience, empathy towards customers, and efficiency of the bankers

etc., considered to be important to the customer before choosing an Islamic bank. In

conventional banks, different types of customers put emphasis on different factors before

choosing their banks. (Rashid & Hassan, 2009)

De Mooji (2004) identified that culture is also an important factor that affect the consumer

standards for selection of a financial institution. The attitude of customer in Malaysia is

different from the Pakistani customers that affect the decision of customer to use the Islamic

banking products and services. Dusuki and Abdullah (2007) also find that for Muslims

religious views are the important and main factor that stimulates the individuals to go on

Islamic banking system instead of conventional banking. Al Ajmi (2009) show that religious

factor may or may not important the main thing is potential profit taken by the investor.

A study conducted by Azhar Sheikh et al (2010) revealed that customers of Islamic and

Conventional banks in Pakistan were satisfied with the facilities provided by their banks –

clients of Islamic banks were satisfied with the facilities provided their banks but the

20

customers of conventional banks were more satisfied than the customers of Islamic banks. In

their analysis, findings proved that economic benefits, financial position of banks, interest on

deposits, strong global image and network reputation were the factors that were motivating

customers towards conventional banks. Factors which motivating customers towards Islamic

banks were: interest free loan, financial position of bank, Islamic teaching and Shariah,

knowledge on Islam and religious environment in the city were the factors which motivating

customers towards Islamic banks.

In a separate study conducted in Malaysia by Selemat and Kadir (2009), findings revealed

the five most important factors considered by Muslim customers in selecting their financial

institutions and which were “provision of fast and efficient service”, “confidential of banks”,

“bank reputation and image”, “a wide range of services provided”, and “friendliness of bank

personnel”. For non-Muslims, the top three factors are similar in sequence with the Muslims.

Only that they ranked “lower interest charges of loans” as forth and follow with “a wide

range of services provided’ and “friendliness of bank personnel”.

The result further showed that both Muslim and non-Muslims in Malaysia are quite similar in

selecting a bank or financial institutions. They were concern on the fast and efficient services

provided by banks. This was in line with the current product and services ranges offered by

the bank. As the banks were mostly offering similar products such as savings deposit fixed

deposit and housing loan, a key difference between two banks would be how fast and

efficient the service they can serve in attaining competitive advantages. The selection of fast

and efficient service as the most important factor was consistent with the findings by Sudin

and Norafifah (1992), Kaynak et al., (1991), Erol and El-Bdour (1989), Gerrard and

Cunningham (1997) and Norhazlin et al (2006).

21

2.4.2 Conceptual framework

Arrays of theoretical and empirical reviews result into various variable dimensions. The

independent variable of this study will therefore comprise of the economic, socio-cultural

and political factors. These are the perceived independent variables expected to determine the

choice of Islamic banking choice by retail consumers in Kenya. The choice of Islamic

banking will thus be the dependent variable of this study. Therefore, these variables and the

hypothesized relationships can be summarized as shown in the conceptual framework Figure

1 above.

2.5 Chapter Summary

The study was attempted towards establishing what factors such as social, economic and

political influence utilization of Islamic banking and financial services in Kenya. What

factors customers relied on while choosing between Islamic and Conventional banks?

Through the study, an attempt was made to know whether customers from different age

brackets, gender, educational qualification, professional background act differently while

selecting their Islamic or Conventional banks, whether they put higher importance to any

specific factor or not? The research further examined how government policies and

regulation including infrastructural development influence Islamic banking.

The study report conclude by outlining practical recommendation to financial investors and

bankers on the open niches that can help expand market and open space for Islamic bank,

Economic factors e.g.

poverty, residence,

occupation, income,

Client’s choice of

Islamic Banking

Political factors e.g.

government policies

& regulations;

infrastructure

development

&governance

Socio-cultural factors

e.g. religious belief,

level of education,

gender, culture etc.

22

redefine objectives and approaches in provision of banking services and products which

conform to the Islamic laws and principles. In addition, recommendation are made on how

proper market strategy can be applied to lure more Kenyans and especially Muslims to

embrace Islamic banking. And finally, to encourage more scholars to venture into studies and

documentation to increase the horizon for research and accumulate relevant literature in areas

of Islamic banking and finance.

The study measured the impact of customer demographics on bank selection criteria hence

provide an insight to banks and other financial institutions to adopt newer marketing

strategies while targeted clients and new market niches. This will help banks understand

group-behavior of their target customers and therefore make it easier for them to positioning

and branding activity easier.

The next chapter discusses the methodology and materials to be used in the study.

23

CHAPTER THREE

3.0 METHODOLOGY

3.1 Introduction

This Chapter sets out various stages and phases that were followed in completing the study. It

outlines the research design, the target population, sampling design, sampling frame,

sampling techniques and sample size, data collection methods, research procedures, data

analysis, and logistical and ethical considerations.

3.2 Research Design

A descriptive survey design was used to describe characteristics of subjects or phenomenal

attitudes. The study adopted cross-sectional study design approach. Study subjects wre

randomly sampled to ensure that individuals in the study are truly representative of the

population from which they are drawn. Cross-sectional survey was suitable for the study

since information was to be collected at a single point in time without manipulating any

aspect of the sample. The purpose was to describe the characteristics of the general

population from an empirically selected sample, identify differences among sub-groups and

assess inter-relationships (Touliatos and Compton, 1988; Robson, 2002; Langdridge, 2004).

3.3 Population and Sampling Design

3.3.1 Population

The study targeted males and females aged 18 years and above who held bank accounts with

either Islamic banks or conventional banks. A total of 125 customers were targeted for

interviews.

3.3.2 Sampling Design

3.3.2.1 Sampling Frame

The entire male and female adult population banking with both conventional and Islamic

banks were considered in the sampling frame. The basis for sampling was all conventional

and Islamic banks operating in Nairobi with the unit of analysis being the individual bank

account holder/client to targeted banks. The key informant interviews drew participants from

the target banks senior management and the leadership of Islamic religion.

24

3.3.2.2 Sampling Technique

The study used various sampling techniques for quantitative and qualitative data acquisition.

The individual survey utilized probability proportional to size (PPS) and convenient

sampling while the key informants was purposively and conveniently sampled.

3.3.2.3 Sample Size

Fischer et al (1998) method of sample size determination will be used to obtain the desired

sample size. The sample size was calculated based on the available Islamic Banks’ customer

population proportion for the financial year 2013. Since this proportion was not known, 0.5

(50%) was assumed as P (proportion of population of interest). The confidence interval was

set at 95% and minimum error at 5%.

But since the target population of conventional and Islamic bank customer base being over

10,000. The sample size determination formula below was applied.

where n = sample size

z = confidence level of 1.96

p = proportion of variable of interest in the population (student non blood donors not known)

q = 1- p

d = precision (0.05 per cent)

But to facilitate the survey process, a convenience sampling was used to generate voluntary

participation from the bank’s customers. This was expected to allow a precise result in the

data findings. Hence about 125 questionnaires were provided for the survey – the decision

was influenced by limited resources and available time by then.

25

Respondents Male Female Total

Islamic Banks 35 30 65

Conventional Banks 30 30 60

Bank Managers 4

Religious leaders 4

3.4 Data Collection Methods

The following instruments were used to collect data: in-depth interviews schedule, key

informant interview guides, focus group guides and review of secondary data. The interviews

were conducted after admission of consent forms by interviewers.

A combination of quantitative and qualitative methods were used during the study. The use

of quantitative and qualitative methods was meant to provide for a more comprehensive,

reliable measure in a study. Multiple measures were allowed for the examination of

convergence among results and greater confidence in the findings. This was pursued through

the following strategies; Population KAP sample survey, Key Informants Interviews (KIIs)

and Document Review. Semi-structured interview and focus groups had guides that are

structured with an open-ended format to allow participants to respond freely to questions and

contribute rich responses. Probes were used to encourage participants to elaborate on issues

relevant to the sub-studies and comment on information gathered from other data.

Methods for achieving the goal and objectives of the study were: individual KAP survey to

gather socio-demographic data in relation to choice of Islamic banking, and key informants

interviews with persons and financial institutions strategically located and who possess vital

information regarding banking in Kenya.

