Abstract:
This study primarily aims at investigating the effect of good governance on bank
lending in Sri Lanka. In this regard, the direct effect of governance on bank lending
and how governance mediates bank deposits in influencing bank lending are
studied. The sample includes data on 13 commercial banks and worldwide
governance indicators from 2011 to 2016. When estimating the direct effect, two
step system-GMM dynamic panel model is used. Meanwhile, Three Stage Least
Squares model is employed in estimating the mediation effect. Results for the
system-GMM model show that, good governance indices have significant impact on
bank lending. Control of corruption and government effectiveness have significant
negative effect on bank lending and political stability, rule of law, regulatory quality,
voice and accountability show significant positive relationship. Further, Three Stage
Least Squares result indicates the presence of a significant mediation effect through
bank deposits. However, the common component developed from the six
governance indicators, to represent overall governance, depicts an insignificant
result.
