Abstract:
Interest rate is one of the important elements in the lending decision process of
Commercial Banks. Commercial Banks are independent business entities that set
their own lending rates. The lending interest rate is the percentage of the loan
amount that the lender charges to lend money. The aim of this study is to
investigate the impact of lending interest rate of Commercial Banks in Sri Lanka.
The analysis of data was based on a sample of 28 Commercial Banks. The study
utilized secondary data which were collected from annual reports of Commercial
Banks in Sri Lanka over the period of 2014 to 2018. Models used in the study were:
pooled OLS model, fixed effects model and random effects model. This study has
used ‘profitability’ measured by return on assets and return on equity as dependent
variable, while the explanatory variable is lending interest rate. The study was
conducted by using the techniques of correlation and regression. The estimated
results reveal that lending interest rate has a significant positive impact on
profitability measured by return on assets (ROA). The management of Commercial
Banks also need to develop polices and investment sources that diversify income.