3.5 Research Procedures

The development of the research tools for collecting the required data will be informed by

the main variables as presented in the conceptual framework. The aim was to address all

main goal of the study and answer to all the research questions. The researcher pre-tested the

instruments on one selected banks offering Islamic banking services and a conventional

bank, the two banks were then be excluded from the final study sample. The purpose of pre-

26

testing the research instruments was be to uncover possible deficiencies in the measuring

devices. The pre-test assisted in checking the time taken to administer the instruments,

nature, sensitivity, language, omissions and ambiguity of questions asked. Data collected

from the pre-test assisted in refining the research instruments and provide an opportunity for

preliminary testing of hypotheses and modification or elimination of inadequate instruments.

The researcher was able to check for adequacy of the data collection techniques, data

processing procedures and methods of analysis for alteration before the study. The moderated

version of instruments was useful in determining the suitability and reliability of the research

instruments for the study.

The data for this study was obtained through a survey which was conducted two Islamic bank

branches and two selected conventional banks, in Nairobi, Kenya. The survey was conducted

within a period of two months from the time of approval of the proposal.

Approval from relevant bodies including University was sought for the study. Consent was

sought before administering interviews. Confidentiality was assured for all individuals

participating in the study.

During the study period, the researcher administered the individual questionnaires

individually to all the respondents who were sampled in the targeted population i.e. clients of

Islamic Banks and two Conventional Banks. The researcher exercised care and controlled to

ensure all questionnaires issued to the respondents were received and achieved the desired

objective. The researcher maintained a register of questionnaires which were sent out, and

which were received back.

3.6 Data Analysis Methods

Data collected was organized, categorized for coding and analysis using both qualitative and

quantitative statistics. The individual survey data was entered in CSPro designed database

and analyzed using SPSS while the qualitative data was analyzed by consolidating emerging

themes from the key informant interviews.

Quantitative data was analyzed by the use of descriptive statistics using SPSS and presented

via percentages, means, standard deviations and frequencies. The information was presented

27

using tables and in prose-form. This was be done by tallying up responses, computing

percentages of variations in response as well as describing and interpreting the data in line

with the study objectives and assumptions.

Data was analyzed according to stated objectives and hypotheses of the study. In quantitative

data management descriptive and inferential statistics was used. Using SPSS package

responses were analyzed by frequencies and percentages for stated objectives. Quantitative

data was summarized and presented in form of tables. Correlation was established to assess

the nature of relationship among variables of the study.

3.7 Chapter Summary

This chapter gives the study design, the study target population and approach and techniques

to be adopted in arriving at the study sample size, procedures and instruments of data

collection and data analysis methods to be used in the study. It is a blue print of what will be

done in the field in attempt to gather the required information to answer the research

questions of this study.

28

CHAPTER FOUR

4.0 RESULTS AND FINDINGS

4.1 Introduction

This chapter reports the analysis of data gathered from the survey conducted to assess the

factors influencing Islamic banking in Nairobi-Kenya. The data was collected using KAP

questionnaire and quantitative data analyzed using Statistical Package for the Social Sciences

(SPSS) and information presented in the tables below.

A total of one hundred and twenty five questionnaires were administered – one hundred and

twenty four were returned (99.2% response rate).

4.2 Demographic and Socioeconomic Characteristics

Table 1 shows the descriptive statistics of the respondents in this study. The respondents

comprised of sixty four males (51.6%) and sixty females (48.4%). Majority of the

respondents (74.2%) were persons aged below thirty five years while those above fifty years

were the least (3.2%). The respondents were either married (52.4%) or single (38.7%) with

the least being divorced (1.6%). Most of them are educated with 93.6% having attained

secondary education and above. Only 3.2% of those sampled had no formal education.

29

Table 1: Demographic and socioeconomic characteristics

Gender Frequency Percentage (%)

Male 64 51.60%

Female 60 48.40%

Total 124 100.00%

Age

18-24 41 33.10%

25-35 51 41.10%

36-50 28 22.60%

50+ 4 3.20%

Total 124 100.00%

Marital Status

Single 48 38.70%

Married 65 52.40%

Separated 9 7.30%

Divorced 2 1.60%

Total 124 100.00%

Education Level

No education 4 3.20%

Primary Education 4 3.20%

Secondary Education 40 32.30%

Tertiary/ College Education 45 36.30%

University 31 25.00%

Total 124 100.00%

4.2.1 Educational Level and Gender Cross tabulation

Table 2 shows educational level and gender cross tabulation of the respondents. Majority of

the female respondents had secondary and tertiary level of education (37.1%) compared to

males (31.4%) at the same level. However, the female respondents were also the majority for

those that had primary level of education and without any formal education (0.8%

respectively). The males were better educated with majority of them (15.3%) having a

University level education.

30

Table 2: Educational Level and Gender Cross tabulation

Education Level Gender

Male Female Total

Freq. (%) Freq. (%) Freq. (%)

No education 3 2.40% 1 0.80% 4 3.20%

Primary Education 3 2.40% 1 0.80% 4 3.20%

Secondary Education 18 14.50% 22 17.70% 40 32.30%

Tertiary/ College Education 21 16.90% 24 19.40% 45 36.30%

University 19 15.30% 12 9.70% 31 25.00%

Total 64 51.60% 60 48.40% 124 100.00%

4.2.2 Ability to Read/Write in Kiswahili and Gender Cross tabulation.

Table 3 shows cross tabulation between gender and ability to read and write in Kiswahili.

Most of the respondents could read and write in Kiswahili (males=50%, females=46.7%)

with no difference across the genders.

Table 3: Ability to Read/Write in Kiswahili and Gender Cross tabulation

Can read or write in Swahili Gender

Male

Female

Total

Freq. (%) Freq. (%) Freq. (%)

Yes 61 50.00% 57 46.70% 118 96.70%

No 2 1.60% 2 1.60% 4 3.30%

Total 63 51.60% 59 48.40% 122 100.00%

4.2.3 Occupation and Gender Cross Tabulation

Table 4 shows the occupation and gender cross tabulation of the respondents. Majority of the

respondents were either self-employed (40.2%), working in the private sector (23%) or in the

public sector (11.5%) with the least in other occupations (3.3%). The males were either self-

employed (21.3%) or students (5.7%) compared to the females who were mostly working in

the private sector (12.3%) or in semi-government agencies (3.3%).

31

Table 4: Occupation and Gender Cross Tabulation

Occupation Gender

Male

Female

Total

Freq (%) Freq (%) Freq (%)

Public Sector 7 5.70% 7 5.70% 14 11.50%

Private Sector 13 10.70% 15 12.30% 28 23.00%

Self Employed 26 21.30% 23 18.90% 49 40.20%

Semi-Government Agency 1 0.80% 4 3.30% 5 4.10%

Wage Earners 5 4.10% 5 4.10% 10 8.20%

Student 7 5.70% 5 4.10% 12 9.80%

Other 3 2.50% 1 0.80% 4 3.30%

Total 62 50.80% 60 49.20% 122 100.00%

4.2.4 Age and Occupation Cross Tabulation

Table 5 shows the cross tabulation between age and occupation of the respondents. Majority

of them were self-employed (40.2%) with those aged 25-35 years being the most (20.5%)

and those above 50 years the least (0.8%). The respondents aged 25-35 years were mostly

self-employed (20.5%), either worked with private sector (11.5%) or were wage earners

(3.3%). These were followed closely by workers aged 36-50 years while the least number of

workers was registered among those with above 50 years. In the above 50 years category,

most of the respondents worked in the private sector (1.6%) and none worked in either public

sector, semi-government agencies, were wage earners or students.

