Does Comprehensive Banking Function Improve the Efficiency of Financial Institutions?; Case of Sri Lanka

This paper investigates the efficiency of major deposit taking financial institutions in Sri Lanka in terms of the involved level of banking activities during the period of 2009–2013. Data envelopment analysis was used to measure the efficiency of financial institutions with three inputs and three outputs. The results revealed that licensed commercial banks were more efficient over the licensed specialized banks and licensed finance companies. The results suggest that the level of banking activities is a matter of efficiency. Licensed commercial banks, which operate in a comprehensive banking function, show better efficiency scores over the other limited scope financial institutions. The efficiency scores revealed that financial institutions in Sri Lanka operate in variable returns to scale rather than constant returns to scale. Further, adoption of fair value based accounting standards has caused to decrease efficiency scores during the initial years of the adoption. This may be viewed as a mismatch of the value of input and output variables, which was arisen as a result of fair values.