Determinants of Banks’ Profitability: Empirical Evidence from Sri Lanka

Abstract

The objective of this paper is to examine the effect of bank specific, industry specific and macro-economic determinants namely, bank size, capital adequacy, credit risk, liquidity risk, operating cost efficiency, assets management, diversification, market concentration, inflation and interest rate on Sri Lankan commercial banks’ profitability over the period from 2010 to 2019. The study used quantitative research approach and analyzed secondary data using E views software of 11 Sri Lankan commercial banks over a period of 2010 to 2019. Multiple panel regression method was used to investigate the effects of bank specific, industry specific and macro-economic determinants on the profitability of commercial banks in Sri Lanka. The result of the study suggests that bank size, capital adequacy, asset management and interest rates bring positive effects on the banks’ profitability, while credit risks bring negative effects on commercial banks’ profitability. This study is one of the pioneering studies examining the determinants of the profitability of commercial banks in emerging economies. The implications of this study would be helpful for policy makers and regulatory bodies in revising their existing practices for developments in the banking sector in achieving the economic growth. Further, this study sheds light on Sri Lankan commercial banks to understand the significant determinants on their overall profitability and set strategies to accordingly.