32

Table 5: Age and Occupation Cross Tabulation

Occupation Age

18-24 25-35 36-50 50+ Total

Freq (%) Freq (%) Freq (%) Freq (%) Freq (%)

Public Sector 4 3.3 3 2.5 7 5.7 0 0.0 14 11.5

Private Sector 6 4.9 14 11.5 6 4.9 2 1.6 28 23.0

Self Employed 15 12.3 25 20.5 8 6.6 1 0.8 49 40.2

Semi-Government

Agency 1 0.8 2 1.6 2 1.6 0 0.0 5 4.1

Wage Earners 3 2.5 4 3.3 3 2.5 0 0.0 10 8.2

Student 9 7.4 2 1.6 1 0.8 0 0.0 12 9.8

Other 2 1.6 1 0.8 0 0.0 1 0.8 4 3.3

Total 40 32.8 51 41.8 27 22.1 4 3.3 122 100.

0

4.2.5 Monthly Income by Gender Tabulation

Table 6 shows how monthly income and gender cross tabulate. Few respondents (5.4%) earn

more than Ksh 100,000 with more males (4.5%) in this category compared to females

(0.9%). Majority of respondents earn between Ksh 10,000-100,000 (69.3%) with males being

the lowest earners with most (13.5%) getting an income of less than Ksh 10,000 compared to

females in the same category (11.7%).

Table 6: Monthly Income by Gender Tabulation

Monthly Income Gender

Male Female Total

Freq (%) Freq (%) Freq (%)

Less than Ksh 10,000 15 13.50% 13 11.70% 28 25.20%

Ksh 10,000 to Ksh 40,000 22 19.80% 26 23.40% 48 43.20%

Ksh 41,000 to Ksh 100,000 15 13.50% 14 12.60% 29 26.10%

More than 100,000 5 4.50% 1 0.90% 6 5.40%

Total 57 51.40% 54 48.60% 111 100.00%

33

4.2.6 Monthly Income by any form of Savings Tabulation

Table shows monthly income by any form of savings tabulation. Majority of the respondents

saved their earnings across all monthly income brackets. However, some did not save

especially those earning less than KSh 10,000 (4.5%) and those earning Kshs 10,000-40,000

(0.9%).

Table 7: Monthly Income by any form of Savings Tabulation

Monthly Income Any form of Savings

Yes No Total

Freq (%) Freq (%) Freq (%)

Less than Ksh 10,000 23 20.70% 5 4.50% 28 25.20%

Ksh 10,000 to Ksh 40,000 47 42.30% 1 0.90% 48 43.20%

Ksh 41,000 to Ksh 100,000 29 26.10% 0 0.00% 29 26.10%

More than 100,000 6 5.40% 0 0.00% 6 5.40%

Total 105 94.60% 6 5.40% 111 100.00%

4.2.7 Monthly Income by Monthly Savings Value Tabulation.

Table shows monthly income by monthly savings value cross tabulation. The amount saved

monthly by the respondents was dependent on the monthly income. Majority of the savings

ranged from Ksh 5,000-20,000 (42.5%) which was mostly done by those earning an income

of Ksh 10,000-40,000 (30.2%). Few of the respondents (4.7%) saved more than Ksh 50,000

which was mostly by those earning an income of more than Ksh 100,000 (2.8%).

Table 8: Monthly Income by Monthly Savings Value Tabulation

Monthly

Income Monthly Savings

Less than Ksh

5,000

Ksh 5,000-

20,000

Ksh 21,000-

50,000

More than

Ksh 50,000 Total

Freq (%) Freq (%) Freq (%) Freq (%) Freq (%)

Less than

Ksh 10,000 23 21.70 2 1.90 0 0.00 0 0.00 25 23.60

Ksh 10,000 -

40,000 11 10.40 32 30.20 3 2.80 0 0.00 46 43.40

Ksh 41,000 -

100,000 0 0.00 11 10.40 16 15.10 2 1.90 29 27.40

More than

100,000 0 0.00 0 0.00 3 2.80 3 2.80 6 5.70

Total 34 32.10 45 42.50 22 20.80 5 4.70 106 100.00

34

4.2.8 Savings by Type

Table 9 shows form of savings used by the respondents. Majority of the respondents (90.3%

have formal savings in the form of an account in formal DTI or mobile with least having

informal savings (8%).

Table 9: Savings by Type

Formal or Informal Savings

Description Frequency Percent

Formal ( Has Account in Formal DTI or Mobile) 102 90.3

Informal (Property, Livestock, Land etc.) 9 8

Both Formal and Informal 2 1.8

Total 113 100

4.3 Knowledge and Attitude Towards Islamic Banking

4.3.1 Owning a Cellphone

Table 10 shows cellphone ownership. Majority of the respondents own a cell phone (91.8%)

Table 10: Cellphone ownership

Own a Cellphone Frequency Percent

Yes 112 91.80%

No 10 8.20%

Total 122 100.00%

4.3.2 Gender by Cellphone Ownership Tabulation

Table shows cellphone ownership by gender tabulation. Almost an equal of the respondents

who own cellphone are either male or female (47.5% and 44.3% respectively).

Table 11: Cellphone ownership by gender tabulation

Gender Own a Cellphone

Yes

No

Total

Frequency Percent Frequency Percent Frequency Percent

Male 58 47.50% 4 3.30% 62 50.80%

Female 54 44.30% 6 4.90% 60 49.20%

Total 112 91.80% 10 8.20% 122 100.00%

35

4.3.3 Any form of Savings by Cellphone Ownership Tabulation

Table shows cellphone ownership and having any form of saving cross tabulation. Majority

of the respondents (87.4%) that own a cellphone have a form of savings they subscribe to.

Table 12: Cellphone ownership and having any form of saving cross tabulation

Any form of Savings Own a Cellphone

Yes

No

Total

Frequency Percent Frequency Percent Frequency Percent

Yes 104 87.40% 8 6.70% 112 94.10%

No 5 4.20% 2 1.70% 7 5.90%

Total 109 91.60% 10 8.40% 119 100.00%

4.3.4 Cellphone ownership by Savings Type

Table 13 shows cellphone ownership by savings type cross tabulation. Majority of the

respondents with cellphones have a formal type of saving (83.2%) with those without a

cellphone but have formal savings being few (7.1%).

Table 13: Cellphone ownership by savings type cross tabulation

Formal or Informal Savings Own a Cellphone

Yes

No

Total

Freq % Freq % Freq %

Formal (Has Account in Formal DTI or Mobile) 94 83.20% 8 7.10% 102 90.30%

Informal (Property, Livestock, Land etc.) 8 7.10% 1 0.90% 9 8.00%

Both Formal and Informal 2 1.80% 0 0.00% 2 1.80%

Total 104 92.00% 9 8.00% 113 100.00%

4.3.5 Account Ownership

Table shows account ownership of respondents. Most of the respondents (90.9%) own a bank

account with few (9.1%) not having one.

36

Table 14: Account ownership of respondents

Owns a Bank Account Frequency Percent

Yes 110 90.90%

No 11 9.10%

Total 121 100.00%

4.3.6 Account ownership by gender and age

Table shows account ownership of the respondents by gender and age. An equal number of

respondents of either gender own bank accounts (45.5%). Majority of the accounts are owned

by respondents aged 25-35 years with the least being owned by those aged above 50 years

(2.5%). A large percentage of those aged 18-24 years (4.1%) said they did not have a bank

account.

Table 15: Account ownership of the respondents by gender and age

Owns a Bank Account

Yes

No

Total

Frequency Percent Frequency Percent Frequency Percent

Gender

Male 55 45.50% 7 5.80% 62 51.20%

Female 55 45.50% 4 3.30% 59 48.80%

Total 110 90.90% 11 9.10% 121 100.00%

Age

18-24 34 28.10% 5 4.10% 39 32.20%

25-35 48 39.70% 3 2.50% 51 42.10%

36-50 25 20.70% 2 1.70% 27 22.30%

50+ 3 2.50% 1 0.80% 4 3.30%

Total 110 90.90% 11 9.10% 121 100.00%

4.3.7 Awareness of Islamic Banking and willingness to open an Islamic Bank account

Table shows awareness of Islamic Banking and willingness to open an Islamic Bank account

by respondents. Majority of the respondents (73.8%) had heard of Islamic Banking but few

(25%) were willing to open an account in an Islamic Bank.

