Credit Risk Management And Financial Performance Of Commercial Banks In Kenya: Panel Evidence From 2018- 2023

This paper examines how credit risk management affects the financial performance of commercial banks in Kenya using panel evidence from 39 banks over the period 2018-2023. The study is motivated by the persistent rise in non-performing loans in the Kenyan banking sector and the need for stronger evidence on how risk variables, control mechanisms, and lending conditions shape bank outcomes. Three related panel models are estimated. The first evaluates the effect of credit risk on return on equity (ROE), the second examines how credit risk control variables influence non-performing loans (NPLs), and the third assesses how lending growth conditions affect NPLs. Levin-Lin-Chu unit root tests indicate that the series are stationary at level, while Hausman tests support the use of random effects for the profitability and lending-growth models and fixed effects for the credit-riskcontrol model. The results show that the capital to risk-weighted assets ratio and the NPL-to-advances ratio significantly reduce ROE, while market share improves profitability. In the NPL models, the loan and advances ratio, the NPL-to-advances ratio, provisioning intensity, interest rate spread, money supply, and the actual liquidity ratio are key determinants. The findings imply that the quality of loan books, pricing of credit, and liquidity management remain central to bank stability and performance in Kenya. The paper recommends stronger early warning systems, more disciplined provisioning, better borrower screening, and transparent credit pricing.