Causality relationship of Banking sector financial performance on economic growth in Sri Lanka

Abstract

The main objective of this study is to find out the causality relationship between banking sector financial performance on Srilankan economic growth. In order to reach this objective, in this research Granger causality test is used to examine the causality relationship between the variables. The GDP, return on equity, credit to the private sector, money supply, trade balance, and the FDI are the variables used in this research. The analysis was carried out with secondary data for the period from 1998 to 2019 and the software of E-views 10 and Ms Excel are used to analyze the data. The Granger causality test indicates that there is uni-directional causation between the banking sector and the economic growth of Sri Lanka. According to these results, this research emphasizes that the return on equity by banks should be increased to drive the economic growth in Sri Lanka. Additionally, policymakers should encourage a competitive market environment in order to improve the banking sector's financial performance in Sri Lanka.