Exploring The Impact of Financial Inclusion and Financial Development on Non-Performing Loans: Evidence from Banking Sector of Pakistan

Abstract

The increase in the volume of NPLs is becoming a mounting issue which persuade insecurity and collision of the banks' motivation and ability to keep extending credits, therefore distressing cumulative demand and investments. As financial sector development is on increasing trend and accessibility of financial products to the masses is the core objective of promoting financial inclusion. However, there is a chance that an increase in the financial accessibility could affect the Bank's performance from a non-performing loans perspective and this needs to be verified from empirical evidence. Hence, this study aims to determine the impact of financial inclusion and financial development on nonperforming loans in the banking sector of Pakistan. Using random effect model on the panel dataset of 24 Pakistani banks from 2007 to 2019, the study reveals a positive impact of financial development and a negative impact of financial inclusion on nonperforming loans. Moreover, it has been found that banks’ liquidity position, size, efficiency ratio and net interest income to total interest income ratio have positive impact on non-performing loans; whereas banks trade portfolio, unemployment rate, inflation rate, foreign direct investment and global financial crisis have negative impact on non-performing loans.