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©NIJCRHSS Print ISSN: 2992-6106

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NEWPORT INTERNATIONAL JOURNAL OF CURRENT RESEARCH IN
HUMANITIES AND SOCIAL SCIENCES (NIJCRHSS)

Volume 5 Issue 1 Page 82-85, 2025

https://doi.org/10.59298/NIJCRHSS/2025/5.1.828500
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Non-Performing Loans of Commercial Banks: A Review
1
Sewanyina Muniru, 2Nyambane David, 3Ongesa Tom and 4Manyange Michael

Department of Business Administration, Faculty of Business and Management, Kampala International

1, 2, 3, 4

University, Uganda.
Corresponding Author Email: [email protected]

ABSTRACT
This literature review delves into non-performing loans (NPLs), focusing on their underlying causes, the effects they
have on commercial banks, and various management strategies. By synthesizing insights from over 20 years of
research, the review highlights how both macroeconomic factors such as economic downturns, rising unemployment,
and inflation, and microeconomic factors like inadequate risk management and aggressive lending practices
contribute to the rise of NPLs. The discussion extends to the significant ways NPLs affect bank profitability,
including reduced interest income, increased provisions for loan losses, and liquidity challenges. Following the 2008
global financial crisis, regulatory measures have been crucial in addressing NPL growth, but their effectiveness can
vary depending on the strength of local regulatory environments. The review emphasizes the need for proactive
management strategies, such as loan restructuring and improved credit risk assessments, to help maintain bank
stability and prevent future NPL issues. Moreover, it identifies critical gaps in current literature and points to
potential directions for future research on NPLs, particularly in both developed and emerging markets. Overall, this
review aims to provide a clearer understanding of NPLs and their implications for the banking sector
Keywords: Non-performing loans (NPLs), Commercial banks, Macroeconomic factors, Credit risk management,
Loan restructuring

