Determinants of Non-Performing Loans in Pakistan

Abstract

Financing from banks play an important role for expansion for firm’s activities. With these financing, firms will buy long term assets that can benefit them over the years thus, financing to firms contribute positively towards the development however, in case of non-payment it will create burden on the banking industry. This paper takes into account the determinants of non-performing loans(NPLs) in Pakistan. The report analyses both bank specific (capital adequacy ratio, market capitalization, weighted maturity, total assets) and macroeconomic factors (output gap, GDP, interest rate) to determine Non-performing loans. The estimation of the model was done on panel dataset using random effect regression for the 21 banks of Pakistan covering the period 2006 to 2016.The data source was secondary and collected from individual bank statements and SBP website. The results showed that NPLs in the Pakistan banking sector can be explained mainly through capital adequacy ratio, output gap and total assets. Commercial bank analysis revealed more rigorous results suggesting that interest rate also caused high levels of NPLs.