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Determinants of Financial Sustainability of Financial Intermediaries: Evidence from Sri Lanka

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  • Champika Liyanagamage

    (Department of Accounting and Finance, The Open University of Sri Lanka)

Abstract

This paper provides interesting insights into the practices of banks and institutional setting in Sri Lanka. The sustainability and stability of banks that makes up an economy’s banking system should be sound at all time. This paper aimed at analyzing the determinants of banking sector stability in Sri Lanka. The study used a broad set of macro and bank level data covering 22 commercial banks for the period 1996-2016. The fixed effect GLSpanel data model tested in this paper sets the relationship between bank stability measure; Z-score and business environment which includes bank characteristics and the elements of macro environment. The analysis of the study revealed lower level of Z-scores and thus lower level of bank stability, indicating a higher risk associated with the commercial banking sector in Sri Lanka. From among the variables tested, strong evidence was found for a positive effect of bank efficiency on bank stability and a negative effect of credit growth on bank stability. At macro level, bank stability is promoted at a higher rate when the economy is more developed and stable. The results imply that efficiency of commercial banks needs to be further improved and regulatory and policy environment should be strengthened to manage the credit growth at the bank level. Further, it is suggestive to strengthening bank supervision and other financial infrastructure in order to ensure sustainability of the banking sector. Thus, the present paper contributes the current banking literature by unveiling the explicit and unforeseen economic implications associate with individual bank operations and macro imbalance which are particularly unique in underdeveloped countries.

Suggested Citation

  • Champika Liyanagamage, 2021. "Determinants of Financial Sustainability of Financial Intermediaries: Evidence from Sri Lanka," International Journal of Finance & Banking Studies, Center for the Strategic Studies in Business and Finance, vol. 10(1), pages 01-10, January.
    • Handle: RePEc:rbs:ijfbss:v:10:y:2021:i:1:p:01-10
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    References listed on IDEAS

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    2. Jan Willem van den End, 2006. "Indicator and boundaries of financial stability," DNB Working Papers 097, Netherlands Central Bank, Research Department.
    3. Mitchell A. Petersen & Raghuram G. Rajan, 1995. "The Effect of Credit Market Competition on Lending Relationships," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 110(2), pages 407-443.
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