An analysis on the impact of the adoption of Islamic financial products in reducing non-performing loans in Harare's commercial banks

Abstract

Non-performing loans (NPLs) are a cause of concern nationally and globally as it affects the normal functioning of the economy as financial sector stability drives economic growth. This is not easy to achieve as financial institutions are face challenges in addressing NPLs levels which affect their performance. The main purpose of this study was to assess the impact of adopting Islamic Financial Products (IFPs) on non-performing loans (NPLs) in Harare’s commercial banks in the year 2019. The study adopted a positivist research philosophy and quantitative research approach with an online survey strategy as the research design. Managers and directors of ten commercial banks in Harare’s commercial banks constituted the population of the study. Stratified random sampling was used to come up with the sample from these banks and management as well as directors were selected to come up with a sample which was used in the study. A self-administered online research questionnaire was used for data collection from this study. Research results indicated that the adoption of Islamic Financial Product (IFPs) that there is a negative correlation between adopting IFPs and commercial banks’ levels of NPLs as three out of five IFPs indicated that there adoption minimises NPLs levels. Results revealed that equity finance (Mudaraba), lease financing (Ijarah) and phased payments (Istisna) reduces banks’ NPLs in commercial banks. Whilst mark-up financing (Murabaha) and venture capital (Musharaka) adoption was viewed as not contributing in NPLs reduction which resulted in the accepting of three hypothesis whilst rejecting two with the main hypothesis being accepted. Recommendations from the research were that the RBZ and the ministry of finance should continuously promote financial inclusion of IFPs in the financial institutions as well as coming up Islamic Financial instruments which promote diversity in the financial sector. The government of Zimbabwe through the ministry of finance should promote Islamic banking as well as amending existing financial legislation and regulations to create a favourable legal environment for efficient setup of IFIs, Islamic Window or for conventional banks to fuse IFPs with conventional products. A commission may be entrusted to draft an Islamic Banking Act to promote IFPs. Commercial banks should try to fuse the Islamic principles in the conventional products especially the principles inherent in equity financing and phased payments which can benefit both borrower and the lender.