The Relationship Between Credit Risk and Profitability with the Moderating Effect of Regulatory Compliance: Evidence from the Banking Sector of Sri Lanka
Year: 2026
Type: article
Abstract: This study aims to examine the relationship between credit risk and the profitability of banks in Sri Lanka, with a moderating effect on regulatory compliance. Using a quantitative approach, secondary data collected from audited annual report from 11 listed banks covering the period from 2014 to 2024 were analyzed. Credit Risk was measured through the Non-Performing Loan (NPLR) and Loan to Deposit Ratio (LDR), while Profitability was represented through Return on Assets (ROA). Regulatory Compliance was operationalized using the Compliance indicator aligned with Basel III guidance. Random Effects regression was used following the Husman Specification test. Regulatory compliance significantly moderates the NPLR & ROA and LDR & ROA relationship, reducing the negative impact of low credit quality and boosting the benefit of sound lending practices. This study provides empirical insight into how the Compliance Framework affects the Risk-return Dynamic in banks within emerging markets. The findings offer insights. for bank managers, Policymakers, and regulators to enhance credit risk practice and align compliance mechanisms to support stable and sustainable profitability.
Authors: K. P. Rathnaweera, W. T. N. M. Perera
Institution: University of Kelaniya
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: diamond
OpenAlex ID: W7225813337