Abstract
Over the past decades, loan default has been a subject of debate regarding the stability of the financial system. That notwithstanding, loan default can be severe and far reaching affecting not only the financial health of banks but also impacting the credit scoring systems. Motivated by this motion, this study investigated the relationship between loan defaults and banks’ performance in South African banking system by leveraging on a three-step panel models through a quantitative research approach. Further, the study utilised 10 commercial banks with a timeframe that spans 2012-2023. First, the study employed trend approach to analyse the movement of non-performing loans in South African commercial banks. The study revealed rising trend of non-performing loans on South African commercial banks. Again, the Autoregressive Distributed Lag Model (ARDL) estimation technique was applied to examine the relationship between loan default and bank’s performance in both long-and short-term. The findings from the second objective show that in the long-term loan default has a significant negative impact on banks’ performance in South Africa. In the third objective, the study revealed that there exists a unidirectional causal linkage between loan default and banks’ performance. In light of this, the study recommends that commercial banks should use sound policies and regulations that will aid in managing and controlling loan default. These strategies include asset-based recovery plans, loan loss provisions, enhancing loan portfolio diversity, and fortifying regulatory compliance.