Non-Performing Loans, Bank Performance, and Financial Stability: The Moderator Effect of Digitalization

[Purpose] This paper examines how digitalization moderates the relationship between non-performing loans (NPLs), bank performance, and financial stability in the banking sector. [Design/methodology/approach] The study applies panel data regression techniques to banks operating in 18 MENA countries over the period 2000–2023. Bank performance is measured using return on assets (ROA) and return on equity (ROE), while financial stability is proxied by the Z-score. Digitalization indicators are included both directly and through interaction terms with NPLs to capture their moderating effect. Several robustness tests are conducted to validate the results. [Findings] Results show that NPLs negatively affect bank performance and financial stability, highlighting the destabilizing impact of deteriorating credit portfolios. Digitalization exerts a direct positive effect by improving credit monitoring, information processing, and operational efficiency. Interaction results indicate that higher digitalization levels significantly reduce the negative effect of NPLs on profitability and resilience. Managerially, banks investing in advanced credit-risk analytics, automated loan monitoring, and digital customer screening tools are better able to mitigate NPL-related losses, detect early loan deterioration, and improve recovery strategies. These findings contribute to Decision Sciences by demonstrating how technological adoption enhances risk prediction, managerial decision-making, and strategic resource allocation. [Originality/value] This study offers new empirical evidence on the moderating role of digitalization in the NPL–performance–financial stability nexus through one of the first long-term panel analyses of the MENA banking sector spanning more than two decades. It extends existing literature by quantifying the impact of technological adoption on credit risk–performance dynamics in emerging markets. [Practical implications] The findings provide actionable insights for managers and policymakers. Banks should prioritize investments in (1) AI and machine learning for predictive credit scoring and early-warning systems, (2) integrated digital loan management platforms for improved monitoring and recovery, (3) digital customer data infrastructures to reduce information asymmetry. Regulators can support digital transformation through regulatory sandboxes and fintech partnerships to strengthen financial stability. Overall, targeted digitalization strategies can reduce NPL accumulation, enhance efficiency, and improve long-term resilience.