Determinants of Non-Performing Assets and the Performance of Islamic Banks in Pakistan

Abstract

These days non-performing assets have been essential factors in terms of the banking sector's profitability and sustainability. This study aims to weigh factors that may affect the surging level of non-performing assets in Pakistani Islamic banks. The study uses the Financing-to-deposit ratio (FTDR), Bank size, Return on assets (ROA), Inflation rate, and interest rate as the determinants of non-performing assets as banks' internal and external factors, respectively. The performance of Islamic banks is measured using Tobin’s Q ratio. Panel data from 2012 – 2022 was extracted from unconsolidated financial statements of Islamic banks and the World Bank database. Descriptive statistics, correlation, and panel least square regression analysis were used to find the relationship between non-performing assets (independent variable) and banks' performance (dependent variable). Data analysis is done through the EViews application software. The findings of this study revealed that there is a significant impact of different factors of non-performing assets on the performance of Islamic banks in Pakistan. The results of the analysis concluded that banks' performance can be increased by reducing the level of non-performing assets. The study will benefit the management of Islamic banks in considering these factors to improve their performance by controlling the level of NPAs.