Impact of Non-Performing Loans and Capital Ratio on the Profitability of Banks: Evidence from Banking Sector of Pakistan

  • Umar Farooq
  • Sidra Qayyum College of Commerce, Government College University, Faisalabad
  • Bilal Haider Subhani School of Economics and Finance, Xi’an Jiaotong University, Xi’an, Shaanxi, P. R. China
Keywords: Non-performing loans, capital ratio, profitability


Abstract Views: 168

This research expresses how non-performing loans hoists the profitability
of the banks. The deductive approach has been used in this study and
profitability used as explained variable. The non-performing loans and
capital ratio used as explanatory variables and proxies by seven key ratios.
Five years data were used ranges from the year 2010 to 2014.This study
used fixed effect model for estimating the regression among variables. The
statistical results show that the non-performing loans may increase the
profitability of banks in some cases but normally showers the adverse effect
on profitability. The outputs of the study suggest that bank should enhance
the more loans because it may cause the more profitability instead of
thinking about non-performing loans as default loans. Because, nonperforming loans just passes from the stage of performing loans which are
the main source of earnings for banks. They should keep an optimistic
thought about loans. This research is an initiative which highlights the
dynamic effects of non-performing loans in determining the profitability of
banks specifically in Pakistanand shows the positive side of non-performing


Download data is not yet available.


