Determinants of Financial Sustainability of Financial Intermediaries
Evidence from Sri Lanka
Keywords:bank stability, financial sustainability, bank efficiency, credit growth, Z-score, banking sector, Sri Lanka
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 GLS panel 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.
Demirguç-Kunt, A. and Detragiache, E. (1998), “Financial liberalization and financial Fragility”, Working paper No 98/83, International Monetary Fund, Washington
Berger, A.N., Klapper, L.F. and Turk-Ariss, R. (2008), “Bank Competition and Financial Stability”, Working Paper No. 4696, Policy Research Working paper series, World Bank.
Liyanagamage, C. (2015), “Financial stability in a moderately competitive banking market: evidence from the Sri Lankan banking sector”, Kelaniya Journal of Management, Vol 4, No. 1, pp. 1-30.
Liynagamage, C. (2018), “Efficiency, Stability and Optimum Level of Bank Competition for Sustainable Development”, OIDA International Journal of Sustainable Development, Vol. 11 No. 09 pp 69-80.
Diamond, D.W., and Rajan, R.G. (2009), “The credit crisis: Conjectures about causes and remedies”. American Economic Review, Vol. 99 No.2, pp. 606-10.
Gomez, F. (2015), “Failed bank takeovers and financial stability”, Journal of Financial Stability, Vol. 16 pp. 45-58.
Boyd, J. H. and De Nicolo, G. (2005), “The theory of bank risk taking and competition revisited”, Journal of Finance, Vol. 60 No. 1, pp. 1329-1343.
Fell, J. and Schinasi, G. (2005), “Assessing Financial Stability: Exploring the Boundaries of Analysis”, National Institute Economic Review, Vol. 192 No. 1, pp.
Panzar, J. and Rosse, J. (1982), “Structure, conduct and comparative statistics”, Economic Discussion Paper, Bell Laboratories.
Van and Van den End, J.W. (2006), “Indicator and Boundaries of Financial Stability”, Working Paper No. 97, DNB, March. 2006.
Schaeck. K. and Cihak, M. (2008), “How does competition affect efficiency and soundness in banking?” Working paper no. 932, European Central Bank.
Petersen, M. and Rajan, R. (1995), “The effect of credit market competition on lending relationship”, Quarterly Journal of Economics, Vol 110 No.2, pp. 407-443.
Broecker, T. (1990), “Credit-worthiness Tests and Interbank Competition”. Econometrica, Vol. 58 No. 2, pp. 429-52
Sharp, S. (1990), “Assymetric Information, Bank Lending, and Implicit Contracts: A Theoretical Model of Customer Relationship”, Journal of Finance, Vol. 45 No. 4, pp.
How to Cite
Copyright (c) 2021 International Journal of Finance & Banking Studies (2147-4486)
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
Authors contributing to IJFBS agree to publish their articles under the Creative Commons Attribution- 4.0 NC license, allowing third parties to share their work (copy, distribute, transmit) and to adapt it, under the condition that the authors are given credit, that the work is not used for commercial purposes, and that in the event of reuse or distribution, the terms of this license are made clear. Authors retain copyright of their work, with first publication rights granted to IJFBS. However, authors are required to transfer copyrights associated with commercial use to the Publisher. The authors agree to the terms of this Copyright Notice, which will apply to this submission if and when it is published by this journal
Submission of an article implies that the work described has not been published previously( exceptin the form of an abstract or as part of a published lecture or academic thesis), that it is not under consideration for publication elsewhere, that its publication is approved by all authors and tacitly or explicitly by the responsible authorities where the work was carried out, and that, if accepted, it will not be published elsewhere in the same form, in English or in any other languages, without the written consent of the Publisher. The Editors reserve the right to edit or otherwise alter all contributions, but authors will receive proofs for approval before publication