Drivers of Commercial Banks Profitability in Sri Lanka

Abstract

Profitability of the banking sector is central as the wellbeing of the industry is closely associated with the wellness of the whole economy in general. Thus a proficient and productivity banking sector is able and better placed to endure negative economic stocks. This study investigated drivers of Commercial banks’ profitability in Sri Lanka.The study explored the effects of bank size, adequacy of capital, liquidity, credit risk and operational efficiency on commercial banks’ profitability. The study adopted a descriptive design helped to establish the factors, which influence the Sri Lankan commercial banks’ profitability. The study used secondary data from11 commercial banks from the years 2012 to 2016. The study employedmultiple regression analysis and Pearson correlation test so as to arrive at the findings. Capital plays a key role in driving commercial banks’ profitability and higher levels of capital adequacy increases profitability of commercial banks, findings reveal. The study also concluded that an increase in nonperforming loans increase credit risk which adversely affects profitability. The study finally concluded that high levels of liquidity provides adequate funds to lend which in turn increase interest income hence banks’ profitability and that poor operational efficiency through poor management of expenses reduces the profitability of commercial banks. The study recommended that managers of commercial banks in Sri Lanka to develop concrete polices to ensure minimum amount of nonperforming loans being kept and that banks should effectively manage their operational expenses and costs to ensure that they are efficient to maximize profit. The study also recommended that regulatory authorities like the Central Bank of Sri Lanka should develop effective policies on capital adequacy, liquidity and credit risk management to ensure that banks are in a position where they can enhance their profitability.