NEXUS BETWEEN NON-PERFORMING LOANS AND BANK PROFITABILITY: A CASE FROM PAKISTAN CONVENTIONAL BANKING SECTOR

Abstract

The banking sector plays a critical role in any economy by facilitating financial intermediation, credit allocation, and economic growth. In Recent years the global banking system has been changed and every business, businessman, investors, corporations’ entrepreneurs and personnel affected by positive changes in worldwide banking system. This study investigates the relationship between capital adequacy, bank size, non-performing loans (NPLs), and bank profitability within Pakistan's conventional banking sector. It further examines the role of corporate governance in influencing bank performance. Given the critical role banks play in economic stability, effective governance and credit risk management are essential to mitigate financial distress and institutional failure. Using a quantitative approach, the study analyzes secondary data from the annual reports and financial statements of selected commercial banks in Pakistan over a ten-year period (2014–2023). A multiple regression model was employed to test the proposed relationships. The findings reveal that both capital adequacy and bank size are significantly associated with the level of non-performing loans. Additionally, corporate governance demonstrates a notable, positive influence on bank profitability, while a positive relationship is observed between NPLs and profitability. The results offer important insights for policymakers and banking professionals in enhancing governance frameworks and risk management strategies to ensure long-term financial stability and improved performance in the banking sector.