Determinants of Non-Performing Loans Between Islamic And Conventional Banks: A Systematic Literature Review

Abstract

This article conducts a systematic literature review of 52 papers on the determinants of non-performing loans (NPL) published for 2006-2022 in peer-reviewed journals. This paper adds to the development of this emerging field of systematic review in non-medical field settings by mapping existing research to inform future research exploits. This study synthesizes NPL studies by applying the systematic review methodology. The data synthesis is done through first and second-level codes. The first level codes group studies according to bank-specific, borrower-specific and comparative (Islamic vs conventional bank types). The literature is conscientiously analyzed through 13 subcategories using an open coding process. The literature synthesis shows that borrower-specific factors that may determine NPL include borrower profile, internal factors, external factors, and social issues. Also, the bank-specific factors that may influence NPL growth include economic conditions, management competence, profit maximization, and information economics. The findings highlight that the way borrower profiles, banks-specific factors and macroeconomic factors interact to influence NPL still needs more understanding. Further, Islamic banks and conventional banks seem to behave similarly regarding many bank-specific and macroeconomic factors even though the profit and loss sharing contract used in Islamic banks was deemed to moderate NPL positively. But the borrower-specific factors' interaction with bank-specific and macroeconomic factors of Islamic banks clients remains unclear. This highlights an important research gap in understanding the behavior of Islamic bank borrowers towards NPL prediction.