Effect of Islamic financing on financial performance of businesses in Eastleigh business community, Nairobi county

Abstract

This study examines the effectof Islamic finance on the EastleighBusiness Community, Nairobi, Kenya, by analyzing the financial performance of the businessesthat accesses the Islamic Financing overallperiod of 3years (2011-2013). The study particularly examinesthe effect of short term financing, long term financing and equity financing on the financial performance of Muslim owned businesses.The study employs the use of information on the type of financing accessed and more specifically returnon Assetto measure the performance of the sampled firms that had access to Islamic financing.The 155 firms in textile industry was undertaken for this study however, the businesses also needed to have been in operation for at least 3 years as at December 2013. Out of the 155 firms the study was able to find 95 firms out of which only 55 firms had been in existence for over three years as at December 2013. Therefore our target population was these 55 firms. Primary data wascollected using questionnaires. Stratified Sampling was used to come up with 43 firms that fully responded to questionnaires and formed the study. Descriptivestatistics, regression and correlation analysis wasused to analyze the variables. The relationship between short term financing and firm’s performance was positive and more specifically, cost plus sales was the most significant of all the types of short term. Long term and Equity financing was insignificant to the study. The findings are important to policy or law makers and Authorities such as capital markets authorities toconstruct and enactpolicies that would foster business growth without disregarding the Islamic Religion. The study may also be used for further researchon related topic.The study recommended review and development of legal framework to fully incorporate Islamic financing to mainstream finance options in Kenya, need for promotion and awareness of the services and also recommended further research on Manufacturing and Construction industries to understand effect on long term financing.