Abstract:
The Licensed Finance Companies (LFCs) sector plays a prominent role within
the financial system in Sri Lanka. LFCs are dealing with massive loan
portfolio in the country and credit risk is one of the most significant risks
which is faced by LFCs. The main purpose of the research is to investigate
impact of credit risk management on profitability of LFCs in Sri Lanka. In the
research model, Return On Assets (ROA) and Return On Equity (ROE) are
the indicators for Profitability of LFCs, and Gross Non- Performing Loans
(GNPL), Provision for Loss Facilities / Credit Facilities ratio (PLFCF), Total
Credit Interest/Credit Facilities ratio (TCICF), Credit Recovery Cost/Credit
Interest ratio (CRCCI), and Capital Adequacy Ratio (CAR) are indicators for
credit risk management. The research collected data from 30 LFCs in Sri
Lanka from 2011 to 2016 and formulated five hypotheses to achieve the
research objective. A series of statistical tests were performed in order to test
the impact of credit risk management on profitability of LFCs in Sri Lanka.
Results disclosed that there is a significant negative impact of the credit risk
indicators of GNPL and PLFCF on profitability of LFCs in Sri Lanka and
Overall findings revealed that there is significant impact of credit risk
management on profitability of LFCs in Sri Lanka. This finding indicates that
the better the credit risk management is, the higher the profitability to the LFCs
in Sri Lanka.
