Firm Specific Determinants and Financial Performance of Licensed Commercial Banks in Sri Lanka

Abstract

Banks, as the critical part of financial system, play a vital role in contributing to a country’s economic development. This study aims to investigate the impact of bank-specific factors which include the operating expenses, credit risk, liquidity risk, capital strength and the bank size of Sri Lankan Licensed Commercial Banks (LCBs) on their financial performance, which is measured by return on assets (ROA) and return on equity (ROE). According to the findings, it is found that banks’ performance in Sri Lanka only affects by the operating expenses and the bank size. The regression coefficients representing size of the banks is statistically significant on bank performance at 5% level for both models whereas operating expenses is significant at 1% level in ROA (model 1) and at 5% level in ROE (model 2). Conversely, the estimated regression coefficients for credit ratio, liquidity ratio and capital strength ratio in the both models are not statistically significant and do not contribute towards performance of LCBs in Sri Lanka. Thus, it is apparent that the Sri Lankan LCBs performance affects by two of the firm-specific determinants; operating expenses and size of the banks. On the whole, results imply that firm-specific determinants employed in this study have only a small contribution on the financial performance of Sri Lankan LCBs.