Abstract:
The objective of this study was to examine the impact of interest rates fluctuations
on the financial performance of companies in financial sector in Sri Lanka. The
study was conducted among sixty five listed companies representing banking,
insurance and finance industries with a reference period of past forty quarters of
the years ranging from 2008 to 2017. Average Weighted Deposit Rate,Average
Weighted Lending Rate, Sri Lanka Inter Bank Offer Rate, and Treasury Bill Rate
were assumed as independent variables and the financial performance of companies
was assumed as dependent variable in the model of the study. All the above interest
rates were obtained from Central Bank records for the above forty quarters. The
financial performance of the companies was measured with industrial averaged
ratios of Return on Assets and Return on Equity for the above corresponding
reference period. The Pearson Correlation and multiple regression analyses were
applied using latest version of the Statistical Package for Social Sciences to find
any significant linear and functional relationship between the assumed independent
and dependent variables. The output of the correlation analysis indicated that a
statistically significant positive relationship exists between three types of interest
rates (Average Weighted Lending Rate, Sri Lanka Interbank Offer Rate, and Treasury
Bill Rate) and the indicators of financial performance (Return on Assets and Return
on Equity) with the positive correlation coefficients of 0.439, 0.491, 0.619, 0.581,
0.513, and 0.581 respectively. The results of multiple regression analysis revealed
a significant impact of interest rate fluctuations on financial performance with the
coefficients of determination (R Square) of 0.455 with Return on Assets, and 0.477
with Return on Equity. Hence, it was concluded that the interest rates fluctuations
related to the Average Weighted Deposit Rate and the Average Weighted Lending
Rate are recognized as the factors having significant influence on determining
the financial performance of companies as measured by the Return Equity in the
financial sector consisting of banking, financing, and insurance industries in Sri
Lankawhile the major portion of variations in their financial performance might
be explained by other non-interests related factors.
