The Determinants of Net Interest Margins of Commercial Banks in Sri Lanka

Abstract

This paper investigates the impact of bank specific, industry specific and macro-economic variables on net interest margin of Sri Lankan commercial banks over the period of 1999-2011 within the dealership framework of Ho and Saunders (1981). We have found that the staff cost, capital cost, market power, inflation and T-Bill rate as positively influencing factors and management quality, statutory reserve requirement and GDP growth as negatively influencing factors on net interest margin. The study has further highlighted that there is no significant difference between the results of systematically important banks and whole sample banks with regard to the factors influencing net interest margin. Considering the prevailing high net interest margin, the findings imply that the management and policy makers need to focus on these factors to mitigate net interest margin in order for banks to act as important catalysts for higher economic growth in Sri Lanka