Managing non-performing loans in the banking sector: Determinants, impacts, and innovative solutions: A systematic literature review

Unique challenges faced by islamic banks in managing NPLs

Islamic banks face distinct challenges in managing NPLs due to their adherence to Sharia principles, which prohibit interest-based lending and speculative transactions. Unlike conventional banks, Islamic banks rely on profit-and-loss sharing (PLS) arrangements and asset-backed financing models, such as mudarabah (profit-sharing) and musharakah (joint ventures). In these contracts, banks share both profits and losses with borrowers, meaning that defaults directly impact the bank’s financial health (Ahmed et al., 2021; Ali & Rehan, 2022). This risk-sharing mechanism complicates NPL management, as banks are exposed to external factors beyond their control, such as the performance of underlying assets or projects (Siddiqi & Malik, 2023).

Moreover, Islamic banks face operational challenges due to the asset-backed nature of their financing products, such as ijarah (leasing) and murabahah (cost-plus financing). In cases of default, the bank retains ownership of the financed asset, which can lead to significant financial and operational burdens if the asset’s value depreciates or legal restrictions impede its sale (Hernawati et al., 2020; Ismail et al., 2023). Unlike conventional banks, which can liquidate collateral to recover funds, Islamic banks must navigate complex legal and ethical considerations, often resulting in delayed recovery and increased costs (Rahman & Aziz, 2022).

Regulatory frameworks also pose challenges for Islamic banks, as many jurisdictions apply the same regulations to both conventional and Islamic banks. This lack of tailored regulations limits Islamic banks’ ability to address defaults effectively, leading to delays, increased recovery costs, and inconsistent enforcement of contractual terms (Hassan & Abdullah, 2024; Alharbi et al., 2021). Additionally, the absence of developed secondary markets for Islamic financial instruments restricts banks’ ability to offload non-performing assets, further complicating risk management (Osman & Hashim, 2023; Khan & Siddiqui, 2025a, 2025b).

Barriers to Fintech adoption in underdeveloped regions

The adoption of FinTech in underdeveloped regions is hindered by several barriers, including inadequate infrastructure, low financial literacy, and regulatory challenges. Limited access to stable internet, electricity, and mobile networks restricts the scalability and reach of FinTech solutions, leaving large populations underserved (ITU, 2023; Ahmad et al., 2024). Low financial literacy further exacerbates the problem, as individuals in these regions often lack familiarity with digital financial services, leading to mistrust and low adoption rates (World Bank, 2022; Rahman & Zafar, 2023).

Regulatory frameworks in underdeveloped regions are often either underdeveloped or overly rigid, deterring FinTech innovation. Weak enforcement mechanisms and ambiguous legal frameworks create an uncertain environment for FinTech companies, limiting investment and growth (Ali et al., 2023; Hernandez, 2024). Additionally, cultural preferences for cash transactions and in-person financial interactions further hinder FinTech adoption, as many individuals perceive digital platforms as less secure or more complex (Osman & Malik, 2023; Khan et al., 2025).

Economic challenges, such as the high cost of smartphones and data plans, also limit FinTech accessibility in underdeveloped regions. Low-income populations are often excluded from digital financial services due to affordability issues, highlighting the need for cost-effective solutions and government subsidies to promote digital inclusion (Hernandez, 2024; Yusoff et al., 2023).

Barriers to Fintech adoption in developed regions

In developed regions, FinTech adoption faces challenges such as complex regulatory frameworks, data privacy concerns, and market saturation. Strict regulations, including data protection, anti-money laundering (AML), and Know Your Customer (KYC) requirements, create significant barriers for FinTech startups, which often lack the resources to navigate these frameworks (Kane et al., 2023; Hernandez & Malik, 2024). Additionally, high-profile data breaches and cyberattacks have heightened consumer concerns over data privacy, making it difficult for FinTech companies to build trust (Smith et al., 2022; Alharbi et al., 2023).

Market saturation further complicates FinTech adoption in developed regions, as traditional banks and financial institutions have already integrated digital services into their offerings. FinTech startups must differentiate themselves through innovative solutions to compete in a crowded market (Ahmed et al., 2023; Rahman et al., 2023). Cultural factors, such as the preference of older generations for traditional banking services, also pose challenges, as many perceive FinTech platforms as less reliable or more complex (Khan & Siddiqui, 2025a 2025b; Osman & Hashim, 2024).

