Efficiency and Productivity in Sri Lanka's Banking Sector
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University of Wollongong Research Online University of Wollongong Thesis Collection 1954-2016 University of Wollongong Thesis Collections 2016 Efficiency and oductivitypr in Sri Lanka’s banking sector: Evidence from the post-conflict era Bolanda Hewa Thilakaweera University of Wollongong Follow this and additional works at: https://ro.uow.edu.au/theses University of Wollongong Copyright Warning You may print or download ONE copy of this document for the purpose of your own research or study. The University does not authorise you to copy, communicate or otherwise make available electronically to any other person any copyright material contained on this site. You are reminded of the following: This work is copyright. Apart from any use permitted under the Copyright Act 1968, no part of this work may be reproduced by any process, nor may any other exclusive right be exercised, without the permission of the author. 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Recommended Citation Thilakaweera, Bolanda Hewa, Efficiency and oductivitypr in Sri Lanka’s banking sector: Evidence from the post-conflict era, Doctor of Philosophy thesis, School of Accounting, Economics and Finance, University of Wollongong, 2016. https://ro.uow.edu.au/theses/4938 Research Online is the open access institutional repository for the University of Wollongong. For further information contact the UOW Library: [email protected] School of Accounting, Economics and Finance Efficiency and productivity in Sri Lanka’s banking sector: Evidence from the post-conflict era Bolanda Hewa Thilakaweera BSc (Hons)(Colombo) MA (Colombo) MSc (UQ) This thesis is submitted to the University of Wollongong, in partial fulfilment of the requirements for the award of the Degree of Doctor of Philosophy 2016 CERTIFICATION I, Bolanda Hewa Thilakaweera, declare that this thesis, submitted in partial fulfilment of the requirement for the award of Doctor of Philosophy, in the School of Accounting, Economics and Finance, University of Wollongong, is wholly my own work unless otherwise referenced or acknowledged. The document has not been submitted for qualifications at any other academic institution. Bolanda Hewa Thilakaweera i ABSTRACT After the end of the 26-year armed conflict between the Sri Lankan government and the ethnic Tamil rebels in 2009, Sri Lanka experienced a favourable macroeconomic environment with an improvement in security conditions, resettlement and the revival of economic activities in the Northern and Eastern regions of the country. The banking sector also recorded significant expansion with respect to the volume of transactions as well as geographical dispersion of banking services during this period, stimulated by the overall economic growth. The aim of this thesis is to conduct a thorough analysis of the technical efficiency and productivity of the Sri Lankan banking sector encompassing the period of post-conflict economic expansion beginning in 2009. To achieve this aim the thesis focuses on five main areas. First, it compares banking sector efficiency in the periods immediately before and after the end of the armed conflict in Sri Lanka. Second, it compares the efficiency of three mutually exclusive bank groups, namely foreign commercial banks, domestic commercial banks and domestic specialised banks. Third, it evaluates the potential determinants of banking sector efficiency, including the contribution of branch network expansion and the geographical dispersion of branches. Fourth, it evaluates productivity changes across the two periods (before and after the end of the armed conflict) for the three abovementioned banking groups. Fifth, it analyses disparities in banking sector efficiency across the nine regions of Sri Lanka, and the contribution of socio-economic factors to their efficiency. Deviating from the use of conventional averages of efficiency scores in comparing performance, this study uses aggregate efficiency measures introduced by Färe and Zelenyuk (2003) to compare banking sector performance before and after the end of the i armed conflict, across the different groups of banks and between the nine regions in Sri Lanka. Further to the aggregate efficiency measures, the Li test, adapted by Simar and Zelenyuk (2006) in the context of the efficiency and meta-technology technique introduced by O’Donnell et al. (2008), are also utilised in this study to compare banking performance before and after the end of the armed conflict and between the different bank groups. The Li test and meta-technology technique are new to the literature on banking efficiency and are ideal methodologies for use in comparing the performances of the banking industry over the time periods highlighted and for comparing the performances of bank groups. The semi-parametric double bootstrap regression analysis employed for evaluating the determinants of banking efficiency at the national level and regional level are also among the latest methods used in the literature. Productivity before and after the end of the armed conflict and across the different groups of banks are measured using the Global Malmquist Index (GMPI). The GMPI enables comprehensive comparisons of banking productivity to be made. The empirical analysis presented reveals an improvement in the efficiency of the Sri Lankan banking industry in the post-conflict era compared to the period before the end of the armed conflict with respect to both intermediation services and profit-oriented operations. In line with the findings of the efficiency analysis, the meta-technology analysis also reveals an improvement in the technology set of the banking industry in the favourable economic environment prevailing in the post-conflict era. Productivity of the banks with respect to intermediation services improved during the post-conflict era mainly due to technological improvement, while a marginal increase in productivity was found for profit-oriented operations. In a comparison of the performances of groups of banks, domestic banks recorded higher efficiency in intermediation while foreign banks ii outperformed the other bank groups with respect to profit-oriented operations, reflecting their focus on profitability. Foreign banks recorded a higher technology set in both intermediation and profit-oriented operations, confirming the higher technology use by foreign banks as asserted in the mainstream literature. Further, the productivity increase in intermediation was mainly driven by technology changes in domestic bank groups during the post-conflict era in line with improvements in the macroeconomic environment. A semi-parametric truncated regression analysis confirmed the absence of a relationship between expansions in branch networks and the efficiency of the banks, suggesting the possible use of branch expansion as a policy tool to achieve balanced regional growth. Regional level analysis also revealed significantly higher efficiency in bank groups in the Western region when output was measured with respect to the volume of advances and deposits, reflecting higher demand and opportunities for banks in the rich Western region. Further, the study revealed closer correlations between bank efficiency and socio-economic conditions when output was measured in terms of the number of advances and deposits, indicating the importance of socio-economic variables in formulating regional level policies for improving banking sector efficiency. This study has made four significant contributions to the efficiency and productivity literature. First, it contributes to the literature by assessing bank efficiency and productivity dynamics when a banking sector expands in terms of credit, the number of branches and geographical dispersion during a post-conflict period, with specific reference to the emerging market of Sri Lanka. Second, Simar and Zelenyuk’s aggregate efficiency measures have been applied in this study for the first time to compare sectors of the banking industry across two periods of time, thereby providing a comprehensive assessment of the post-conflict performance of the banking sector in Sri Lanka. A new iii framework for banking studies to use in assessing industry-level efficiency across two time periods is provided by this methodology, which accounts for bank size when comparing the banking industry over time. Third, this study is among a limited number of studies which explore the expansion-efficiency nexus in the banking sector, particularly in the context of a developing country incorporating growth in branch networks and the geographical dispersion of branches. Fourth, the study also introduces a new approach to compare regional level banking performance by employing an aggregate efficiency technique which is an ideal framework for tracking disparities in regional level banking. iv LIST OF CANDIDATURE’S PUBLICATIONS, PRESENTATIONS AND AWARDS Thilakaweera, B, Harvie, C & Arjomandi, A 2016, ‘Branch expansion and banking efficiency