DETERMINANTS OF PROFITABILITY OF LISTED COMMERCIAL BANKS IN SRI LANKA

Abstract

The banking sector has a significant impact on economic development in any country since banks play a pivotal role in improving overall economic activities, which are crucial for any country’s economic development. A profitable banking sector can endure negative shocks and contribute to the financial system’s stability. The objective of this study is to determine the factors that influence the profitability of licensed commercial banks in Sri Lanka in order to mitigate the negative consequences and ensure financial stability. Data for the study was gathered from 11 Licensed Commercial banks over the period of 2011 to 2020 and the secondary data used for analysis was collected from the audited financial statements of the selected licensed Commercial banks. This study used Bank Size, Operating Efficiency, Liquidity, Capital Adequacy, and GDP growth as the determinants of bank profitability while ROA is the dimension of profitability. This study employed Random Effect Model, and Generalized Moment of Method to examine the impact of bank-specific determinants; bank size, capital adequacy, operating efficiency, liquidity, and GDP growth on ROA of Listed Commercial Banks in Sri Lanka. As per the Random Effect Model and Generalized Moment of Method, Bank Size, Liquidity, Capital Adequacy, and GDP have a positive and significant impact on profitability while Operating Efficiency doesn’t have any significant impact on profitability. That means bank size, liquidity, capital adequacy, and GDP are highly influential towards bank profitability. Therefore, banks should pay more attention to these determinants when focusing on maximizing the profits of banks.