Impact of bank size on bank profitability: using four licensed commercial banks in Sri Lanka

Abstract

Introduction

The banking sector, in all countries, has an important effect on economic measures due to the essential role played by banks for improvements in overall economic activity necessary for economic growth (Monnin and Jokipii 2010). Today, the sector is moving towards integrated financial services. One of the main goals of a bank is to make profits. Only a profitable banking sector can contribute to the stability of the financial system. As such, an understanding of factors that affect bank profitability is very important for banks themselves. In the existing literature, bank size has been considered as a fundamental variable in explaining bank profitability by various researchers. Size of a business means the ability it possesses and the variety and production capacity or the quantity and multiplicity of services the business can be offer to its customers.

Previous studies examining this relationship have yielded mixed results. Correlation analysis of Velnampy and Nimalathasan (2010) showed a positive relationship between bank size and profitability in Commercial Bank of Ceylon Ltd, but there is no relationship between bank size and profitability in Bank of Ceylon. Aladwan (2015), Ani et al. (2012) and Sufian and Habibullah (2009) have found a negative relationship. Therefore, it is very essential to address the following research question which is “What is the impact of bank size on bank profitability in Sri Lanka?” Given this background, the present study investigates the impact of bank size on bank profitability in Sri Lanka, using four LCBs namely Bank of Ceylon, Peoples Bank, Sampath Bank and Hatton National Bank over the period 1998 to 2017.