INTRODUCTION
Banks are crucial to the development of any economy or financial system, making it essential for these institutions
to maintain good health. One characteristic often associated with banks is their financial fragility, particularly when
adverse conditions affect the quality of their assets. A key determinant of a bank’s performance is the quality of its
loan portfolio, which is closely tied to the issue of loan defaults. When borrowers or companies struggle to meet
their scheduled loan repayments, the loans transition to a non-performing status. This shift poses a significant risk
to the health of the commercial bank involved. Therefore, ensuring the stability and solvency of banks is of utmost
importance [1, 2]. Numerous studies have been conducted worldwide to explore various aspects of non-performing
loans (NPLs) and their implications for banking systems [2, 3]. While existing research offers valuable insights,
this particular study aims to address important gaps that have yet to be explored. The ongoing heterogeneity in
previous works and the fact that NPLs remain at the epicenter of financial crises underscore the need for continued
research in this area [4]. Unlike many other studies that primarily focus on panel data analysis using established
methodologies, this research employs a systematic literature review coupled with meta-analysis. Although this
method is commonly used in fields like medicine and sociology [5], its application in economics has been less
frequent. This reluctance can be attributed to several factors, including the diverse nature of economic issues, which
complicates the synthesis of results, and the absence of a detailed guide tailored specifically for systematic literature
reviews in economics [6, 7]. Additionally, there is a prevailing belief that the varied accuracy of estimates in
different areas stems from the need for a consistent understanding of cost-benefit analysis in meta-studies [8, 9].
By addressing these challenges, this work aims to contribute significantly to the literature on NPLs and their impact
on financial stability.
The economic development of a country heavily relies on effective financial intermediation, with banks playing a
crucial role in channeling surplus funds into productive investments. A well-functioning financial sector is essential
for sustainable economic growth, as it not only reflects the overall economic health but also influences it. However,
like any other industry, banks face various risks, particularly in the context of heightened competition and financial
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liberalization, which expose them to the increasing threat of loan defaults [10, 11]. The accumulation of non-
performing loans within bank portfolios can erode interest income, making it a pressing concern for financial
stability [12]. Several factors contribute to the rise of default loans, which can be categorized into internal and
external influences. Bankers must grasp these factors and devise strategies to mitigate the associated risks. Indicators
of credit risk include loan growth rates, sector turnover, overall economic growth, and inflation [13]. Systemic risk
often arises from contingent liabilities, with rapid withdrawals of deposits being a common precursor to bank
failures, exacerbated by adverse rumors that trigger asset fire sales [2, 14]. Understanding systemic risk is vital, as
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it is closely linked to the concept of asymmetric information, which can lead to reckless banking behavior when
mechanisms to mitigate its effects fail [15]. Furthermore, risk-taking behavior is influenced by the central bank's
monetary policy, suggesting that the trade-off between acceptable risk levels should not solely rest on the interests
of shareholders and managers. It is crucial to recognize the underestimation of systemic risk and the neglect of
stabilization measures, emphasizing the need for countercyclical monetary policies to maintain financial credibility
and stability [3, 16].
This review aims to interpret and summarize studies related to non-performing loans (NPLs) and their impact on
commercial banks, particularly in the context of banking management accounting. It emphasizes the need for future
research and seeks to expand our understanding of how NPLs intertwine with management accounting within the
banking system. Currently, the banking sector relies heavily on its resources, but a significant portion is tied up in
non-performing loans. The management of these loans carries considerable social and economic significance, as they
can lead to capital, operational, solvency, and liquidity issues. These challenges ultimately diminish the stability of
banks and restrict their ability to lend in the future [17, 3]. Additionally, non-performing loans negatively affect
profitability and operational capacity, particularly when funds are tied up in loan restructuring efforts [2].
Given the profound implications of NPLs, there is a pressing need for improved oversight and enhanced
management and control strategies within banks. This includes standardizing operations, assessing attractiveness
and effectiveness, and minimizing competition among banks, both domestically and internationally [1, 18].
Moreover, it is essential to eliminate ambiguities in banking operations, alert bankers to transaction risks, and
strengthen risk management frameworks [7]. The shift in perspective toward risk management has transformed
banking operations from merely addressing deficits to proactively managing risks [4]. In this evolving landscape,
non-financial transactions are gaining prominence, necessitating a specialized form of management accounting
known as banking management accounting [6]. Despite these developments, there remains a notable gap in the
literature, as no systematic review has yet been conducted on the intersection of management accounting and credit
risk management.
METHODOLOGY
The methodology for this review implements a structured approach to identifying, evaluating, and synthesizing
relevant studies on non-performing loans (NPLs). The inclusion criteria targeted high-quality sources, such as peer-
reviewed journal articles, working papers, and reports published by reputable institutions like the International
Monetary Fund (IMF), World Bank, and European Central Bank (ECB). The review focused on literature published
in English between 2000 and 2023, with particular emphasis on capturing insights into NPLs during and following
the 2008 financial crisis. Priority was given to studies discussing global trends in NPLs, particularly in commercial
banking sectors within developed regions (the U.S. and Europe) and emerging markets (India, China, and Sub-
Saharan Africa). Studies were excluded if they were not peer-reviewed, did not focus on banking, or were published
before 2000 unless they were foundational to the field.
A rigorous search strategy was applied across multiple academic databases, including Google Scholar, Scopus,
EBSCOhost, JSTOR, and Web of Science. A combination of keywords and Boolean operators was used, including
terms such as "non-performing loans," "NPLs and commercial banks," "causes of NPLs," "impact of NPLs on
profitability," "NPL management strategies," and "NPLs in emerging markets." To ensure high relevance, search
filters were applied, narrowing the focus to peer-reviewed articles and reports published between 2000 and 2023.
This systematic approach enabled the identification of studies that addressed the main themes in NPL research,
including their causes, consequences, regulatory interventions, and management strategies.
After gathering relevant studies, a systematic process of data extraction and analysis was conducted. Initially, titles
and abstracts were screened to exclude irrelevant content. Then, full-text reviews were carried out for articles that
met the inclusion criteria, with key data points such as research objectives, methods, findings, and regional focus
captured in a standardized extraction template. Thematic analysis was used to identify recurring patterns, such as
differences between macroeconomic and microeconomic factors driving NPLs, their effect on bank profitability, and
the implementation of regulatory frameworks for resolution. These findings were synthesized into a comprehensive
report that outlined common insights while also highlighting gaps and areas for future research.
RESULTS
The literature review on non-performing loans (NPLs) highlights several key findings regarding their causes, effects,
and management approaches. A prominent pattern in the research is that NPLs are driven by both macroeconomic
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and microeconomic factors. On a macroeconomic level, conditions such as economic recessions, rising
unemployment, and inflation contribute to an increase in NPLs, as borrowers struggle to meet their loan obligations.
On the microeconomic side, inadequate risk management, weak internal controls, and aggressive lending during
economic booms are significant contributors to NPL accumulation in banks. Moreover, research suggests that
emerging markets are more susceptible to these issues due to their less diversified economies and weaker regulatory
frameworks, which often lead to higher NPL ratios compared to those in more developed nations.
NPLs have a substantial negative impact on the financial performance of commercial banks, affecting profitability
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and overall stability. High NPL ratios are associated with reduced income from loan interest, higher loan loss
provisions, and constrained liquidity. The review also emphasizes the critical role of regulatory measures in
managing NPLs, particularly following the 2008 financial crisis. Policies such as tighter capital requirements, asset
quality assessments, and the establishment of asset management companies have helped control NPLs in various
regions, although the success of these interventions is influenced by the robustness of local institutional frameworks
and enforcement capabilities. Additionally, the literature points to the necessity of proactive NPL management,
including loan restructuring and enhanced credit risk practices, as vital strategies for reducing future NPL levels
and maintaining financial system stability.
CONCLUSION AND IMPLICATIONS FOR FUTURE RESEARCH
This review highlights the complex interplay of macroeconomic, institutional, and borrower-specific factors in
driving NPLs in the banking sector. The impact of NPLs on bank profitability, liquidity, and stability underscores
the importance of sound credit risk management practices and regulatory oversight. While much of the existing
research has focused on developed economies, there is a need for further studies on NPL trends in emerging markets,
where financial systems are evolving rapidly. Additionally, future research could explore the long-term efficacy of
various NPL resolution mechanisms, as well as the role of technological innovations in improving loan monitoring
and recovery efforts. In conclusion, addressing the challenges posed by NPLs requires a multifaceted approach that
includes robust macroeconomic policies, stringent regulatory frameworks, and sound risk management practices at
the bank level.
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2. Klein, N. Non-Performing Loans in CESEE: Determinants and Impact on Macroeconomic Performance.
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16. Buncic, D., & Melecky, M. Measuring the Effects of Systemic Risk on Banking Sector Stability. World Bank
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CITE AS: Sewanyina Muniru, Nyambane David, Ongesa Tom and Manyange
Michael (2025). Non-Performing Loans of Commercial Banks: A Review.
NEWPORT INTERNATIONAL JOURNAL OF CURRENT RESEARCH IN
HUMANITIES AND SOCIAL SCIENCES 5(1): 82-85
https://doi.org/10.59298/NIJCRHSS/2025/5.1.828500