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Internal Bank-Specific Determinants of Non-Performing Loans in Zambian Commercial Banks: A Time-Series Analysis, 2018–2024

Author

Listed:
  • Kalenga, Danicious

    (University of Zambia)

  • Chisenga, Daniel

    (University of Zambia)

Abstract

Non-performing loans (NPLs) pose a serious threat to the soundness of the banking sector in developing countries where credit markets are shallow and borrowers are informationally opaque. This study investigates the determinants of NPLs in Zambian commercial banks at the internal bank-specific level: profitability, lending practices, efficiency, and capitalisation-proxied by the return on assets (ROA), the loan-to-deposit ratio (LDR), the efficiency ratio and the capital adequacy ratio (CAR) respectively. Using a panel of secondary data derived from annual banking sector-wide reports of the Bank of Zambia over the period 2018-2024, an Ordinary Least Squares (OLS) regression is fitted after rigorous pre- and post-estimation diagnostic testing. The regression explains 85.8 per cent of the variation in the net NPL ratio and is fully compliant with classical linear regression assumptions. The evidence suggests a significant, strong negative relation between the ROA and NPLs; also negatively and significantly related to default are the LDR and efficiency ratio. The CAR is instead significantly positively related to NPLs, thus validating the risk-shifting hypothesis where well-capitalised banks take greater credit risk. Neither the net foreign-exchange exposure nor liquidity variable is significant. The findings corroborate the significance of internal management quality in restraining credit risk and underscore that strengthening profitability, lending, and efficiency should underpin credit risk management strategy within Zambia's banking sector.

Suggested Citation

  • Kalenga, Danicious & Chisenga, Daniel, 2026. "Internal Bank-Specific Determinants of Non-Performing Loans in Zambian Commercial Banks: A Time-Series Analysis, 2018–2024," East African Finance Journal, East African Finance Journal, vol. 5(2).
    • Handle: RePEc:cwk:eafjke:2026-22
    DOI: 10.59413/eafj/v5.i2.10
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    References listed on IDEAS

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    1. MBelen Salas & Prosper Lamothe & Enrique Delgado & Angel L. Fernández-Miguélez & Lucia Valcarce, 2024. "Determinants of Nonperforming Loans: A Global Data Analysis," Computational Economics, Springer;Society for Computational Economics, vol. 64(5), pages 2695-2716, November.
    2. Khalil Alnabulsi & Emira Kozarević & Abdelaziz Hakimi, 2022. "Assessing the determinants of non-performing loans under financial crisis and health crisis: evidence from the MENA banks," Cogent Economics & Finance, Taylor & Francis Journals, vol. 10(1), pages 2124665-212, December.
    3. Jensen, Michael C. & Meckling, William H., 2008. "Theory of the firm: managerial behavior, agency costs and ownership structure," RAE - Revista de Administração de Empresas, FGV-EAESP Escola de Administração de Empresas de São Paulo (Brazil), vol. 48(2), April.
    4. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    5. Lamine Chibawe & Dr. Lubinda Haabazoka, 2025. "A Study of the Factors Influencing Bank Loan Performance in Zambian Commercial Banks," African Journal of Commercial Studies, African Journal of Commercial Studies, vol. 6(2).
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    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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