Capital Adequacy and Performance: A study of Licensed Commercial Banks in Sri Lanka

Abstract

Banks and financial institutions are special components of a healthy and wealthy financial system of the country. Banks are generally subject to minimum capital requirements based on an international set of capital standards, known as the Basel Accords. Therefore the present study an attempt to analysis the capital adequacy and performance of Licensed Commercial Banks (LCB) in Sri Lanka. For the study purpose all LCB’s data were drawn for the period of 1998 to 2016. In the light of the findings of this study, the study concludes that, the casual relationship between capital adequacy and performance of licensed commercial banks is statistically insignificant. This implies that performance in terms of return on assets is not majorly influenced by capital adequacy. It means that the various efforts by the monetary authority to review often times the capital base of the banking sector to maintain the sound capital base. Further, the study is in line with the Buffer Theory of capital adequacy which explains the reason why some of these banks in spite of their huge capital base run at loss. Functionally, adequate capital is regarded as the amount of capital that can effectively discharge the primary function of preventing bank failures by absorbing losses.