Strategic capabilities and financial performance of Islamic banks in Kenya

Abstract

In Kenya, commercial banks, including Islamic banks, have faced challenges such as liquidity shortages, credit risk, and inefficiencies in loan management. Amid competitive nature of the banking sector, Islamic banks remain behind in terms of performance. Given the dwindling performance, this study seeks to determine the effect of strategic capabilities on financial performance of these banks in Kenya. Specifically, the study sought to determine if network, innovation, leadership and information acquisition capabilities have an effect on the financial performance of Islamic banks in Kenya. The research is grounded on Resource Based View, Upper Echelons Theory, and the Dynamics Capabilities Theory. Methodologically, the research employed a cross-sectional descriptive design approach on a sample of 113 respondents drawn from a population of 126 branch managers, finance managers, and Information Communication Technology (ICT) managers in selected branches of three Islamic banks: Dubai Islamic Bank, Gulf Africa Bank, and Premier Bank. Stratified random sampling technique was used to select the participants, with data collection involving the use of self-administered questionnaires. Data was analysed and presented in form of tables and figures. The results established a substantial influence of strategic capabilities on the financial performance of Islamic banks in Kenya. Specifically, leadership capabilities had the strongest positive impact, innovation capabilities had a substantial positive effect together with network capabilities and information acquisition capabilities. The study concludes that strategic capabilities have significant effect on financial performance of Islamic banks in Kenya. To enhance financial performance, Islamic banks should focus on strengthening strategic leadership through visionary and ethical management practices, as leadership had the most significant impact on financial outcomes. Investing in innovation, including technology adoption and product development, will sustain competitiveness and boost customer perceptions.

Key words: Strategic capabilities; Islamic bank; financial performance