Abstract
Non-performing loans (NPLs) continue to pose a significant risk to bank stability in Sub-Saharan Africa (SSA), yet the institutional and macroeconomic factors that influence their dynamics are not well understood. The present research focuses on the degree to which the quality of institutions and the macroeconomic indicators cause the loan performance in the context of a panel ARDL model in the SSA economies between 1996 and 2023. The institutional quality is modelled by a composite index that is built with Principal Component Analysis (PCA) and this guarantees a statistically sound aggregation of six fundamental aspects of governance. The empirical results indicate that the quality of institutions is decisive in enhancing loan performance. The economic size (GDP level) also displays a negative and statistically significant impact on NPLs and it is possible to suggest that larger and more diversified economies have a higher risk-absorption capacity and a more resilient credit system. Inflation on the other hand has a positive and sizable effect on NPLs proving that price instability undermines borrowers’ repayment power and increases credit risk. The effects of unemployment and monetary policy rate are theoretically consistent yet statistically insignificant, and this means that their impacts on NPLs may not be the same in different countries and may be transmitted through indirect mechanisms. The coefficient of Error Correction Mechanism (ECM) (-0.892) that is significant at the 5% level proves the presence of fast adjustment towards long-run equilibrium, meaning that there are powerful corrective forces in the institutional and macroeconomic systems. In sum, the paper highlights institutional quality and macroeconomic stability specifically inflation control as the key to mitigating credit fragility and increasing banking sector resilience in SSA.