Empirical study on determinants of profitability of listed commercial banks: with special reference to Sri Lanka

Abstract

It is an accepted truth that, a robust and vigorous banking system is a precondition for an economic growth condition. Banks in Sri Lanka have been experiencing major challenges in the changing internal and external environment over the past few decades. It has been focused to identify the determinants that influence the profitability of Licensed Commercial Banks in Sri Lanka, in order to repel the adverse effects and to assure the financial stability. This paper analyses the Bank specific and Macroeconomic determinants affecting the profitability of Licensed Commercial Banks in Sri Lanka. This study uses GDP growth, Operating Efficiency, Interest Rate, Bank Size and Liquidity ratio as the determinants of profitability while taking ROA as the dimension of profitability. The findings reveal that Bank size and Operating efficiency and GDP growth rate significantly affect the banks’ profitability when using ROA as the measure of profitability. In line with above findings, financial stability can be achieved by increasing the banks’ liquidity and by being operationally efficient. Nevertheless, Macro Economic factors were found to be insignificantly influencing the profitability while Bank focused factors are highly influential for the profitability of the Licensed Commercial Banks in Sri Lanka.