CAMEL Rating System and Financial Performance of Islamic Banks in Kenya

Kenyan Islamic banks are facing a myriad of credit risk issues adversely affecting their financial performance. Importantly. CAMEL rating system has been identified as an effective approach when making credit risk management decisions. However, most of the research associating financial performance of Islamic banks has ignored issues arising in emerging market such as Kenya, a knowledge gaps this research locked. Quantitative approach was utilised while adopting correlational research design. The research had its target population as being the three (3) Islamic banks which had been operating in Kenya between the year 2012and 2020 where census was employed. The researcher compiled financial data from secondary data for between 2012 and 2020. Quantitative analysis approach was applied in the analysis to yield respective statistics; descriptive and inferential. The study concludes that; capital adequacy has a statistically significant positive, assets quality has a statistically significant negative, management efficiency has a statistically significant positive, earnings ability has a statistically significant positive, and liquidity has significant negative, effect on financial performance of Islamic banks in Kenya. Accordingly, CAMEL rating model is appropriate for assessing financial performance of Islamic bank in Kenya. The study recommends that the Kenyan Islamic bank, should employ the optimal investment strategy for capital adequacy determination, manage their assets, enhance their management efficiency capability, improve their earnings ability, and strictly adhere to recommended liquidity levels. The research recommends that Kenyan IBs should be employing CAMEL rating model on yearly basis to identify elements requiring special attention.