CREDIT RISK MANAGEMENT PRACTICES AND FINANCIAL PERFORMANCE: A COMPARISON BETWEEN LICENSED COMMERCIAL BANKS AND LICENSED FINANCE COMPANIES IN THE COLOMBO STOCK EXCHANGE

Sewwandi, M.D.D.¹ and Karunarathne, W.V.A.D.²

¹²Department of Accountancy, Faculty of Commerce & Management Studies, University of Kelaniya, Sri Lanka.

dilshara0620@gmail.com, anurawvadk@kln.ac.lk

DOI : 10.57075/jaf922204

 ABSTRACT

The stability of the financial performance of financial intermediaries is one of the key determinants of the sustainable development of any country in the current world. Licensed Commercial Banks (LCB) and Licensed Finance Companies (LFC) are the main financial intermediaries in Sri Lanka. Lending is one of the primary income-generating activities in financial intermediaries. The credit risk arises due to the failure of borrowers to repay the loans or meet their contractual obligations. Among different types of risks facing LCB and LFC, credit risk is considered a significant determinant of financial performance. Even though numerous prior studies were conducted to examine the impact of credit risk management on the financial performance of LCB and LFC individually, there were very rare studies available that compared the impact of credit risk management practices on the financial performance of LCB and the LFC in Sri Lanka in parallel. Hence, the study aims to fill this empirical gap by investigating the impact of credit risk management on the financial performance of LCB and LFC. Further, the study investigated the level of credit risk management practices of Sri Lankan LCB sector and LFC sector by employing the CAMEL rating method. The sample comprises 15 LCBs and 34 LFCs and the examined period is from 2014 to 2019. The panel regression model to estimate the model. Data was collected through published annual reports. Descriptive analysis, Correlation, and Regression analysis were performed using EViews Statistical software. Based on the lowest CAMEL composite ranking LFC is ranked as the best sector of credit risk management. The findings of the study revealed useful insights for investors to invest their funds more accurately and earn higher profits with low risk. Based on the regression analysis, the study concludes that asset quality and capital adequacy significantly influence the performance of both LCBs and LFCs.

Keywords: Credit Risk, CAMEL analysis, License Commercial Banks (LCBs), License Finance Companies (LFCs), Financial Performance.