The Impact of Macroeconomic Factors on the Profitability of Commercial Banks on Sri Lanka

A country’s banking sector has a significant impact on economic development because banks play a critical role in enhancing the overall economic activities, which are critical for any country’s economic development. Thus, the research problem of the study was to determine to what extent selected macroeconomic variables affect bank profitability, which was focused on Sri Lankan domestic LCBs.Data for the study were collected from 11 licensed commercial banks from 2012 to 2020 Q-2, with secondary data derived from the audited financial statements of the selected domestic licensed commercial banks and Central Bank and DCS. This study’s explanatory variables were GDP Growth Rate, Inflation Rate, and Interest Rate. Return on assets was used as a dependent variable to assess the profitability. The data was analyzed with SPSS software version 20 and presented in graphs and frequency tables. Secondary data on annual bank performance was obtained from individual banks’ annual financial reports, while data on macroeconomic variables was obtained from both the Central Bank of Sri Lanka and the Department of Census and Statistics Sri Lanka, and was analyzed using Pearson Multiple Linear Regressions. The study’s findings revealed a strong (R=0.821) relationship between macroeconomic variables and commercial bank profitability. In addition, the study found an adjusted R-squared value of 0.674. This means that macroeconomic variables account for 67.4% of the total variance in profitability in Sri Lanka’s commercial banking sector. The regression model was ideal, according to ANOVA statistics, because it had a significance level of <5%. The study also discovered that macroeconomic factors such as GDP growth rate had a positive and significant impact, whereas inflation had a negative moderate correlation and interest rate had a positive weak relationship on domestic commercial bank profitability. The study recommends that Sri Lankan government, CBSL, and policymakers should reform policy decisions in order to increase the contribution of all three sectors of agriculture, industry, and services in a planned manner in order to develop a number of economic stimulus plans to increase the country’s GDP and to maintain low inflation in order to promote greater economic growth, as this will increase the profitability of the banking industry.