| dc.description.abstract | In the Kenyan economy, commercial banks have expanded and opened many branches over the
last few years. This has resulted in a tremendous increase in loans, government securities and
placements portfolios. The question of what determines the level of investment portfolios of
commercial banks in Kenya is therefore an important one. Nonetheless, decisions pertaining to
investment portfolios especially in a developing economy like Kenya require a critical
consideration of both internal and external factors. The study aimed to test and support the
effects of the determinants of commercial banks’ investment portfolios and how they affect
investment decisions of commercial banks in Kenya. The determinants included rate of return,
deposit asset ratio, cash reserve ratio, liquidity reserve ratio, bank risk, interest rate elasticity,
non-performing loans, fee income ratio, bank size and rate of inflation. The study used secondary
data which was collected from banks’ annual balance sheets, income statements, Central Bank
annual reports and Banking Survey 2012. Hausman and Lagrange multiplier tests were
conducted to assess whether to use the fixed effects estimation or random effects estimation. The
latter was favored and random effect maximum likelihood estimation was used. The study
supported that there exists a functional relationship between the commercial bank’s investment
portfolios and the determinants in the Kenyan context. It also established that cash reserve and
deposit asset ratios have the greatest impact on the investment portfolios. The study
recommended that commercial banks need to consult with the government whenever a policy
regarding cash reserve requirement is made. The banks should also mobilize deposits to enhance
their investments. Therefore, a critical, realistic and comprehensive strategic and financial plan
should be formulated. | en |
