ABSTRACT
This study sought to identify the relevant determinants of investment decisions by commercial banks in Kenya and how they affect financial performance. Specific objectives included establishing the determinants of investment decisions of commercial banks in Kenya and establishing inherent effect of the determinants on financial performance. The study considered risk aversion, interest rates, financial tools and financial literacy as determinants of investment decisions, and return on average capital employed as a measure of financial performance. The study used a descriptive research design as well as a census approach on all commercial banks in Kenya. Findings indicated that banks are aware of the four determinants of investment decisions and that are all considered when undertaking investment decisions. Even though all determinants were found to be fairly distributed among banks, the occurrence of financial literacy had a unique distribution among banks with lower tier banks seemingly compromising on stringent requirements otherwise put on the determinants by the top tier banks. Lower tier banks were found to be flexible on financial literacy. All the four determinants were found to have a strong and significant linear correlation with return on average capital employed. From the regression analysis, the study identified that the determinants of investment decisions do influence the return on average capital employed even though none of them presented an acceptable significance level. Interest rates presented a negative effect on return on average capital employed. The study concluded that the determinants of investment decisions are important but do not entirely determine the return on average capital employed.