Effect of Mortgage Financing on Profitability of Islamic Banks in Kenya

Abstract

The growth of Islamic banking has been on a steady increase hence currently a force to reckon with in the financial market. This banking subsector is presently competing for market share with conventional banks. The purpose of this study was to assess the effect of mortgage financing on profitability of Islamic banks in Kenya. Specifically, the study sought to establish the effect of interest-free mortgage financing on Profitability Islamic banks, to explore how collateral requirements influence profitability in Islamic banks, and to examine the effect of mortgage credit on profitability in Islamic banks. This study adopted the descriptive research design and sampled 45 respondents by Census survey technique. Data was collected by use of a structured questionnaire and analyzed both by descriptive and inferential statistics. On the correlation analysis to determine the relationship between interest free mortgage financing and profitability of Islamic banks in Kenya the findings indicated a significant correlation (r = 0.637, p < 0.05). The findings indicated that that interest free mortgage financing had a positive and statistically significant influence on profitability of Islamic banks in Kenya. On collateral the correlation analysis yielded a Pearson’s product correlation (r = 0.607, p < 0.05) indicating that a strong and positive relationship existed between collateral and profitability in Islamic banking. On mortgage the findings yielded a Pearson’s product moment coefficient of correlation (r = 0.575, p < 0.05) suggesting that a strong and positive relationship existed between the two variables. The study established that there was a positive correlation between mortgage credit and profitability in Islamic banks. The R square was 0.609 indicating that 60.9% of variance in profitability in Islamic banking could be explained by interest free mortgage financing, collateral and mortgage credit. Based on the findings it was recommended that in order to address Interest free mortgage financing in Islamic banks further studies on Islamic banking should be carried out. On collateral further analysis should be carried out on factors that influence collateral and how this can be expanded to address more clients. On Mortgage Credit it was recommended that Banks should make efforts to ensure that mortgage credit is easily available.