The Impact of Bank-internal factors on Profitability of the Banking industry in Sri Lanka

Abstract

The financial industry in Sri Lanka started as a part of total economic growth and development. The profitability of the bank has become vital for financial stability. This study aims to examine how the bank-internal factors impact the profitability of the banking industry in Sri Lanka. Capital Adequacy Ratio (CAR), Tier 1 Capital Ratio (T1CR), Non-performing Loans to Total Loans and Advances (NPL_TO_TLA), Specific Provision Coverage Ratio (SPCR), Statutory Liquid Assets Ratio (SLAR), Borrowings to Total Assets Ratio (BTAR) and Foreign Currency Denominated Liabilities to Total Liabilities (FCDLTA) are considered as bank-internal factors. Return on Assets (ROA), Net Interest Income to Gross Income (NIIGI), and Efficiency Ratio (ER) are considered as profitability measures. The study used a quantitative research approach. Based on the data during the sample period from the year 2008 Quarter 1 to 2021 Quarter 3, the time-series data were collected from the website of the Central Bank of Sri Lanka (CBSL). The results revealed that CAR, T1CR, and NPL_TO_TLA have contributed significantly to the profitability of commercial banks as measured by ROA and NIIGI. NPL_TO_TLA has contributed significantly to the profitability as measured by ER. SLAR, BTAR, and FCDLTA exposed the statistically insignificant impact on profitability. Findings will be useful to the financial institutions, policymakers, and future researchers regarding bank-internal factors and their impact on profitability.