Malik, M. S., Awais, M., & Aisha . (2016). Impact of Liquidity on Profitability: A Comprehensive Case of Pakistan’s Private Banking Sector. International Journal of Economics and Finance, 8(3).
Aballey. (2009). Bad Loans Portfolio: The Case of Agriculture Development Bank, . Master‟s Dissertation,Kwame Nkrumah University of Science and Technology, Kumasi, 6-73.
Abreu, M. a. (2001). Commercial bank interest margins and profitability: evidence from some EU countries. Paper presented at the Pan-European Conference Jointly Organised by the IEFS Organised by the IEFS, (pp. 17-20). Greece.
Aburime, U. T. (2009). Impact of political affiliation on bank profitability in Nigeria. African Journal of Accounting, Economics, Finance, and Banking Research, 4(4), 61-75.
Adebisi, J. F., & Matthew, O. O. (2015). The Impact of Non-Performing Loans on Firm Profitability:. American Research Journal of Business and Management, 1(4).
Adebola, S. S. (2011). An ardl approach to the determinants of nonperforming Loans. Kuwait Chapter of Arabian Journal of Business and Management Review, 1(2).
Adhikari, B. K. (2007). . Non-performing Loans in the Banking Sector of Bangladesh: Realities and Challenges. . Bangladesh Institute of Bank Management (BIBM).
Ahmad. (1997). .Natural Hazards and Hazard Management in the Greater Caribbean and Latin America, Publication No. 3.
Ahmed, F. &. (2013). Explanatory Power of Macroeconomic Variables as Determinants of Non-Performing Loans: Evidence Form Pakistan. World Applied Sciences Journal, 22(2), 243-255.
Akinwumi, J. a. (1990). The Role of Loan Repayment Capacity in Small Scale Farmers Credit Administration. Quarterly Journal of Credit Administration, 15(2).
Akter, R., & Roy , J. K. (2017). The Impacts of Non-Performing Loan on Profitability: An Empirical Study on Banking Sector of Dhaka Stock Exchange. International Journal of Economics and Finance, 9(3).
Almazari, A. A., & Alamri , A. M. (2017). THE EFFECT OF CAPITAL ADEQUACY ON PROFITABILITY: A COMPARATIVE STUDY BETWEEN SAMBA AND SAAB BANKS OF SAUDI ARABIA. International Journal of Economics, Commerce and Management, United Kingdo(11).
Alton , & Hazen. (2001). As Economy Flounders, Do we see A Rise in Problem Loans?,. Federal Reserve Bank of St. Louis.
Arif, M., Khan, M. Z., & Iqbal, M. (2013). IMPACT OF BANK SIZE ON PROFITABILITY: EVIDANCE. International Journal of Applied Research, 2, 98-109.
Asediolen. (2004). . For the economic and financial interest of Nigeria. Nigerworld,. 1(2).
Balogun, E. a. (1988). .Loan Delinquency Among Small Farmers in developing countries: A case study of small-farmers credit programme in Lagos State of Nigeria,. CBN Economic and financial Review. .
Boudriga, A. T. (2009). Bank specific, business and institutional environment determinants of nonperforming loans: Evidence from MENA countries. . Paper for ERF conference on Shocks, Vulnerability and Therapy. Cairo, Egypt.
Brownbridge, M. (1998). The causes of financial distress in local banks in Africa and implications for prudential policy. . United Nations Conference on Trade and Development. .
Chang , Y. T. (2006). Role of Non-Performing Loans (NPLs) and Capital Adequacy in Banking Structure and Competition. Center for Competition Policy School of Management, University of Bath UK, (pp. 6-15). UK.
Committee, B. (2001). Sound Practices for the Management and Supervision of Operational Risk. Basel Committee on Banking Supervision.
Constant, F. a. (2012). Determinants of bank long-term lending behavior in the Central African Economic and Monetary Community (CEMAC). . Review of Economics & Finance , 107-114.
Dash, M. a. (2010). The determinants of non-performing assets in Indian commercial bank:. An econometric study. Middle Eastern Finance and Economics 7. , (pp. 94-106).
Dash, M. a. (2012). The determinants of non-performing assets in Indian commercial bank: An econometric study. Middle Eastern Finance and Economics, 7, 94-106.
Dash, M. K. (2010). The Determinants of Non-Performing Assets in Indian Commercial Bank. An Econometric Study. .
Devinaga R, a. T. (2010). Theoretical Framework of Profitability as Applied to Commercial Banks in Malaysia. European Journal of Economics, Finance and Administrative Sciences, 23, 149-160.
Dusabe, J., & Mulyungi, P. (2018). EFFECT OF CREDIT MANAGEMENT PRACTICES ON FINANCIAL PERFORMANCE OF BANKS IN RWANDA. International Journal of Management and Commerce Innovations, 6(1), 1458-1467.
Fan, L. S. (2004). “Efficiency versus Risk in Large Domestic US Banks Managerial Finance, (Vol. 30).
Felsovalyi A. (1998). Measuring Loss on Latin American Defaulted Bank Loans, a 27-Year Study of 27 Countries”. The Journal of Lending and Credit Risk Management,, 80, 41-46.
Fofack. (2005). Nonperforming loans in Sub-Saharan Africa: Causal analysis and macroeconomic implications. . Working Paper No. 3769. World Bank Policy Research.
Furlong. (2008). Capital Regulation and Bank Lending, Federal Reserve Bank of San Francisco,. Economic Review(3), 23-33.
Goddard, J. M. (2004). Dynamics of Growth and Profitability. Journal of Money, Credit and Banking, 36, 1069-1090.
