This study examined the impact of non-performing loans on the financial performance of publicly listed commercial banks in Kenya, focusing on the bank lending rate as a mediating variable. It analyzed the relationship between non-performing loans and banks’ return on assets (ROA) and return on equity (ROE) through a review of empirical literature from Google Scholar and the Central Bank of Kenya reports. Studies show mixed results on the relationship between non-performing loans (NPLs) and bank performance. Previous studies have highlighted an inverse relationship between non-performing loans and return on assets (ROA), as noted by Siddique et al. (2022) and others. On the other hand, Mrindoko et al. (2020) discovered a negligible negative correlation with return on assets. Generally, the literature suggests an inverse relationship between NPLs and bank performance, emphasizing a diversified loan portfolio for improved profitability. Researchers have noted connections between NPLs and lending rates (Case et al., 2023; Rahmananingtyas, 2022; Koskei & Samoei, 2024), as well as between lending rates and bank performance (Hania & Himel, 2023; Dondi & Mule, 2023). This hypothesis suggests that lending rates play a mediating role in the relationship between non-performing loans (NPLs) and the financial performance of commercial banks in Kenya, highlighting the need for additional empirical research in this area.
Keywords: Financial Performance, Lending Rate, Non-Performing Loans, Return on Assets, Return on Equity
