Abstract:
Banking system takes a major part to provide better financial services to the people in
a country. Aim of this study is to examine what extent bank internal factors impact on
profitability of commercial banks in Sri Lanka. Capital adequacy, Operating cost
efficiency, Non-performing loans, Bank size, Liquidity, Assets Quality and
Managerial efficiency are considered as bank internal factors while Return on assets
is considered as profitability measure of this study. Panel data has been collected
from published financial statement of nine commercial banks listed on Colombo Stock
Exchange (CSE) for the period of ten years from 2006 to 2015. Fixed effect and
random effect models are performed to investigate the best model to evaluate the
impact of bank internal factors on profitability. Results of the study reveal that
random effect model is the best model using Hausman specification test. As per the
random effect model, capital adequacy has positive and significant impact on
profitability while non-performing loan and operating cost efficiency have negative
and significant influence on profitability. Rest of the selected variables such as bank
size, liquidity, assets quality and managerial efficiency don't have any significant
impact on profitability of commercial banks in Sri Lanka. The finding of this study
provides information to present and future investors for making best decision on which
internal factors should be well analyzed when they make investment on banking sector
in Sri Lanka.
