Open AccessEffect of Inflation on Sri Lankan Banks’ Performance: Mediation Effect of Interest Income and Expenses
Author(s) -
B. W. C. M. Amarasena,
T. U. I. Peiris
Publication year - 2021
Publication title -
european journal of business and management research
Language(s) - English
Resource type - Journals
ISSN - 2507-1076
DOI - 10.24018/ejbmr.2021.6.3.896
Subject(s) - net interest income , interest rate , inflation (cosmology) , economics , robustness (evolution) , monetary economics , mediation , context (archaeology) , nominal interest rate , regression analysis , econometrics , real interest rate , statistics , mathematics , paleontology , biochemistry , chemistry , physics , biology , theoretical physics , political science , law , gene
This study hypothesizes that the inflationary effects on bank performance are not straightforward but mediates through interest income and expenditure. This hypothesis is tested in the Sri Lankan context, referring to 17 licensed banks from 2011 to 2019. Findings were obtained using the Seemingly Unrelated Regression (SURE) model, and the results were tested for robustness by applying Three-Stage Least Squares Regression (3SLS) model. Results indicated that interest expenses negatively significant as a mediator between inflation and banks’ performance. In contrast, the effect of interest income is positive. Therefore, a significantly negative overall effect can be expected because interest expenses are relatively more substantial than the influence of interest income on the banks' performance. Furthermore, although banks with excess savings can grant loans to the customers, customers are reluctant to gain the loans because they have to spend more interest in an inflationary situation.