Bank and customer-specific factors and customer trust in Islamic banks in Kenya: the moderating role of the economic environment

Abstract

Islamic banking is pivotal in addressing the financial needs of Muslim communities in Kenya while appealing to non-Muslims through its ethical, interest-free, and socially responsible principles. However, with Kenya’s Muslim population growing at 2.7% annually, Islamic banking struggles to expand, leaving many Muslims excluded from formal financial systems or compelled to use conventional banking products misaligned with Sharia principles. The fragility of Islamic banks, exemplified by the 2022 liquidity crisis at First Community Bank (now Premier Bank), underscores the importance of trust. This study explored the drivers of trust in Islamic banking among customers of Islamic banks, guided by Customer Trust Theory, Theory of Planned Behavior, and Information Asymmetry Theory. Adopting a pragmatism research philosophy and a convergent mixed methods design, it examined bank-specific factors (Sharia compliance, service quality, transparency), customer-specific factors (religious adherence, financial literacy, prior banking experiences), and the moderating role of Kenya’s economic environment (macroeconomic stability, inflation, regulatory frameworks). Using ordered logistic regression to analyze survey data from 384 both Islamic banking and non – Islamic banking customers in Nairobi, Mombasa, and Garissa, and integrating qualitative insights, the study found that bank-specific factors (Sharia compliance, service quality, transparency) had a significantly positive effect on trust. Customer specific factors (religious adherence, financial literacy, prior banking experiences) also exhibited a significantly positive effect. Contrary to expectations, Kenya’s economic environment did not moderate these relationships, indicating trust resilience across macroeconomic conditions. Qualitative insights revealed regional differences, with Garissa customers prioritizing Sharia compliance more than those in Nairobi. The study recommends institutional reforms to strengthen Sharia governance, service quality, and transparency, alongside customer-centric strategies like tailored financial literacy programs and community engagement. Policymakers should develop sector-specific regulations to enhance stability and inclusivity. By aligning operations with ethical values and customer needs, Kenya’s Islamic banking sector can deepen financial inclusion, reduce reliance on conventional systems, and foster economic resilience, harmonizing the financial landscape with the nation’s socio-cultural ethos. The study advances theoretical frameworks by demonstrating how religious norms (Theory of Planned Behavior) and ethical transparency (Commitment-Trust Theory) drive trust in Islamic banking, offering a faith-based lens for analyzing financial systems. It provides actionable strategies for Islamic banks, emphasizing Sharia compliance audits, digital transparency tools, and tailored financial literacy programs to strengthen customer trust in Kenya’s dual-banking context. Policymakers benefit from recommendations to harmonize regulations with global Islamic finance standards and integrate Sharia literacy into national education, fostering institutional credibility and financial inclusion. The finding that trust resists economic moderation challenges conventional banking models, highlighting Islamic finance’s ethical resilience and offering insights for faith-based sectors globally. Geographic bias toward urban centers (Nairobi, Mombasa, Garissa) limits rural perspectives, while the cross-sectional design overlooks temporal trust dynamics. Reliance on self reported data risks response bias, and Likert-scale measurements may oversimplify nuanced trust constructs like religiosity or digital engagement. The study excludes emerging factors (e.g., fintech innovations, blockchain) and extreme economic scenarios, narrowing its applicability to evolving banking landscapes. Despite log transformations, skewed financial literacy variables and ordinal data constraints may underrepresent complex interactions between trust drivers.