IMPACT OF NON-PERFORMING LOANS ON BANK’S PROFITABILITY: EVIDENCE FROM THE BANKING SECTOR OF PAKISTAN

Abstract

This study examines the relationship betw focus on the banking sector in Pakistan. Design/Methodology/Approach een non-performing loans and bank profitability with a Using deductive research and causality research, the study analyzes data from 15 listed commercial banks in Pakistan. Using empirical analysis and theoretical frameworks, the study identifies the key factors influencing in different market contexts. non-performing loans and their impact on bank profitability Findings Findings show significant correlations between non-performing loans, capital adequacy ratio (CAR), liquidity (LQDT), and return on capital (ROA). Specifically, higher NPL and liquidity are linked with lower ROA, while an increase in CAR is linked with higher ROA. However, gross domestic product (GDP) does not significantly affect ROA in the considered models. In addition, a diagnostic test is done to ensure the reliability of regression analysis by demonstrating the normal distribution of the data and finding the absence of heteroscedasticity and serial correlation, both fixed and random effects models are used, with the Hausman specification test favoring the fixed effects model. Originality/Value This research provides valuable information to policymakers, investors, and financial improving the understanding of the challenges posed by non-performing loans. By institutions, examining the background factors and systemic effects of non-performing loans, the study informs evidence-based policies and risk management practices aimed at ensuring financial stability and promoting sustainable economic development.