Can state-owned banks outperform private banks?- The evidence from Sri Lanka.

Abstract

Despite worldwide movement towards privatization of financial intermediaries and liberalization of financial markets, there is no straightforward empirical evidence to suggest that private ownership is better. Owing to many practical reasons, state-owned banks can still outperform their private counterparts, at least in certain dimensions. Despite substantial structural changes and liberalization of the banking system less have been done in Sri Lanka to analyze performance differences among various ownership groups. Based on data during 2000-2007, this study first, provides quantitative estimates on revenue-based performance using Data Envelopment Analysis (DEA). Second, it evaluates the influence of ownership on performance using regression techniques to show whether state-owned banks can outperform. The study finds that state-owned banks can perform better than private banks in certain aspects though they significantly lag behind foreign banks in terms of revenue efficiency. Further, even though foreign banks remain efficient, in terms of country’s financial development their contribution remains low.