Abstract:
The underlying arguments on the ownership-performance association mainly stem from three
major theories, namely, agency theory, public choice theory, and property rights theory. For
example, state-owned banks are expected to perform relatively poorly than privately owned
banks due to undue political interventions. Thus, contracts of such state-owned firms are
harder to enforce. Further, poor monitoring systems in state-owned banks hinder productivity,
investment, and, ultimately, performance (Altunbas et al., 2001). In comparison, private banks
perform better compared to state-owned banks due to low operating costs and effective
monitoring (Micco et al., 2007). Nevertheless, private banks outperform other banks in terms
of profitability and costs (Shaban & James, 2018) and better operational processes (Fernando
& Nimal, 2014). Therefore, in general, these theories favour privatisation and deregulation
since private ownership is associated with higher performance.
Moreover, foreign banks seem to outperform their domestic counterparts in transitional and
developing countries. This can be partly because their business activities are concentrated in
more profitable areas. Moreover, they provide a wide range of high-quality financial services
to their customers more efficiently through advanced technology, better corporate
governance, economies of scale, and greater financial strength (Demirgüç-Kunt & Huizinga,
1999).
This literature review highlights that the association between ownership and performance of
banks is still conflicting. Furthermore, a majority of studies on this topic have been conducted
in developed countries. Studies conducted on this topic in Sri Lanka are limited (Ekanayake &
Premerathne, 2016). Moreover, since the structure and conduct of banking systems constantly
change, the ownership-performance association can also change over time. Therefore, this
study examines the effect of ownership on the performance of licensed commercial banks in
Sri Lanka using the most recent annual data from 2012 to 2021.
