Open AccessCredit Risk and Profitability of Banking Sector in Sri Lanka
Author(s) -
Herath Mudiyanselage Kasun Salitha Bandara,
A.L.M. Jameel,
Athambawa Haleem
Publication year - 2021
Publication title -
journal of economics, finance and accounting studies
Language(s) - English
Resource type - Journals
ISSN - 2709-0809
DOI - 10.32996/jefas.2021.3.1.6
Subject(s) - profitability index , return on assets , capital adequacy ratio , business , credit risk , loan , sri lanka , financial system , panel data , non performing loan , net interest margin , finance , economics , econometrics , incentive , socioeconomics , microeconomics , tanzania
This paper aims to investigate the impact of credit risk on the profitability of the banking sector in Sri Lanka. The profitability is measured with and Return on Assets. At the same time, credit risk is quantified with four indicators: Non-performing loan Ratio (NPLR), Loan to Deposit Ratio (LDR), Net Charge off Ratio (NCOR), and Capital Adequacy Ratio (CAR). Data from thirteen banks over eight years from 2010 to 2017 was analyzed using panel data regression analysis. The finding shows that the Profitability of the Banking Sector in Sri Lanka has been determined by important determinants such as credit risk. The study further finds that non-performing loans have negative and significant return on assets. However, the net charge-off ratio and the loan to deposit ratio are not important variables for expanding the bank's profitability. On the other hand, the CAR positively impacts returns on assets. The study suggested the need to strengthen the management of credit risk in order to preserve Sri Lankan banks' current profitability.