Godlewski. (2004). Bank capital and credit risk taking in emerging market economies. Journal of Banking Regulation, 6(2), 128-45.
Goldstein, M., & Turner, P. (1996). Banking crises in emerging economies: origins and policy options,. Bank for International Settlements, Monetary and Economic Department.
Gorter, N. &. (2009). “The macroeconomic statistical treatment of Non-Performing Loans, Publication of the Organization for Economic Corporation &Development”. .
Haneef, S. &. (2012). Impact of Risk Management on Non-Performing Loans and Profitability of Banking Sector of Pakistan. International Journal of Business and Social Science, 3(7).
Hassan, M. K. (2003). Determinants of Islamic banking profitability,. 10th ERF Annual Conference., (pp. 16-18 ). Moroco.
Hu, J. L. (2004). Ownership and nonperforming loans: Evidence from Taiwan’s banks. The Developing Economies journal, 42(3), 405-420.
Ikpefan. (2013). “A.Capital adequacy, management and performance in the Nigerian commercial bank (1986 - 2006)”. .African Journal of Business Management,, 7(30), 2938-2950.
Keeton, W. R. (1999). Does faster loan growth lead to higher loan losses? Economic Review-Federal Reserve Bank of Kansas City 84., (pp. 57-76).
Khan, I., & Ahmad, A. (2017). Assessing Banks Internal Factors as Determinants of NonPerforming Loans: Evidence from Pakistani Commercial Banks. Journal of Managerial Sciences, 6(1).
Kohansal, M. a. (2009). Factors Affecting on Loan Repayment Performance of Farmers in Khorasan-Razavi Province of Iran,. University of Hamburg. . Hamburg.
Kwakwa, P. (2009). Causes of Non-Performing Loans at Bosomtwe Rural Bank Limited in Ghana, Unpublished Dissertation. .
Makri Vasiliki, T. A. (2014). Determinants of Non-performing Loans:. The Case of Eurozone Panoeconomicus , 193-206.
Merritt, E. (2009). Mortgage Default: Causes and Cures, Mortgage Loan Compliance, the Forensic Loan Audit Company.
Michael, J. V. (2006). Effect of Non-Performing Assets on operational Efficiency of Central-Cooperative Banks. Indian Economic Panorama,, 6(3), 33-39.
Morris, K. W. (1987). Why Do Banks’ Loan Losses Differ? . Federal Reserve Bank of Kansas City, Economic Review , (pp. 3-21).
Nwokoji, C. (2013). Sound banks: Nigeria banks very healthy. Retrieved June, 2013 from
Okoli, A. a. (2013). Credit Management and Bad Debt in Nigeria Commercial Banks –Implication For development. Journal of Humanities and Social Science,, 3, 47-56.
Okorie, A. (1986). Major Determinants of Agricultural Loan Repayments, Savings and Development, X(1) .
Okpugie, G. (2009). High Microfinance Interest Rates Cause Loan Defaults in Nigeria, the Guardian, Nigeria. .
Pakistan, S. B. (2010). Retrieved from: f. Annual Report 2009-10.
Pakistan, S. B. (2013). Annual Report 2012-13. Karachi: The State Bank of Pakistan.
Rajan, R. &. (2003). Non-performing loans and terms of credit of public sector banks in India:. An empirical assessment. Occasional Papers, 24(3), 81-121.
Rajan, R. G. (1998). Financial Dependence and Growth. American Economic Review, 88(3), 556-586.
Rengasamy , D. (2014). Impact of Loan Deposit Ratio (LDR) on Profitability: Panel Evidence from Commercial Banks in Malaysia. Third International Conference on Global Business, Economics, Finance and Social Sciences, (pp. 19-21). Mumbai, India.
Saba, I. K. (2012). Determinants of Non-Performing Loans: . Case of US Banking Sector. .
Saba, I. K. (2012). Determinants of Non Performing Loans: Case of US Banking Sector. The Romanian Economic Journal, 44(6), 125-136.
Sahir, M. H. (2007). Specific Concerns of Pakistan in the Context of Energy Security Issues and Geopolitics of the Region. Energy Policy, 35, 2031-2037.
Saona. (2011). Determinants of the Profitability of the US Banking Industry. International Journal of Business and Social Science, 2(22), 222-269.
Silaban, P. (2017). The Effect of Capital Adequacy Ratio, Net Interest Margin and Non-Performing Loans on Bank Profitability: The Case of Indonesia. International Journal of Economics & Business Adminisration, 3, 58-69.
Sinkey, J. F. (1991). Loan-Loss Experience and Risk-Taking Behavior at Large Commercial Banks. . Journal of Financial Services Research.
TENGEY2, J. O. (2014). AN EMPIRICAL STUDY ON THE EFFECT OF BAD LOANS ON BANKS’ LENDING. International Journal of Research in Business Management, 2(11), 1-12.
Torbira, & Zaagha. (2016). Capital Adequacy Measures and Bank Financial Performance in Nigeria. A Cointegration Analysis, Journal of Finance and Economic Research, 3(1).
Udom , I., & Onyekachi R, E. (2018). Effect of Capital Adequacy Requirements on the Profitability of Commercial Banks in Nigeria. International Research Journal of Finance and Economics(165).
Volkwein, J. F. (1998). . Who Defaults on Student Loans? The Effects of Race, Class, and Gender on Borrower Behaviour, in Condemning Students to Debt: College Loans and Public Policy. ed. Richard Fossey and Mark Bateman. .
Williamson, S. (1987). Financial intermediation, business failures, and real business cycles. Journal of Political Economy, 95(6), 1196–1216.
Yixin. (2001). The Non-performing Loans: Some Bank-level Evidences. Journal of Banking and Fnance.