Factors Influencing Islamic Banking in Kenya: a Case Study of Nairobi County

FACTORS INFLUENCING ISLAMIC BANKING IN KENYA: A CASE STUDY OF NAIROBI COUNTY

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 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

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.

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.

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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

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

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

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

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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

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).

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

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.

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

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

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

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

discussion of the study findings, the conclusions drawn from these and the recommendations proposed by the researcher relevant to this undertaking.

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)

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

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

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.

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),

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

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).

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

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

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

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)

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

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).

2.4.2 Conceptual framework

Economic factors e.g.

poverty, residence,

occupation, income,

Political factors e.g.

Socio-cultural factors government policies

e.g. religious belief, & regulations; level of education, infrastructure gender, culture etc. Client’s choice of development Islamic Banking &governance

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,

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.

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.

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.

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-

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

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.

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.

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.

Table 2: Educational Level and Gender Cross tabulation

Gender Education Level 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

Gender Can read or write in Swahili 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%).

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.

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 1 0.8 2 1.6 2 1.6 0 0.0 5 4.1 Agency 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 3.3 100. Total 40 32.8 51 41.8 27 22.1 4 3.3 122 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%

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 Monthly Savings Income Less than Ksh Ksh 5,000- Ksh 21,000- More than 5,000 20,000 50,000 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

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%

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.

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 Gen der 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.

Table 16: Awareness of Islamic Banking and willingness to open an Islamic Bank account

Yes No Total Frequency Pe rcent 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.

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.

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%

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.

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

(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 Knowledge on How deposits and savings are invested Banking Yes No Not Sure Total Freq % Freq % Freq % Freq % 43.80 No 20 17.90% 20 17.90% 9 8.00% 49 % 25.90 56.30 Not Sure 10 8.90% 24 21.40% 29 % 63 % 33.90 100.0 Total 30 26.80% 44 39.30% 38 % 112 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.

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

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%

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%

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 Government Regulation in Banking in Kenya services 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

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 Government Should Regulate Islamic Services Banking Tota Yes No l Freq % Freq % Freq % Yes 38 33.30% 14 12.30% 52 45.60% No 17 14.90% 45 39.50% 62 54.40% 100.00 Total 55 48.20% 59 51.80% 114 %

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%

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

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.

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.

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

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.

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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:

� 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

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

� 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

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

� 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: ……………………

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

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

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

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]

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]

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%

Q41-43 (5 questions) & KII questions 3, RQ3 30% 7, 8, 9 & 10

B. RESEARCH BUDGET

Budget Line Items Total (KSh.)

1. Proposal development 20,000.00 i. Materials 10,000.00 ii. Printing 12,000.00 iii. Photocopying 5,000.00 2. Data Collection (Fieldwork) i. Travelling 6,000.00 ii. Research Assistants (4RAs*10days*1000/=pd) 40,000.00 3. Data analyses & Interpretation i. Database development 5,000.00 ii. Data entry 24,000.00 iii. Data analyses 15,000.00

4. Report writing & dissemination 20,000.00

Total cost (Kenya Shillings) 147,000.00

C. IMPLEMENTATION SCHEDULE

Period (months in 2014) Activity details 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