Impact of bank-specific and macroeconomic factors on The profitability of Commercial Banks in Sri Lanka

Abstract

The objective of this research study is to investigate the impact of Bank specific and Macroeconomic indicators/forces on the Profitability of the Listed Commercial banks in Sri Lanka. Balance panel data regression analysis mode was used to analyze the data. Data for each macroeconomic and bank-related variables were collected with the assistance of secondary resources and it covers a period of 13 years commencing from the year 2006 up to 2018. The study sample contained nine licensed commercial banks that cover both the private and government sector. The study employed ROA and ROE as dependent variables while using exchange rate, GDP growth, inflation, lending interest rate, unemployment rate, BOP, Central government debts, operating margin, deposits, loan to assets, debt to equity, capital adequacy, loans to deposits and assets size as independent variables. Inflation, Balance of payments, Central government debts, operating margin, loans, equity debt, and capital adequacy variables were positively correlated with both ROA and ROE while the rest of the variables indicated a mixed effect under two regression models. Many existing studies on Banks profitability have focused either on Bank specific or macroeconomic variables but this study focused on both bank specific as well as macroeconomic factors giving equal weight for both factors as well as extending existing literature by including variables such as central government debts and BOP.