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

Abstract

Despite the availability of many studies on the ownership-performance association, existing literature provides contradictory evidence on the effect of ownership on bank performance. Therefore, this study examines the effect of ownership on the performance of licensed commercial banks in Sri Lanka using annual data from 2012 to 2021. The data was collected from the published annual reports of 18 licensed commercial banks in Sri Lanka. Bank ownership was categorized as state, private, and foreign and included in the model using two dummy variables. Return on equity, net interest margin, and nonperforming loans were used as bank performance indicators. Three random effects panel regression models were used to explore the effect of ownership on the three measures of bank performance while controlling for bank size, loan-to-deposit ratio, income diversification, and management inefficiency. The results suggest that state-owned banks outperform other banks in terms of return on equity. However, their performance in terms of net interest margin and non-performing loans was not significantly different from that of other banks. Therefore, the evidence in this study is inadequate to claim a straightforward association between ownership and bank performance. Nevertheless, this study provides recent evidence of the effect of ownership on bank performance in Sri Lanka. Further, the findings of this study will provide insights for the government, banks, and policymakers in formulating appropriate policies to improve the performance of the banking sector