Abstract:
It is an accepted truth that, a robust and vigorous banking system is a precondition for an economic growth
condition. Banks in Sri Lanka have been experiencing major challenges in the changing internal and external
environment over the past few decades. It has been focused to identify the determinants that influence the
profitability of Licensed Commercial Banks in Sri Lanka, in order to repel the adverse effects and to assure the
financial stability. This paper analyses the Bank specific and Macroeconomic determinants affecting the
profitability of Licensed Commercial Banks in Sri Lanka. This study uses GDP growth, Operating Efficiency,
Interest Rate, Bank Size and Liquidity ratio as the determinants of profitability while taking ROA as the
dimension of profitability. The findings reveal that Bank size and Operating efficiency and GDP growth rate
significantly affect the banks’ profitability when using ROA as the measure of profitability. In line with above
findings, financial stability can be achieved by increasing the banks’ liquidity and by being operationally
efficient. Nevertheless, Macro Economic factors were found to be insignificantly influencing the profitability
while Bank focused factors are highly influential for the profitability of the Licensed Commercial Banks in Sri
Lanka.
