Abstract:
Many small financial institutions (SFIs) in developing countries make great effort to provide efficient services to
poor house holders. It is generally accepted that maintaining the best financial practices which are of importance
in corporate governance mechanism of institutions, has a close relationship with the efficiency of financial
institutions, although they are small. This paper seeks to test best financial practices of cooperative rural banks
in Sri Lanka (CRBs) and whether these practices have a significant impact on the efficiency of these institutions.
The financial practices of CRBs was assessed using ratios of capital adequacy, liquidity, asset quality, loan to
deposit, profitability, loan portfolio yield, operational efficiency, and operational self-sufficiency. The efficiency
of CRBs in Sri Lanka was examined by using Data Envelopment Analysis (DEA). Based on the data extracted
from CRBs’ financial statements, correlation coefficients showed that several ratios have significant
associations with the efficiency of CRBs. This confirms that efficient CRBs maintain best financial practices
which contribute to their higher levels of efficiency.
