2020•Journal of Economics and BusinessOpen access

Capital Adequacy Requirements and Profitability: An Empirical Study on Banking Industry in Sri Lanka

Larojan Chandrasegaran

Open full text 17 citations

Abstract

In Sri Lanka, capital adequacy requirements conforming to Basel III was implemented in June 2017. The Central Bank of Sri Lanka introduced the internal capital adequacy assessment process in 2013, which facilitated the introduction of Basel III. In this paper an attempt has been made to study the impact of capital adequacy requirements on profitability of banking industry in Sri Lanka. The main objectives of this study were to identify the relationship between the capital adequacy requirements and profitability and to examine the effect of capital adequacy requirements on profitability of banking industry in Sri Lanka. The study adopted a descriptive explanatory research design. Capital adequacy ratio, core capital ratio, asset quality, risk-weighted assets to total assets ratio, tier 1 capital to total assets were used as the proxies for the capital adequacy requirements. Non-interest income to average assets, net interest margin and return on assets were used as the proxies for the profitability. The results of the multiple regression analysis shown that capital adequacy ratio had a positive significant relationship with Non-interest income to average assets. Tier 1 capital to total assets had a negative significant relationship with Non-interest income to average assets. Asset quality had a negative significant relationship with net interest margin. Other factors had insignificant relationship with dependent variables.

Open-access reader

About this research paper

What this paper is about

In Sri Lanka, capital adequacy requirements conforming to Basel III was implemented in June 2017. The Central Bank of Sri Lanka introduced the internal capital adequacy assessment process in 2013, which facilitated the introduction of Basel III. In this paper an attempt has been made to study the impact of capital adequacy requirements on profitability of banking industry in Sri Lanka. The main objectives of this study were to identify the relationship between the capital adequacy requirements and profitability and to examine the effect of capital adequacy requirements on profitability of banking industry in Sri Lanka. The study adopted a descriptive explanatory research design. Capital adequacy ratio, core capital ratio, asset quality, risk-weighted assets to total assets ratio, tier 1 capital to total assets were used as the proxies for the capital adequacy requirements. Non-interest income to average assets, net interest margin and return on assets were used as the proxies for the profitability. The results of the multiple regression analysis shown that capital adequacy ratio had a positive significant relationship with Non-interest income to average assets. Tier 1 capital to total assets had a negative significant relationship with Non-interest income to average assets. Asset quality had a negative significant relationship with net interest margin. Other factors had insignificant relationship with dependent variables.

Why it matters

OpenAlex reports 17 citations for this work. Citation counts describe recorded attention and do not establish research quality.

Key contribution

A contribution statement is not available in the OpenAlex record.

Method / approach

Method details are not available in the OpenAlex metadata.

Main findings

Findings are not separately available in the OpenAlex metadata.

Limitations

Limitations are not available in the OpenAlex metadata.

Applications

Application details are not available in the OpenAlex metadata.

Available abstract

In Sri Lanka, capital adequacy requirements conforming to Basel III was implemented in June 2017. The Central Bank of Sri Lanka introduced the internal capital adequacy assessment process in 2013, which facilitated the introduction of Basel III. In this paper an attempt has been made to study the impact of capital adequacy requirements on profitability of banking industry in Sri Lanka. The main objectives of this study were to identify the relationship between the capital adequacy requirements and profitability and to examine the effect of capital adequacy requirements on profitability of banking industry in Sri Lanka. The study adopted a descriptive explanatory research design. Capital adequacy ratio, core capital ratio, asset quality, risk-weighted assets to total assets ratio, tier 1 capital to total assets were used as the proxies for the capital adequacy requirements. Non-interest income to average assets, net interest margin and return on assets were used as the proxies for the profitability. The results of the multiple regression analysis shown that capital adequacy ratio had a positive significant relationship with Non-interest income to average assets. Tier 1 capital to total assets had a negative significant relationship with Non-interest income to average assets. Asset quality had a negative significant relationship with net interest margin. Other factors had insignificant relationship with dependent variables.

Key concepts: Capital adequacy ratio, Net interest margin, Profitability index, Risk-adjusted return on capital, Capital requirement, Return on equity, Equity (law), Business

Related papers

Back to paper searchBrowse research topicsOriginal source
Capital Adequacy Requirements and Profitability: An Empirical Study on Banking Industry in Sri Lanka — Research Paper | ScholarLens