IMPACT OF BANK EFFICIENCY ON BANKING SECTOR DEVELOPEMENT IN SRI LANKA

Abstract

The study investigates the impact of bank efficiency on banking sector development in Sri Lanka. The data gathered through the World Bank database over the period from 1977 to 2018. The study employed ARDL model and apply three-stages of analysis procedure to enhance the objectives. In this study, the banking sector development has defined through develop a composite index using separate proxies for banking sector size, stability and banking access dimensions. The bank efficiency measured by using Private sector credit to GDP. The banking sector development used as dependent variable and bank efficiency as independent variable. Also, the economic growth, inflation, trade openness and financial openness represent the macro-economic determinants of the banking sector development. The study found that the bank efficiency, economic growth and trade openness have positive significant impact on banking sector development in long run. The economic growth shows statistically significant negative impact on banking sector development in short run. But the inflation and financial openness found as insignificant determinants of the banking sector development in Sri Lanka. The overall banking sector development and bank efficiency estimates indicate that the banks can still improve their level of development as well as the efficiency. Since, the banks should be encouraged to lend to the entire economy as against favoring specific sectors and the government should avoid the finance for budget deficit from the private sector in order to crowd out private sector investments. Further, financial reforms should further strengthened to reap large amount of foreign currencies.