37

Table 16: Awareness of Islamic Banking and willingness to open an Islamic Bank account

Yes

No

Total

Frequency Percent Frequency Percent Frequency Percent

Heard of Islamic Bank 90 73.80% 32 26.20% 122 100.00%

Willing to open an account in an Islamic Bank 8 25.00% 24 75.00% 32 100.00%

4.3.8 Reasons why one would not open an account with an Islamic Bank

Table shows reasons given by respondents as to why they would not open an account with an

Islamic Bank. Majority of the respondents (22.5%) cited the lack of interest and unreliability

as the core reasons why they would not open an account with an Islamic Bank. Apart from

these, others also mentioned; that their bank branches are few or inaccessible (18.3%),

religious belief (15%), risk of embezzlement (7.5%) and the least concern was high fees

(3.3%).

Table 17: Reasons by respondents as to why they would not open an account with an Islamic

Bank

Reasons Frequency Percent

Fees are high 4 3.33%

There are no interest 27 22.50%

Bank is unreliable 27 22.50%

Risk of Embezzlement 9 7.50%

Bank Branches are few / inaccessible 22 18.33%

My religious belief 18 15.00%

Others 13 10.83%

120 100.00%

4.3.9 How much do you know about Islamic Banking and Finance?

Table shows level of knowledge about Islamic Banking and Finance among respondents.

Most of the respondents (75.9%) know about Islamic Banking and Finance with a large

percentage (41.1%) having sufficient knowledge or know it very well. Only few (24.1%) of

respondents said they have never thought about.

38

Table 18: Level of knowledge about Islamic Banking and Finance among respondents

Know about Islamic Banking and Finance Frequency Percent

Never thought about it 27 24.10%

Not much 39 34.80%

Sufficient knowledge 40 35.70%

Very well 6 5.40%

Total 112 100.00%

4.3.10 Banks that provide Islamic Banking

Table shows banks that provide Islamic Banking. The respondents identified the following

banks as the ones that provide Islamic Banking: Gulf Bank, First Community Bank, Standard

Chartered Bank, Barclays Bank of Kenya, Bank of Africa, Equity Bank Limited.

Table 19: Banks that provide Islamic Banking

Bank Frequency Percent

Gulf Bank 43 35.83%

First Community Bank 40 33.33%

Standard Chartered Bank 15 12.50%

Barclays Bank of Kenya 9 7.50%

Bank of Africa 4 3.33%

Equity Bank Limited 4 3.33%

Others 3 2.50%

Family Bank 1 0.83%

Cooperative Bank of Kenya 1 0.83%

Bank of Baroda 0 0.00%

Eco-Bank 0 0.00%

Commercial Bank of Africa 0 0.00%

NIC Bank 0 0.00%

Diamond Trust Bank 0 0.00%

Total 120

4.3.11 Know banks in Kenya that provide interest free services

Table shows knowledge by respondents of Kenyan banks that provide interest free services.

Majority of the respondents (63.1%) either know little or have never thought that there are

banks in Kenya that provide interest free services. On the other hand, few of the respondents

(36.9%) are aware of banks in Kenya that provide such services.

39

Table 20: Knowledge by respondents of Kenyan banks that provide interest free services

Knows Banks in Kenya that provide interest free services Frequency Percent

Never thought about it 37 30.30%

Not Much 40 32.80%

Sufficient Knowledge 23 18.90%

Very Well 22 18.00%

Total 122 100.00%

4.3.12 Respondent’s source of knowledge about interest free banking

Table shows respondent’s source of knowledge about interest free banking. Majority of the

respondents said they either learnt from friends of family (26.9%) or from Madrassa teaching

or Mosque (25.6%). The least source of knowledge was the internet (6.4%) though

respondents also cited other sources to be; bank employee (17.9%) and Media (23.1%).

Table 21: Respondent’s source of knowledge about interest free banking

Knowledge Source Frequency Percent

Bank Employee 22 17.90%

Media (Newspaper , TV) 28 23.10%

Internet 8 6.40%

Madrassa Teaching / Mosque 31 25.60%

Friends / Family 33 26.90%

122 100.00%

4.3.13 Trust in Islamic Banking

Table shows respondents trust in Islamic banking. More than half the respondents (56.1%)

said they trusted Islamic banking with some of the respondents being indifferent (16.3%)

Table 22: Respondent’s trust in Islamic banking

Trust in Islamic Banking Frequency Percent

Yes 69 56.10%

No 34 27.60%

I don't know 20 16.30%

40

4.3.14 Existing relationship in Islamic Banking

Table shows if there is any existing relationship of respondents in Islamic banking. Half the

respondents (52%) said they had an existing relationship with Islamic banking while the rest

did not have (48%).

Table 23: Existing relationship of respondents in Islamic banking

Existing Relationship with Islamic Banking Frequency Percent

Yes 64 52.00%

No 59 48.00%

Total 123 100.00%

4.3.15 Reasons for Lack of Relationship with Islamic Banking

Table shows respondents reasons for lack of a relationship with Islamic banking. Majority of

the respondents (33.9%) didn’t know why they lacked a relationship with Islamic banking.

Most of them cited the following reasons: their religious beliefs (26.8%), risk of

embezzlement (8.9%), inaccessibility (7.1%) and lack of interest (5.4%) as the prime one

barring them from having a relationship with Islamic banking.

Table 24: Respondents reasons for lack of a relationship with Islamic banking

Reasons Frequency Percent

I don't know of existence 41 33.90%

Fees are high 2 1.80%

There are no interest 6 5.40%

Bank is unreliable 4 3.60%

Risk of Embezzlement 11 8.90%

Bank is inaccessible 9 7.10%

My religious belief 32 26.80%

Others 15 12.50%

Total 121 100.00%

4.3.16 Preferred Banking Option

Table shows preferred banking option for the respondents. The respondents equally prefer

either commercial banks or Islamic banking (34.2%) with none of them opting for internet

banking.

41

Table 25: Preferred banking option for the respondents

Preferred Banking Option Frequency Percent

Commercial Banks 40 34.20%

Islamic Banking 40 34.20%

Mobile Banking 37 31.60%

Internet Banking 0 0.00%

Total 117 100.00%

4.3.17 Knowledge about charging Interest in Islam

Table shows knowledge of respondents on whether they know it is Haram to charge interest

in Islam. Most of the respondents (66.1%) know that it is Haram to charge interest with few

of them (15.7%) not sure.

Table 26: Knowledge of respondents on whether they know it is Haram to charge interest in

Islam

Haram to Receive and Charge Interest Frequency Percent

Yes 80 66.10%

No 22 18.20%

Not Sure 19 15.70%

Total 121 100.00%

4.3.18 Interested in a Loan?

Table shows respondents interest in taking loan. Majority of the respondents (58.7%) would

be interested in taking a loan with few of them (12.4%) not sure.

Table 27: Respondents interest in taking loan

Interested in taking a Bank loan Frequency Percent

Yes 71 58.70%

No 35 28.90%

Not Sure 15 12.40%

Total 121 100.00%

4.3.19 Interested in a Loan from which kind of Bank

Table shows the preferred bank respondents can take loan from. Majority of the respondents

(48.6%) would be interested in a loan from an Islamic bank compared to a commercial bank

42

(39.2%). The least favorite institution to get a loan from was micro-financial institutions

(5.4%)

Table 28: Preferred bank respondents can take loan from

Bank Type Frequency Percent

Commercial Bank 44 39.20%

Islamic Bank 54 48.60%

Micro-financial institution 6 5.40%

Others 8 6.80%

Total 112 100.00%

4.3.20 Respondents knowledge whether Islamic banking is costlier than non-Islamic

and knowledge on how banks invest

Table shows respondents knowledge whether Islamic banking is costlier than non-Islamic

and knowledge on how banks invest. Majority of the respondents (25.9%) were neither sure

whether Islamic banking is costlier than non-Islamic nor knew how banks invested deposits

and savings. However, an equal percentage of respondents (17.9%) that knew Islamic

banking to be cheaper than non-Islamic either knew how banks invest or didn’t know how

they invested.

