Is Inefficiency a Matter of Consolidation of Licensed Finance Companies in Sri Lanka?

Abstract

This paper investigates the efficiency of licensed finance companies in Sri Lanka by applying the non-parametric Data Envelopment Analysis method in view of the recent discussions on consolidation of financial institutions. Annual financial data of all the operating finance companies for the period of 2009–2013 was used for the study. The results revealed that the mean technical efficiency, pure technical efficiency and scale efficiency were in decreasing trend over the period of study in contrast to the increasing trend of number of finance companies. The efficiency scores indicate that the increasing trend of number of finance companies has reduced the mean efficiency scores. Further, it was revealed that finance companies in Sri Lanka operated in variable returns to scale rather than constant returns to scale during the period and there were scale inefficiencies. Size of an LFC is a matter of the efficiency since large three LFCs were efficient in terms of pure technical efficiency throughout the period. Therefore, proposed consolidation of financial institutions in Sri Lanka may improve the efficiency of combined financial institutions.