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Political Instability, Civil War and Cost Efficiency of Banking Firms: A Case Study in Sri Lanka*

Political Instability, Civil War and Cost Efficiency of Banking Firms: A Case Study in Sri Lanka* This paper investigates the effects of political instability resulting from successive regime changes and the 30‐year civil war on the cost efficiency of local banks in Sri Lanka. A translog cost function was used to estimate bank cost efficiency, and a multivariate regression model was used to investigate the determinants of bank cost inefficiency. On average, the cost efficiency of banks in Sri Lanka during the study period was relatively high. Sri Lankan banks performed more efficiently during the second political regime (2001–2004), which had more liberal political and economic policies to promote the private sector compared with other regimes. During this period, the government was involved in peace talks, leading to a ceasefire agreement that temporarily stopped the violence. Furthermore, the positive coefficients for the dummy variables representing the third and fourth political regimes showed that more restrictive economic policies can increase bank cost inefficiencies. The results also indicate that immediately following the civil war, Sri Lankan banks recorded a decline in cost efficiency. Cost inefficiency was positively associated with banks' risk aversion, credit risk, market share, interest rate risk and increase in GDP and negatively associated with non‐earning assets, liquidity, bank size and concentration. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Asian Economic Journal Wiley

Political Instability, Civil War and Cost Efficiency of Banking Firms: A Case Study in Sri Lanka*

Seelanatha, Lalith
Asian Economic Journal , Volume 35 (3) – Sep 1, 2021
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References (22)

Publisher
Wiley
Copyright
© 2021 East Asian Economic Association and John Wiley & Sons Australia, Ltd.
ISSN
1351-3958
eISSN
1467-8381
DOI
10.1111/asej.12250
Publisher site
See Article on Publisher Site

Abstract

This paper investigates the effects of political instability resulting from successive regime changes and the 30‐year civil war on the cost efficiency of local banks in Sri Lanka. A translog cost function was used to estimate bank cost efficiency, and a multivariate regression model was used to investigate the determinants of bank cost inefficiency. On average, the cost efficiency of banks in Sri Lanka during the study period was relatively high. Sri Lankan banks performed more efficiently during the second political regime (2001–2004), which had more liberal political and economic policies to promote the private sector compared with other regimes. During this period, the government was involved in peace talks, leading to a ceasefire agreement that temporarily stopped the violence. Furthermore, the positive coefficients for the dummy variables representing the third and fourth political regimes showed that more restrictive economic policies can increase bank cost inefficiencies. The results also indicate that immediately following the civil war, Sri Lankan banks recorded a decline in cost efficiency. Cost inefficiency was positively associated with banks' risk aversion, credit risk, market share, interest rate risk and increase in GDP and negatively associated with non‐earning assets, liquidity, bank size and concentration.

Journal

Asian Economic Journal – Wiley

Published: Sep 1, 2021

Keywords: banks

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