THE ANATOMY OF NON-PERFORMING LOANS AND BANK PERFORMANCE IN EMERGING MARKETS: A COMPREHENSIVE INVESTIGATION OF MACRO-ECONOMIC, MACRO-FINANCIAL, AND BANK-SPECIFIC FACTORS

Abstract

Non-performing loans (NPLs) pose a critical challenge to banking stability in emerging markets, yet the interplay of macroeconomic and bank-specific determinants remains inadequately explored, particularly in diverse economic contexts. This study addressed this gap by investigating how sovereign debt, broad money supply, inflation, GDP growth, and exchange rates influence NPLs across 26 emerging economies from 1999 to 2023, a period marked by financial crises and structural shifts. The research aimed to identify key drivers of NPLs and assess their directional impact, leveraging a panel dataset from the World Bank. Methodologically, the study employed Panel OLS and GLS regression, supplemented by Breusch-Pagan LM and Hausman tests to validate model specifications. Key findings revealed that broad money (M2) significantly reduced NPLs (coefficient: −1.17, *p* < 0.01), while sovereign debt exhibited dual effects: short-term stabilization (−0.33, *p* = 0.049) versus long-term risk accumulation (+0.30, *p* < 0.05). Surprisingly, GDP growth showed no statistically significant linkage, challenging conventional assumptions. The models explained ~30% of NPL variance (R² = 0.305), underscoring the role of unobserved institutional factors. These results highlight the delicate balance between liquidity provision and fiscal discipline in mitigating credit risk. The study contributes to policy debates by advocating for macro prudential regulations and standardized NPL reporting to enhance financial resilience. Implications extend to policymakers designing crisis-responsive frameworks and banks refining risk management strategies in volatile economies.