Identify the Factors Which Affect to Risk Management Efficiency of the Banks: Evidence from Licensed Commercial Banks in Sri Lanka

Abstract

Key financial indicator in banking system is capital adequacy ratio is considered. This ratio was approved by the Basel Committee on Banking Supervision. The main objective of this study was examining and identifying the factors affecting to risk management efficiency in domestic licensed commercial banks in Sri Lanka. As well as to find out what is the relationship between capital adequacy ratio and each risk factors. To achieve my research objectives, various type of analytical methods uses to analysis the data: Descriptive Analysis, Unit Root Test, Correlation and Coefficient Regression Analysis, The Hausman’s test and Hypothesis Testing. The sample of this study is 12 licensed commercial banks in Sri Lanka. There are 13 domestic licensed commercial banks and one bank has removed due to deviations of the data. A nature of this study is quantitative and annual data got period from 2013 to 2018. The Capital adequacy ratio use as the dependent variable and Credit risk, market risk, liquidity risk, profitability, operational efficiency, and bank size were used as independent variables. The results of the study revealed that credit risk, liquidity risk, profitability and operational efficiency has a significant impact on capital adequacy ratio and credit risk, liquidity risk and profitability share a positive significant relationship with the capital adequacy ratio. Further, operational efficiency has a negative significant relationship with the capital adequacy ratio and market risk and bank size did not show an impact on the on the risk management efficiency. The study concluded that the independents variables have a high impact on the dependent variable and explanatory power of the model is approximately 66%.