Table 29: Respondents knowledge whether Islamic banking is costlier than non-Islamic and

knowledge on how banks invest

Islamic Banking costlier

than Non Islamic

Banking

Knowledge on How deposits and savings are invested

Yes No Not Sure Total

Freq % Freq % Freq % Freq %

No 20 17.90% 20 17.90% 9 8.00% 49

43.80

%

Not Sure 10 8.90% 24 21.40% 29

25.90

% 63

56.30

%

Total 30 26.80% 44 39.30% 38

33.90

% 112

100.0

0%

4.3.21 How respondents differentiate banking services

Table shows how respondents differentiate banking services. Majority of the respondents

(39.5%) consider convenience followed by interest rate or profit (37.1%) as the most

important factors in differentiating banking services while the least if the cost of banking.

43

Table 30: How respondents differentiate banking services

Frequency Percent

Interest Rate/ Profit 46 37.10%

Convenience 49 39.50%

Cost of Banking 23 18.50%

Others 6 4.80%

Total 124 100.00%

4.3.22 Ranking of Bank Facilities

Table 31 shows respondents ranking of bank facilities. The top bank facility identified by

respondents was its confidentiality (Weighted mean=3.7). They also cited: availability of

financial advice, knowledge on customers’ business, speed and efficiency of transactions,

faster document processing and sufficient time for transactions among core important

facilities a bank can offer. The least bank facility identified (Weighted mean=3.1) was

whether a bank provided Islamic products and services or it had overdraft privileges on its

current accounts. The respondents also cited: the provision of profit-sharing investment

products, an average decent return and provision of uniform services in all branches as the

least important facilities a bank can offer.

Table 31: Respondents ranking of bank facilities

Bank Facilities Strongly Disagree Neutral Agree Strongly Total Weighted

Disagree

Agree

Mean

Count Count Count Count Count Count

1 2 3 4 5

Provision of Islamic products and services 22 13 22 20 25 102 3.1

Overdraft privileges on current account 10 16 38 35 8 107 3.1

Provision of profit-sharing investment products 9 13 44 28 12 106 3.2

Average decent return 15 14 24 41 12 106 3.2

Uniform services in all branches 8 18 37 27 16 106 3.2

Strong global network 11 9 39 34 12 105 3.3

Wide Electronic Communication System 4 17 36 37 9 103 3.3

Lower service charge 7 19 34 29 18 107 3.3

Run on Islamic law and principles 16 19 20 20 32 107 3.3

Competitive Product Offerings 11 11 35 34 17 108 3.3

Awareness program on services 9 10 40 32 16 107 3.3

No interest paid nor taken on savings and loans 18 15 21 17 35 106 3.3

Provision of free interest loans 18 15 18 19 36 106 3.4

Confidence in Bank's management 11 16 27 22 31 107 3.4

Convenient branch location 7 9 34 43 13 106 3.4

Interior comfort of Branches 9 8 39 30 22 108 3.4

44

Bank size in assets and capital 5 13 33 44 14 109 3.4

Sufficient time for transaction 9 8 26 49 14 106 3.5

Fast and efficient counter services 23 7 15 19 43 107 3.5

Faster document processing 7 12 24 44 20 107 3.5

Speed and efficiency of transactions 11 11 19 43 26 110 3.6

Knowledge on customer's business 6 12 25 39 24 106 3.6

Availability of financial advice 10 10 23 33 34 110 3.6

Confidentiality of Bank 10 15 15 20 47 107 3.7

4.3.23 Overall Satisfaction

Most of those sampled were satisfied with their banking services.

Table 32: Satisfaction with banking services

Count Weighted Mean

Overall Satisfaction Highly Dissatisfied 1 8 0.1

2 2 0.05

3 11 0.4

4 24 1.16

5 27 1.63

6 8 0.58

Highly Satisfied 7 3 0.25

Total 83 4.16

4.4 Islamic Bank Users.

4.4.1 Reason for choosing Islamic Banking

Table shows why respondents have chosen Islamic banking. Majority of the respondents

(48.31%) cited religion as the number one reason why they had chosen Islamic banking.

Other reasons given were: cheap products (30.5%), convenient location (14.4%) and ethical

reasons (5%)

Table 33: Reasons for respondents’ choice of Islamic banking

Frequency Percent

Religion 57 48.31%

Cheap Products 36 30.51%

Convenient Bank location 17 14.41%

Friends 0 0.00%

Ethical 6 5.08%

Others 2 1.69%

118 100.00%

45

4.4.2 Duration respondent has been a consumer of Islamic banking

Table shows duration respondent has been a consumer of Islamic banking. Majority of the

respondents (79.2%) are new to Islamic banking with some having been a consumer for less

than year (34.3%). Few respondents (11.4%) said they have been using Islamic banking for

more than ten years.

Table 34: Duration respondent has been a consumer of Islamic banking

Duration of being a customer of Islamic Banking Frequency Percent

Less than 1 Year 24 34.30%

1-5 Years 30 42.90%

6-10 Years 8 11.40%

More than 10 Years 8 11.40%

Total 70 100.00%

4.4.3 Switching from one Islamic Bank to another

Table shows whether respondents switched from one Islamic bank to another. Majority of the

respondents (69.7%) did not switch from one Islamic bank to another, rather they are new

consumers of Islamic banking. A third of the respondents (30.3%) said they had switched

from one provider of Islamic banking to another.

Table 35: Whether respondents switched from one Islamic bank to another

Switched from one Islamic bank to another Frequency Percent

Yes 23 30.30%

No 53 69.70%

Total 76 100.00%

4.4.4 Respondents’ reaction to an increase in price of Islamic products

Table shows respondents reaction to an increase in price of Islamic products. Half of the

respondents (51.3%) would still consider Islamic products if they became costly.

Table 36: Respondents’ reaction to an increase in price of Islamic products

If Islamic Products become costly would you still consider them Frequency Percent

Yes 39 51.30%

No 37 48.70%

Total 76 100.00%

46

4.4.5 Satisfaction with Islamic Financial products

Table shows respondents satisfaction with Islamic financial products. Majority of the

respondents (56.8%) prefer the personal visit compared to either telephone/mobile banking

(29.7%) or internet banking (13.5%) in provision of Islamic financial products.

Table 37: Respondents satisfaction with Islamic financial products

Satisfaction in Islamic Financial Products Frequency Percent

Internet Banking 10 13.50%

Telephone/ Mobile banking 22 29.70%

Personal visit 42 56.80%

Total 74 100.00%

4.5 Government Policies and Regulations

4.5.1 Knowledge on government regulation by frameworks on banking regulation in

Kenya

Table 38 shows cross tabulation of respondents’ knowledge on government regulation by

frameworks on banking in Kenya. All respondents agree that there is government regulation

of banking in Kenya. Majority of them (47.6%) know of consumer protection followed by

administrative regulation (15.9%). Few of the respondents (7.9%) are aware of branching

regulations and agency regulations (11.1%).

Table 38: Cross tabulation of respondents’ knowledge on government regulation by

frameworks on banking in Kenya

Policy framework to regulate banking

services Government Regulation in Banking in Kenya

Yes

No

Total

Freq. % Freq. % Freq. %

Agency regulation 7 11.10 0 0.00 7 11.10

Customer regulation 11 17.50 0 0.00 11 17.50

Branching regulation 5 7.90 0 0.00 5 7.90

Administrative regulation 10 15.90 0 0.00 10 15.90

Consumer protection 30 47.60 0 0.00 30 47.60

Total 63 100.00 0 0.00 63 100.00

47

4.5.2 Cross tabulation of whether government should regulate Islamic banking and

whether this regulation will affect the choice of banking services

Table shows cross tabulation of whether government should regulate Islamic banking and

whether this regulation will affect the choice of banking services. Majority of the respondents

(39.5%) believe that government regulation doesn’t affect choice of banking but they don’t

advocate for the government to regulate Islamic banking. On the other hand, some of the

respondents (33.3%) were of the opinion that regulation affects the choice of banking

services and that the government should in fact regulate Islamic banking.

