Examining Islamic banking models in Kenya: a comparative study between First Community Bank and Kenya Commercial Bank
Islamic banking is based on the principles of Islamic law (Shariah) and guided by Islamic economics. The basic principles of Islamic banking are the sharing of profit and loss and the prohibition of the collection and payment of interest. The Shariah principles also prohibit investments in non-permissible (haram), excessive risk taking that stems from speculative behaviour, businesses that carry uncertainty and instead promotes profit and risk sharing, financing on the basis of underlying assets as well as upholding sanctity of contracts. The concept of Islamic banking is generally getting into the mainstream global financial system as an alternative business model that enhances financial inclusion. Diversification of investment portfolio through Islamic banking models captures three perspectives: Customer (compliance to faith or religious believes), government (enhance foreign direct investment) and business community (access to source of revenue). The aim of the study was to compare Islamic banking models and assess the appropriate model for providing Islamic finance products and services to enhance financial inclusion. The study was carried out through a qualitative approach and multi-case study strategy where data were collected through semi-structured interviews from two banks that offer Islamic banking in Kenya using different models namely First Community Bank (FCB) (using the fully- fledged bank model) and Kenya Commercial Bank (KCB) (using the window model). Data collected through face to face interviews were coded and analysed using thematic synthesis approach The findings indicated that window and full- fledged models were not different based on the challenges and coping mechanisms but were different on operational scale and size. Window model had better reach and significantly larger operational scale. Considering the cost of setting up a bank and the need for economies of scale, the window model was a more viable business model and was a good platform to have a better market reach. This is because the window model leverages on the existing infrastructure of conventional banking. Nonetheless, low market awareness, weak regulatory framework, technological inadequacy, lack of adequate experienced human capital and capacity challenges were common irrespective of which model was adopted. The key policy recommendations of the study were, providers of Islamic products and services should partner to continuously develop new strategies to enhance marketing of Islamic banking, lobby necessary arms of government to develop better regulation and supervisory framework and enhance research, training and development through consultation with academic institutions to build capacity of the banks in offering Islamic banking products and services.