The Relationship Between Investments and Financial Performance of Commercial Banks in Kenya

Abstract

Investment decisions are one of the significant decisions in a company since they are hypothesized to influence its value by influencing profitability and risk. However, investment decisions are risky and very uncertain on whether the costs incurred to invest will be recouped and profits gained within the specified time period. This study sought to determine the relationship between investments and financial performance of commercial banks in Kenya. The neoclassical theory of investment, the q theory of investment and the accelerator model of investment were used as the main theoretical underpinning for the study. A descriptive research design was employed and secondary data collected from the targeted 42 commercial banks in Kenya. Correlation, regression and descriptive statistical techniques were adopted to analyze the collected data. The results found an insignificant negative relationship between investment in government securities, investment in properties and return on asset. The results also revealed a positive and insignificant relation between corporate bonds and return on assets of the commercial banks. The findings also found a significant relationship between investment in stocks, liquidity, bank size, capital adequacy and return on assets of the commercial banks. Finally, it was found that the relationship between credit risk and return on asset is negative and insignificant. The study concluded that investments in stock of ordinary shares and investment in other companies’ shares significantly influence performance of commercial banks in financial terms. The study also concluded that liquidity, bank size and capital adequacy have a significant impact of on commercial banks financial performance. The study recommends that the management of commercial banks should focus on investment in stock and maintain adequate liquidity and capital adequacy ratio to enhance financial performance of their banks.