Effect of Ownership on the Performance of Licensed Commercial Banks in Sri Lanka

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.