Table 39: Cross tabulation of whether government should regulated Islamic banking and

whether this regulation will affect the choice of banking services

Regulation affects choice of Banking / Financial

Services

Government Should Regulate Islamic

Banking

Yes

No

Tota

l

Freq % Freq % Freq %

Yes 38 33.30% 14 12.30% 52 45.60%

No 17 14.90% 45 39.50% 62 54.40%

Total 55 48.20% 59 51.80% 114

100.00

%

4.5.3 Respondents’ awareness of consumer protection in Kenya

Table shows respondents awareness of consumer protection in Kenya. Majority of the

respondents (63.2%) are aware that there is a consumer protection act in Kenya with few of

them (26.8%) not aware.

Table 40: Respondents’ awareness of consumer protection in Kenya

Aware of Consume Protection Act in Kenya Frequency Percent

Yes 74 63.20%

No 43 36.80%

Total 117 100.00%

48

CHAPTER FIVE

5.0 DISCUSSION, RECOMMENDATIONS AND CONCLUSION

5.1 Introduction

This chapter focuses on the discussion of the findings, conclusion and recommendations

relevant to the problems in the research.

5.2 Summary of findings

The research sought to assess the factors that influence the choice of Islamic banking in

Kenya by seeking the views of respondents from Nairobi region on their level of knowledge

of Islamic banking and financial products, their attitude, their socio-cultural inclinations and

political regulations. Data collected from the respondents suggests that there are a number of

factors that influence Islamic banking in Kenya.

The study found that majority of those surveyed had heard of Islamic banking and financial

products with some of them being very knowledgeable about them. They could even name

some of the providers of the services for example Gulf Bank and First Community Bank.

Despite this, a few were willing to open an account with an Islamic bank citing different

reasons why they would not. Some of the reasons they mentioned as barring them were: the

banks’ lack of interest, their perceived unreliability, they had fewer branches rendering them

inaccessible, risk of embezzlement and religious inclinations. The least of their concerns was

the high fees charged by the institutions. This is in agreement with a study by Guyo and

Adan that found that customers of Islamic banking services view the industry more favorably

by the social and ethical goals that it serves, rather than the mechanics of its

operationalization and functions. And that customers’ attitude reflected the social-welfare

factors as important objectives than commercial factors in how they perceived Islamic

banking. (Guyo & Adan, 2013)

Consumers of banking services said they prefer equally either commercial banks or Islamic

banking. They are well aware of how they operate for example that they don’t charge interest

and that it is Haram to do so. They would also prefer a loan from an Islamic bank compared

49

to a commercial bank based on the understanding that they don’t charge interest. This

suggests that Islamic banking is attractive to those surveyed. Islamic banking has the same

purpose as conventional banking except that it operates in accordance with the rules of

Shari’ah, (Islamic rules on transactions) like the sharing of profit and loss and the prohibition

of riba (usury/interest) (Shamim Njeri Kinyanjui, 2013). The fundamental differences

between Islamic banking and conventional banking, is not only in the ways they practice

their businesses, but above all the values which guide Islamic banking whole operation and

outlook. (Guyo & Adan, 2013).

The convenience of banking with an institution followed by the level of interest if offers

ranked highest among respondents in terms of differentiating services offered by different

banks. The consumers also preferred banking institutions with; high levels of confidentiality,

that could provide financial advice, that offered fast and efficient transactions and they were

least concerned with whether the institution provided Islamic banking or financial services.

These findings concur with those of a study by Azhar Sheikh et al (2010) that showed that

customers of Islamic and Conventional banks in Pakistan were satisfied with facilities

provided by their banks though customers of conventional banks were more satisfied than the

customers of Islamic banks. They concluded that economic benefits, financial position of

banks, interest on deposits, strong global image and network reputation motivated customers

towards conventional banks. On the other hand, customers were drawn to Islamic banks due

to: interest free loan, financial position of bank, Islamic teaching and Shariah, knowledge on

Islam and religious environment in the city were the factors which motivating customers

towards Islamic banks (Azhar 2010). Several studies in Malaysia have shown that both

Muslim and non-Muslims are quite similar in selecting a bank or financial institution. Their

major concern was the speed and efficiency of services provided by banks (Sudin and

Norafifah (1992), Kaynak et al., (1991), Erol and El-Bdour (1989), Gerrard and Cunningham

(1997) and Norhazlin et al (2006). In the current study, consumers noted that they were

satisfied with personal visits compared to telephone or internet banking when accessing

Islamic banking services. This could be a great motivator in influencing the choice a person

made on whether to open an account with a conventional or an Islamic bank.

50

The survey results showed that an equal number of males and female were sampled. Majority

were less than 35 years of age and were either married or single. They were highly educated

as most had secondary level of education and above. Account ownership was equal between

males and females and was majorly by those aged 25-35 years. Other studies have shown that

many individual characteristics such as place of residence, gender, age, level of education,

numeracy, employment status etc. are associated with the use of financial services.

According to 2011 World Bank report, about 42 per cent of Kenyan aged 15 years and above

held accounts with formal financial institutions (The World Bank, 2011). This suggests that

even though these factors influence one’s decision to have a formal account, they do not

influence the choice one makes on whether to prefer Islamic banking or conventional

banking. Studies concur that education is an important predictor of the use of formal banking

and other formal financial services. Kenyans with tertiary education are more likely to use

formal banking and other formal financial services than those with secondary education or

lower.

The respondents sampled were either self-employed, working in the private or public sector.

The working population comprised majorly of those below 35 years of age. They saved their

earnings across all monthly income brackets and preferred to use a formal bank account with

the majority saving between Ksh 5,000 to Ksh 20,000. Income is one of the strongest

predictors of usage of both formal and informal financial services – more Kenyans are likely

to use formal banks as their income brackets increases (reference). Most consumers of

Islamic banking interviewed were new to it with majority having used the services for either

less than a year or for 1-5 years. They had not necessarily switched from another provider of

Islamic banking and acknowledged that they would still consider using the services even if

they became costlier Few of the respondents had used the banking services for a duration of

more than ten years. This suggests that more Kenyans are warming up to the idea of owning

an Islamic bank account to enjoy the services they offer. Studies have shown that older

Kenyans, salaried employees and those self-employed are more likely to use financial

services than younger citizens, those dependent on pensions or remittances and agricultural

workers.

51

Religious affiliation was the number one cited reason for choice of Islamic banking and

financial services for Islamic users. Other reasons given were that: it offers cheap products,

banks are conveniently located and other ethical reasons. This is in contrast to a study

conducted in Malaysia by Selemat and Kadir (2009) that found the five most important

factors considered by Muslim customers in selecting their financial institutions as: “provision

of fast and efficient service”, “confidentiality of banks”, “bank reputation and image”, “a

wide range of services provided”, and “friendliness of bank personnel”. They also found that

non-Muslims had similar views apart from, “lower interest charges of loans”, “a wide range

of services provided’ and “friendliness of bank personnel” (Selemat and Kadir 2009)

The research found that most people are aware of government regulation on banking services

in Kenya. Some of the areas regulated by the government are: consumer protection,

administration, branching and in agency banking. In Kenya, those surveyed were mostly

aware of consumer protection than the other forms of government regulations. Despite all

these regulations, respondents are still divided on whether these regulations affect the choice

of banking preferred by a consumer. Majority don’t see how this can affect and therefore

advocate that the government should not regulate Islamic banking. On the hand, some

consider government regulations an important factor in influencing the choice of banking

services and therefore encourage regulation of Islamic banking. According to Wako,

Kamaria and Kimani (2014), Islamic banks in most countries are put under the supervision of

the central bank of the country and are given the same treatment given to conventional banks.

This position is supported by Azizul, (1999) who believes that most Islamic banks in the

contemporary world operate in a mixed environment in which interest based banks function

side by side with Islamic banks. The central banks subject Islamic banks to the same

controls, conditions, and regulations that they apply to interest-based banks. However,

Azizul, (1999) notes that there are certain factors that require that Islamic banks be treated on

a different footing. For instance, Central banks usually pay interest on deposits which Islamic

banks cannot accept, Central banks function as lenders of last resort to

conventional/commercial banks providing loans at times of liquidity crunch. (Wako,

Kamaria, & Kimani, 2014). Although the concept of Islamic Finance and Banking has

generated a lot of interest and overwhelming support from both Muslim and non-Muslim

52

population in Kenya, as a regulator, CBK was faced by certain challenges which need to be

addressed. (Wako et al., 2014) In part, all banks offering Islamic banking have established

their own separate Shari’ah Board to supervise and offer guidance to their respective banks

on Islamic banking system. (Kinyanjui, 2013).

