IMPACT OF BANK EFFICIENCY ON BANKING SECTOR DEVELOPMENT IN SRI LANKA

Abstract

Bank efficiency is momentous for enhancing banking sector development in developing economies which ultimately directs to economic progress. Therefore, this research aims to analyze the short-run and long-run impact of bank efficiency on banking sector development in the Sri Lankan context. The study utilized both the Autoregressive Distributive Lag model and three stages of analysis procedure to enhance study aims. The data was collected from the World Bank’s database over the sample period from 1977 to 2018. The dependent variable of banking sector development is measured via developing a composite index utilizing different proxies for banking sector size, stability, and banking access. Private sector credit to GDP is used as the measure of the independent variable of bank efficiency. Economic growth, inflation, trade openness and financial openness represent the macro-economic determinants of the banking sector development. The study found that bank efficiency, economic growth, and trade openness have a significant positive impact on banking sector development in the long run. The economic growth shows a statistically significant negative impact on banking sector development in the short run. Thus, the banks should encourage lending against preferring specific business industries and the government should avoid the finance for the budget deficit from the private sector to crowd out the private sector investments. Additionally, the financial reforms should further strengthen to reap large sums of foreign exchanges.