Abstract:
Financial sector plays a pivotal role in the economic development. It is generally
agreed that a strong and healthy banking system is a prerequisite for sustainable
economic growth. Banks in Sri Lanka have been undergoing major challenges in
the dynamic environment over the past few years. In order to resist negative shocks
and maintain financial stability, it is important to identify the determinants that
mostly influence the overall performance of banks in Sri Lanka. This study aims to
give the analysis of the determinants of commercial banks profitability in Sri Lanka
over the period 2001-2010. The focus is on the internal factors only. This paper
uses the multiple regression analysis method to investigate the impact of capital
ratio, credit risk, activity mix, size and overhead expense on profitability indicator
return on asset(ROA).
The empirical results have found strong evidence that the severable have a strong
Influence on the profitability. However, there sults show the higher capital ratio may not
necessarily lead to higher profits. Also higher assets contribute towards profitability,
credit risk is strongly negative with profitability, when bank of Ceylon invest their
capital in diverse options it could earn more profit because of activity mix has a
positive relationship with profitability, and finally overhead expenses weakly
negative relationship with profitability. This is indicating bank expenses are
efficiently allocated to earn much more profit. Most of the situations about
overhead expenses are going to heavy negative relationship with profitability, by
wastage of expenses. Buthere researcher significant finding is overhead expenses
has weakly negative relationship with profitability. But here when we seeing as a
whole there are none of the variable statistically significant with profitability.
Key words: activity mix, capital ratio, credit risk, overhead expense, return on
assets, size
