Towards Increasing the Financial Performance: An Application of CAMEL Model in Banking Sector in the Context of Sri Lanka

Abstract

The main objective of this study was to evaluate comparative ability of financial performance of banks in Sri Lanka. For this purpose, a sample of banks consisting both private and public banks are selected. Data were gathered for ten years commencing from 2005. For evaluating the financial performance and comparison well known CAMEL model was used. All the CAMEL model parameters (capital adequacy, assets quality, management quality, earning quality, liquidity) were used as independent variables and as the indicators of financial performance return on equity (ROE) and return on assets (ROA) were considered as dependent variable. Descriptive, correlation and regression analysis were employed to test the hypotheses.  The study found that private banks are best in all parameters of CAMEL and financial performance. However, performances of public banks were less compared to the private banks. From the findings it can be revealed that capital adequacy, assets quality and earning quality were significantly correlated with financial performance, and management efficiency and liquidity were not significantly correlated with financial performance of the banks. Implications of findings and directions for future research also discussed.

Keywords: CAMEL model, capital, assets, efficiency, quality, liquidity.