Abstract:
In Sri Lanka, the formal rural financial sector comprises a large number of small financial institutions (SFIs).
Among SFIs, cooperative rural banks (CRBs) play an important role in meeting the rural credit needs in rural
sector in Sri Lanka. CRBs have gained an increasing share of financial assets, which has been particularly
helpful for satisfying the growing demand for loans and advances in poor people in the country. However,
performance of SFIs in Sri Lanka is less than satisfactory and highly criticised today. Poor performance has
been attributed to poor management of assets and consequently, the sustainability of these institutions is
uncertain. Moreover, an attention to the efficiency of SFIs in Sri Lanka is more concern to the general public
given collapses of several formal and informal SFIs. Hence, aim of this study is to evaluate the overall
efficiency of SFIs in Sri Lanka by taking all CRBs operate in Sri Lanka. CRBs established in 1964 and end of
2010 there are 1,933 branches operate in all 25 districts of the country. Data envelopment analysis (DEA) is
used to measure efficiency. The study found that the efficiency of CRBs in Sri Lanka have declined during the
study period of 2005 to 2010. Further found that there were significant differences in the efficiency of CRBs by
geographical locations and the efficient banks are closely associated with size of the Banks. The findings of this
study may convince industry decision makers to establish more comprehensive policy settings for promoting
particularly, CRBs activities, and overall all SFIs in Sri Lanka’s rural financial sector.
