Non-Performing Loans (NPL) And Return on Asset (ROA): Evidence from Pakistan’s Banking Sector

Abstract

This study examines the impact of Non-Performing Loans (NPL), Size (SZ), Liquidity (LQ), and Management Efficiency (ME) on the financial performance of commercial banks in Pakistan, with Return on Assets (ROA) as the dependent variable. The study employs secondary data sourced from the annual financial statements of 16 selected commercial banks operating in Pakistan from 2011 to 2020. A quantitative approach is used, and data is analyzed through various statistical techniques, including regression analysis, correlation, and descriptive statistics, using Stata software. The findings reveal that NPL and bank size have a significant impact on ROA, while management efficiency and liquidity do not exhibit a statistically significant influence. The results suggest that higher non-performing loans negatively affect bank profitability, whereas larger banks tend to achieve better financial performance due to economies of scale. These findings provide valuable insights for bank managers and policymakers in formulating strategies to improve asset quality and optimize bank size for better financial stability. Future research could enhance reliability by expanding the dataset to include other financial institutions in Pakistan, enabling a broader perspective on the factors influencing profitability across the financial sector. This study contributes to the existing literature on banking performance and financial stability.