EFFICIENCY OF THE LICENSED DOMESTIC COMMERCIAL BANKS IN SRI LANKA

Abstract

Banks have been making profits irrespective of the bank size or ownership. However, a question remains whether profits are made through increased efficiencies. A large gap exists in terms of published literature on the efficiency of Licensed Domestic Commercial Banks (LDCBs) in Sri Lanka, in which, this study intends to fill to some extent. Measuring the efficiency, Data Envelopment Analysis (DEA) is utilised with traditional ratio analysis. DEA model (input-oriented) used consists of two outputs, interest income and non-interest income and three inputs labour, capital and interest bearing liabilities. Traditional ratios used are Return on Equity, Return on Assets, Efficiency Ratio and Employee Cost Ratio. While profitability has increased over 2003-2007, no statistically significant relationship was found with efficiency. There were no significant differences between the efficiency levels of individual banks. However there were efficiency level differences between large and small banks, privately owned and government owned banks. LDCBs could improve their cost efficiency by 16% on average. Dominant source of cost inefficiency was allocative .No significantly high relationship was found between the DEA measurements and traditional ratios.

Key Words: Data Envelopment Analysis, Cost Efficiency

For full paper: fmscresearch@sjp.ac.lk