Efficiency, Stability and Optimum Level of Bank Competition for Sustainable Development - A Study of Sri Lankan Banking Sector

12 Pages Posted: 19 Nov 2018

See all articles by H.D.D. Champika Liyanagamage

H.D.D. Champika Liyanagamage

Open University of Sri Lanka - Department of Management Studies

Date Written: September 30, 2018

Abstract

Traditional Industrial Organization models predict that restraining competitive forces should unequivocally produce welfare losses. However, recent empirical literature questions the conventional wisdom on the topic, and reveals that there is a trade-off between competition and stability of financial market when it focuses on a banking sector which supports sustainable development. This paper attempts to assess whether the current level of competition in the Sri Lankan banking sector is optimum as far as efficiency and stability of the banking sector are concerned. The sample covers a comprehensive set of panel data for the period from 1996 to 2013. Using bank level accounting data and applying Panzar-Rosse approach the study reveals that Sri Lankan banking sector is moderately competitive on average. Further, by using non parametric approach (Data Envelopment Curve analysis) study reveals a moderate level efficiency and as per Z- score high level of instability in the Sri Lankan banking sector. The results of the core analysis provide evidence for U shape relationships of bank competition with efficiency and stability in the Sri Lankan banking sector during the sample period. However the findings of the study do not point out a specific point as an optimum level of competition that should prevail in the banking sector. Rather, it supports to specify a minimum level of competition that should prevail in the Sri Lankan banking sector in order to support sustainable development of the economy by keeping the banking sector more efficient and financially stable. Hence, in conclusion a different approach emerges with underdeveloped countries giving a stronger role to competition authorities to understand the complex relationships between competition, efficiency and stability in the financial sector. Understanding these complexities particularly will help in developing strategies to achieve sustainable development of developing economies.

Keywords: banking sector; efficiency; optimum competition; stability; underdeveloped countries

Suggested Citation

Liyanagamage, H.D.D. Champika, Efficiency, Stability and Optimum Level of Bank Competition for Sustainable Development - A Study of Sri Lankan Banking Sector (September 30, 2018). OIDA International Journal of Sustainable Development, Vol. 11, No. 09, pp. 69-80, 2018, Available at SSRN: https://ssrn.com/abstract=3286906

H.D.D. Champika Liyanagamage (Contact Author)

Open University of Sri Lanka - Department of Management Studies ( email )

Colombo
Sri Lanka

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