Modeling the Relationship between Profitability and Market Share of Licensed Commercial Banks in Sri Lanka

Abstract

Sri Lankan banking industry comprises of two major types of establishments viz. Licensed Commercial Banks (LCB) and Licensed Specialized Banks of which the profitability of the former being determined by the size of the firm, indicated by total assets held by the bank. In this study, the relationship between market share and profitability of LCBs was investigated using Multiple Linear Regression (MLR) analysis and considering the variables unique to the Sri Lankan banking industry. Quarterly data were obtained from the Central Bank of Sri Lanka from 2008 to 2020. In addition to MLR, analysis of variance and time-series analysis was also carried out to ensure the reliance of the results and conclusions. It was found that the market share represented by Deposit Customers and Loan Customers have a positive relationship with the profitability measured by Profit After Tax (PAT). Further, market share explained a substantial 96.5% of the variability in profitability. The model predicted that a unit increase in deposits and loans lead to an increase in profitability by 6.1% and 10.7% respectively. Finally, it could be concluded that the loans granted to bank customers accounted for increasing the profitability of LCBs in Sri Lanka than the deposits made by the customers. Accordingly, the LCBs can review their strategies to optimize profitability based on the loans granted to and deposits received from the customers.