Abstract:
The objective of the study is to examine the impact of credit risk and bank-specific
factors on the financial performance of licensed banks in Sri Lanka during the
period of seven years (2015 - 2021). In the empirical investigation, return on assets
and return on equity are used to measure financial performance while non-
performing loans and capital adequacy are proxies for credit risk. Cost efficiency,
average lending, loan-to-deposit ratio, and bank size are considered bank-specific
factors. Seventeen licensed commercial banks and five licensed specialized banks
are taken as samples of this study, and data is collected from annual reports of
licensed banks in Sri Lanka during the period from 2015 to 2021. Panel data
regression analysis is employed to examine the hypotheses. Results of the study
revealed that non-performing loans have a negative impact on banks’ financial
performance in terms of return on assets of licensed banks whereas average lending
has a positive impact on banks’ financial performance in terms of return on assets.
Other variables such as capital adequacy, cost efficiency, loan-to-deposit ratio, and
bank size have not shown any significant impact on the financial performance of
licensed banks. The output of the study may be useful to the bank lending unit’s
decision-makers, investors, and economic policymakers of the country. The Banks
should seek mechanisms to improve their risk management capacity efficiency and
quality lending to remain competitive in the market.