Both Islamic and conventional banks both create competition among banks to satisfied

customers and fulfill their expectations and long term benefits for the economy. The

conventional banks and the Islamic banks are differentiated commonly on the basis of their

goals, Riba and risk sharing practices. The foregoing discussion has identified a number of

factors that influence the choice of Islamic banking services over conventional banks. It is

encouraging to note that there are more new users opting to have Islamic banking and

financial services.

5.3 Recommendations

This study recommends that:

a) Islamic banking institutions need to market their products and services to reach more

Kenyans as some are unaware of them or do not trust them due to ignorance.

b) There is a great opportunity for Islamic banks to get more customers thereby enhance

their business since consumers of banking services prefer equally either commercial

banks or Islamic banking.

c) Banking institutions should be convenient, have high levels of confidentiality,

provide financial advice, and offer fast and efficient transactions to remain

competitive.

d) Islamic banks need to tone down religious affiliation in order to appeal to non-

Muslims

e) Government regulations should be applied on banking services in Kenya but should

be customized for the different institutions as they have different services.

53

REFERENCES

Central Bank of Kenya. (2013). “Developments in the Kenyan Banking Sector for the

Quarter ended 30th June, 2012.” Nairobi. Retrieved from

http://www.centralbank.go.ke.

Dr. Theodore Karasik, Frederic Wehrey, & Steven Strom. (2005). Islamic Finance in a

Global Context: Opportunities and Challenges. In Islamic Finance.

Dr. Wario Guyo, & Noordin Adan. (2013). The Determinants of retail consumer choice of

Islamic Banking in Kenya. International Journal of Arts and Entrepreneurship, 1(2),

601–612.

Habiba J. Wako, Joe K. Kamaria, & John Kimani. (2014). Challenges affecting performance

of Islamic banks in Kenya. Prime Journal of Social Science (PJSS), 3(2), 586–591.

Hanudin Amin, Abdul Rahim Abdul Rahman, Stephen Laison Sondoh Jr, & Ang Magdalene

Chooi Hwa. (2011). Determinants of customers’ intention to use Islamic personal

financing: The case of Malaysian Islamic banks, 2(1), 22 – 42.

Haque A, Osman J and Ismail A. Z. H, (2009) Factor Influences Selection of Islamic

Banking: A Study on Malaysian Customer Preferences, American Journal of Applied

Sciences 6 (5): 922-928, 2009

Institute of Islamic Banking and Insurance. (2014). Islamic Banking (Feature). Retrieved

from http://www.islamic-banking.com/Default.aspx

Institute of Islamic Banking and Insurance. (n.d.). Islamic Banking and Finance. Islamic

Banking and Finance. Retrieved from http://www.islamic-banking.com/Default.aspx

Jaffer. (2006). Islamic Retail Banking and Finance: Global Challenges and Opportunities

(Reprint.). Euromoney Books. Retrieved from www.euromoneybooks.com

54

Kenya Bankers Association (KBA). (2013). History of Banking in Kenya. Nairobi: Kenya

Bankers Association, KBA. Retrieved from

http://demo.nationmedia.com/historyofbanking/

Khan, Feisal. (2010). Journal of Economic Behavior & Organization: How “Islamic” is

Islamic Banking?, 76(3), 805–820.

Mamunur Rashid, & M. Kabir Hassan. (2009). Customer Demographics Affecting Bank

Selection Criteria, Preference, and Market Segmentation: Study on Domestic Islamic

Banks in Bangladesh, 4(6). Retrieved from www.ccsenet.org/journal.html

Nuru Mugambi. (2012). A Consumer Guide to Banking in Kenya. Kenya Bankers

Association.

Qadeeruddin, A. (2005). What is Riba? J. Islamic Bank. Fin.

Rachel Kent. (2013). Banking Regulation (First Edition.). Global Legal Group. Retrieved

from www.globallegalinsights.com

Shamim Njeri Kinyanjui. (2013). Challenges Facing the Development of Islamic Banking.

Lessons from the Kenyan Experience. European Journal of Business and

Management, 5(22), 94–104.

Sudin, H., Norafifah,A., Patronage Factors of Retail Customers Towards Commercial Bank,

Banker’s Journal Malaysia, October,1992, pp. 44-49.

Sudin, H., Norafifah. A. and Planisek, S. L, Bank Patronage Factors of Muslim and Non-

Muslim Customers, International Journal of Bank Marketing, Vol. 12 (1), 1994,

pp.32-40.

The Impact of Government Policy and Regulation on the Financial-Services Industry. (n.d.).

In Introduction to Banking and Financial Services.

55

The World Bank. (2011). The World Bank Financial Inclusion Data, Country Dashboard.

Retrieved from http://datatopics.worldbank.org/financialinclusion/country/kenya

Thorsten Beck, Robert Cull, & Michael Fuchs. (2010). Banking Sector Stability, Efficiency,

and Outreach in Kenya (Policy Research Working Paper No. 5442) (p. 40). Retrieved

from http://econ.worldbank.org

56

ANNEX

A. RESEARCH TOOLS

1. Individual Questionnaire

Instructions: Please tick (√)

Questionnaire by Saida Ali Aden of USIU

PART I: BACKGROUND AND DEMOGRAPHIC DETAILS OF THE

RESPONDENT

1. Your gender:

� Male

� Female

2. Your age:

� 18-24

� 25-35

� 36-50

� 50+

3. Your marital status:

� Single � Married � Separated � Divorced

4. Your education level:

� No education

� Primary education

� Secondary education

� Tertiary/college education

� University

5. Can you read or write in Swahili

� Yes � No

6. Your occupation:

57

� Public sector

� Private sector

� Self employed

� Semi-government agency

� Wage earners

� Student

� Others (please specify ……………)

7. Your Monthly Income:

� Less than KES. 10,000

� KES. 10,000 to KES. 40,000

� KES. 41,000 to KES. 100,000

� More than KES. 100,000

8. Do you have any form of savings?

� Yes � No

9. If YES, is the saving formal or informal?

� Formal (Has Account in Formal Deposit-Taking Institution or Has Mobile Money

Account)

� Informal (Saves money in form of property or livestock, land etc.)

10. Your Monthly Savings:

� Less than KES. 5,000

� KES. 5,000 to KES. 20,000

� KES. 21,000 to KES. 50,000

� More than KES. 50,000

PART II: KNOWLEDGE AND ATTITUDE TOWARDS ISLAMIC BANKING

11. Do you own a cell phone? And does it have mobile banking platform?

� Yes � No

58

12. Do you have a bank account?

� Yes � No

13. What is the distance to closest deposit-taking branch (in km)?

km

14. What is the distance to closest bank branch offering cash withdrawals (in km)?

km

15. Have you heard of the Islamic Bank?

� Yes � No

16. If No, would you be willing to open an account in an Islamic Bank?

� Yes � No

17. If No in Q16, why would you not be willing to open an account with an Islamic

Bank?

� Fees are high

�There are no interest

� Bank is unreliable

� Risk of Embezzlement

� Bank branches are few/inaccessible

� My religious belief

�Others (specify)

18. If Yes in Q15, how much do you know about Islamic banking and finance?

� Never thought about it.

� Not much

� Sufficient knowledge

� Very well

19. Which banks [in Kenya] do you know that provide Islamic Banking?

� Commercial Bank of Kenya

� Post Bank

59

� National Bank of Kenya

� First Community Bank

� Gulf Bank

� Bank of Africa

� Barclays Bank of Kenya

� Equity Bank Limited

� Family Bank

� Cooperative Bank of Kenya

� Bank of Baroda

� Eco-Bank

� Commercial Bank of Africa

� NIC Bank

� Diamond Trust Bank

� Standard Chartered Bank

� Others (Specify)

20. Do you know that banks in Kenya provide interest-free services?

� Never thought about it.