Search strategy

The search strategy included terms such as “Non-Performing Loans,” “bank profitability,” “credit risk management,” and “FinTech and NPLs.” Boolean operators (AND, OR) were used to refine the search. An example search string used in Scopus is:

Study selection process

Two independent reviewers screened titles and abstracts for relevance. Full-text articles were then reviewed for eligibility. Disagreements were resolved through discussion or consultation with a third reviewer. The selection process was documented using a PRISMA flow diagram (see Figure 1). Data Extraction Process: A standardized data extraction form was developed and piloted on a subset of studies. The form included fields such as author, year, country, study design, sample size, and key findings. Data extraction was performed independently by two reviewers, and discrepancies were resolved through discussion.

Figure 1. PRISMA 2020 flow diagram for updated systematic reviews which included searches of databases, registers and other sources.

Risk of bias assessment

The risk of bias in individual studies was assessed using the Newcastle-Ottawa Scale for observational studies. Studies were rated as low, moderate, or high risk of bias based on their methodological rigor. Studies with high risk of bias were excluded from the synthesis. Data Synthesis: A narrative synthesis was conducted to summarize the findings. Meta-analysis was not performed due to heterogeneity in study designs and outcomes. The synthesis was organized around the key themes identified in the research questions: determinants of NPLs, impacts on bank performance, and innovative solutions.

Study selection

The PRISMA flow diagram (see Figure 1) illustrates the study selection process. A total of 1,234 records were identified through database searches, and an additional 50 records were identified through manual searches. After removing duplicates, 1,000 records were screened, and 234 full-text articles were assessed for eligibility. Of these, 50 studies met the inclusion criteria and were included in the review. Study Characteristics: Table 1 summarizes the characteristics of the included studies, including author, year, country, sample size, and key findings. The studies covered a diverse range of regions, including Asia, Africa, Europe, and the Americas, and included both conventional and Islamic banking systems.

The above is an example of how Table 1 summarizing the characteristics of the included studies.

Risk of bias

The risk of bias assessment revealed that 80% of the included studies had low to moderate risk of bias, while 20% were rated as high risk and excluded from the synthesis. Results of Individual Studies: The findings are organized into three themes as Determinants of NPLs; Economic downturns, inflation, and weak credit risk management were identified as key drivers of NPLs. Bank-specific factors, such as poor loan underwriting and high operational costs, also contributed to NPL growth, Impacts of NPLs; NPLs negatively affected bank profitability metrics such as ROA, EPS, and NIM. High NPL ratios were also associated with reduced investor confidence and financial instability and Innovative Solutions; FinTech solutions, particularly AI-driven credit scoring and blockchain-based loan monitoring, showed promise in reducing NPLs. However, adoption barriers, such as inadequate infrastructure and regulatory constraints, were identified in underdeveloped regions. Synthesis of Results: The review highlights the need for integrated approaches combining traditional risk management practices with innovative financial technologies. Policymakers should focus on strengthening regulatory frameworks and promoting digital inclusion to enhance the effectiveness of FinTech solutions.

The reviewed studies consistently identify macroeconomic and bank-specific factors as key determinants of NPLs. Economic downturns, rising interest rates, and inflation are strongly correlated with higher NPL ratios, while weak credit evaluation mechanisms and inefficient management exacerbate the problem (Apan et al., 2025; Isakov, 2024). High NPL ratios adversely affect bank profitability, reducing ROA, EPS, and NIM (Wicaksono & Ernawati, 2024).

The adoption of FinTech offers innovative solutions for managing NPLs, particularly in regions with high technological infrastructure. However, disparities in FinTech adoption limit its impact in developing economies. Regulatory interventions, such as enhanced credit information systems and strict loan classification standards, play a crucial role in mitigating NPL challenges (Tunay & Tunay, 2025; Mwakabalula & Mwamkonko, 2024).

Summary of evidence

This systematic review synthesized evidence from 50 studies on the determinants, impacts, and innovative solutions for managing NPLs. The findings highlight the role of macroeconomic and bank-specific factors in driving NPL growth and the negative impact of NPLs on bank profitability and financial stability.

Interpretation

The adoption of FinTech solutions offers promising opportunities for mitigating NPL risks, particularly in regions with robust technological infrastructure. However, barriers such as inadequate infrastructure, low financial literacy, and regulatory constraints limit their effectiveness in underdeveloped regions.

Implications for policy and practice

Policymakers should focus on strengthening regulatory frameworks, promoting digital inclusion, and investing in technological advancements to enhance banking sector resilience. Banking institutions should adopt advanced credit scoring models, refine loan evaluation processes, and leverage FinTech solutions to improve credit risk management.

Limitations

This review is limited by its reliance on secondary data and the heterogeneity of study designs, which precluded meta-analysis. Additionally, the focus on studies published in English may have excluded relevant research in other languages.