Macroeconomic Variables and Banking Sector Performance in Sri Lanka

This paper aims to evaluate the effect of selected macroeconomic variables on banking sector performance in Sri Lanka while using ARDL co-integration technique and Granger causality approach. According to study results, in the long run, model 1 shows all explanatory variables have a negative and significant impact on ROE Model 2 shows IR and LER have a positive and significant effect on IM and RR has a negative impact on IM. For model 2 in the short run, the current year's interest rate negatively impacts and the Current year's GDP growth positively impacts IM. It should be carefully controlled by both fiscal and monetary phenomena in Sri Lanka. Because it is needed favorable macroeconomic environment to boost the banking sector as well as the financial market in a country.