� Not much

� Sufficient knowledge

� Very well

21. If yes, How did you come to know that bank offers interest-free banking in Kenya?

� Bank employee

� Media (Newspaper, TV)

� Internet

� Madrassa teaching/mosque

� Friends/ Family

22. Do you trust Islamic Banking?

� Yes � No� I Don’t Know

60

23. If NO, why don’t you trust Islamic Bank?

PART II: FACTORS INFLUENCING CHOICE OF FINANCIAL SERVICES

24. Do you have any existing relationship with Islamic Banking Institutions in Kenya?

� Yes � No

25. If NO, what is the reason for not having any existing relationship with Islamic

Banking?

� I don’t know of existence

� Fees are high

�There are no interest

� Bank is unreliable

� Risk of Embezzlement

� Bank is inaccessible

� My religious belief

�Others (specify)

26. What is your preferred banking option?

�Commercial banks

�Islamic banking

�Mobile Banking (MPESA, Airtel Money, Orange Money etc.)

� Internet Banking

27. Do you know that it is HARAM (not permissible) to receive and charge interest in

Islam?

� Yes � No � Not sure

28. Are you interested in taking loan from a bank?

� Yes � No � Not sure

29. If Yes, from which bank?

� Commercial bank

61

� Islamic bank

� Micro-financial institution

�Others (specify)

30. If No, why are you not interested in bank loan?

� Interest charged are high

� Bank loans are unreliable

�It is too risky

� I don’t have security or bank will seize collateral

� Don’t of bank that can provide

� I don’t need the money

� I can’t pay immediately

� My religious belief

31. Do you feel, Islamic or interest free services are costlier than non-Islamic services?

� No � Not sure

32. Do you know how your deposits and savings are invested by the banks? I.e. Ethical

investment or war, arms, trade, gambling, alcohol, tobacco etc.

� Yes � No � Not sure

33. How do you differentiate banking services?

� Interest rate/profit

� Convenience

� Cost of banking

� Other; please specify: ……………………

62

34. Please rank the bank facilities for the following items. Rank them from 1 to 5. ‘1’

represents strongly disagree, ‘2’ represents disagree, ‘3’ represents neutral, ‘4’ represents

agree and ‘5’ represents strongly agree.

1 2 3 4 5

(a). Fast and efficient counter services

(b). Speed and efficiency of transactions

(c). Interior comfort of Branches

(d). Availability of financial advice

(e). Faster document processing

(f). Knowledge on customer's business

(g). Provision of free interest loans

(h). Provision of Islamic products and services

(i). Run on Islamic law and principles

(j). Provision of profit-sharing investment products

(k). No interest paid nor taken on savings and loans

(l). Wide Electronic Communication System

(m). Strong global network

(n). Sufficient time for transaction

(o). Convenient branch location

(p). Awareness program on services

(q). Competitive Product Offerings

(r). Uniform services in all branches

(s). Overdraft privileges on current account

(t). Confidentiality of Bank

(u). Confidence in Bank's management

(v). Bank size in assets and capital

(w). Lower service charge

(x). Average decent return

63

What is your level of Overall Satisfaction?

Highly Dissatisfied Highly Satisfied

1 2 3 4 5 6 7

PART III: ISLAMIC BANK USERS

35. Why have you chosen Islamic Banking?

� Religion

� Cheap products

� Convenient bank location

� Friends

� Ethical

� Other than above, please specify: ………

36. For how long are you dealing with or have you become a consumer of Islamic

Banking?

� Less than 1 year

� 1-5 Years

� 6-10 Years

� More than 10 Years

37. Did you switch from one Islamic Bank to Another?

� Yes � No

38. If Islamic product becomes costly, would you still consider them?

� Yes � No

39. While dealing in Islamic Financial products, you feel more satisfied at:

� Internet Banking

� Telephone/Mobile Banking

� Personal Visit

64

PART IV: GOVERNMENT POLICIES AND REGULATIONS ON ISLAMIC

BANKING

40. Do you know of any government regulation in baking in Kenya?

� Yes � No

41. If YES, what kind of policy framework has government put in place to regulate

banking services in Kenya?

� Agency regulation

� Customer regulation

� Branching regulation

� Administrative regulation

� Consumer protection

42. Does government regulation or policy affect your choice of banking/financial

services?

� Yes � No

43. Should government regulate Islamic Banking?

� Yes � No

44. Are you aware of consumer protection act in Kenya?

� Yes � No

65

2. Key Informant Interview Guide [for bank managers]

Name of Interviewee:

Position/designation in the bank:

Roles and responsibilities in the bank:

I am going to ask you some questions in relation to Islamic Banking in Kenya

1. Does your bank offer Islamic Banking Financial Goods and Services? (Probe, specify

which one, targeting which market segment)

2. Special plans/arrangement the bank has to target customers interested in Islamic banking?

3. Are customers utilizing Islamic Financial Services given special treatment compared to

those seeking conventional financial services? YES/NO (Probe to establish the special

treatment offered and the impact it has had on the overall performance of the bank. For

no response, why is the bank not offering sharia-compliant financial services?)

4. Why are most Kenyans not utilizing Islamic banking services?

5. What are the benefits of Islamic Banking?

6. What are the challenges in offering sharia-compliant financial services?

7. The market share of Islamic banking still remain huge [untapped], what can be done to

make Islamic Banking more popular?

8. Does Central Bank of Kenya (CBK) regulate Islamic Banking in Kenya? [probe for the

kind of regulatory measure put in place for Islamic banking]

9. What political factors or government policies or regulations affect Islamic banking?

10. Is there anything you would like to add in relation to Islamic Banking in Kenya? [Probe

for regulatory measures, commercial viability in terms of profits generated compared to

other conventional banks]

66

3. Key Informant Interview Guide [for religious leaders]

Name of Interviewee:

Position/designation in Islamic faith:

Roles and responsibilities in Islam/Mosque:

I am going to ask you some questions in relation to Islamic Banking in Kenya

1. What is your understanding of Islamic banking? (Probe, what does sharia say about

Islamic Banking)

2. In your own opinion, do you think Muslim faithful like utilizing Islamic Financial

Services? YES/NO (Probe to establish the level of knowledge, attitude and practice of

Islamic Banking).

3. If answer in 3 above is NO, probe to find out why Kenyans [especially of Islamic faith]

not utilizing Islamic banking services? [probe for religious, socio-cultural issues or

political issues]

4. What are the benefits of Islamic Banking?

5. What are the challenges in operating sharia-compliant financial services?

6. The market share of Islamic banking still remain huge [untapped], what can be done to

make Islamic Banking more popular? [How can the operators of Islamic Financial

Services attract more clients to utilize their financial services?]

7. Is there anything you would like to add in relation to Islamic Banking in Kenya? [Probe

for regulatory measures, commercial viability in terms of profits generated compared to

other conventional banks]

67

Summary of the number of questions in the research tools and the spread per each

research question:

Research question Number of questions in the tool Percentage

RQ1 Q11-24 (13 questions) 34%

RQ2 Q25-39 (14 questions) 36%

RQ3 Q41-43 (5 questions) & KII questions 3,

7, 8, 9 & 10 30%

68

B. RESEARCH BUDGET

Budget Line Items Total (KSh.)

1. Proposal development

i. Materials

ii. Printing

iii. Photocopying

20,000.00

10,000.00

12,000.00

5,000.00

2. Data Collection (Fieldwork)

i. Travelling

ii. Research Assistants (4RAs*10days*1000/=pd)

6,000.00

40,000.00

3. Data analyses & Interpretation

i. Database development

ii. Data entry

iii. Data analyses

5,000.00

24,000.00

15,000.00

4. Report writing & dissemination 20,000.00

Total cost (Kenya Shillings) 147,000.00

69

C. IMPLEMENTATION SCHEDULE

Activity details

Period (months in 2014)

Mar Apr May Jun Jul Aug

1. Proposal development

2. Proposal review, presentation and

submission to graduate school

3. Data Collection (fieldwork)

4. Analysis and interpretation

5. Report writing and submission of 1stdraft

6. Correction of thesis and submission of final

version