Impact of Risk Management on the Profitability of Licensed Commercial Banks in Sri Lanka

In today's rapidly evolving financial environment, banks face many risks that can significantly affect their profitability and overall stability. Effective risk management has emerged as a critical factor in maintaining a bank's long-term success and competitive advantage. To overcome these challenges and improve the performance of commercial banks, it is necessary to investigate the factors that influence their operations. The purpose of this study is to analyze the impact of risk management on the performance of commercial banks in Sri Lanka, using return on assets and net interest margin as proxies. The study looks at different aspects of risk management, such as credit risk, liquidity risk, bank capital, and operational risk as well as how they affect a bank's profitability. Panel regression analysis is used in the study to investigate the impact of risk management on commercial banks in Sri Lanka. The study included 10 Sri Lankan commercial Banks listed in the Colombo Stock Exchange (CSE). According to the study's findings, credit risk, bank capital, operational risk had a statistically significant impact on Return on Assets (ROA) and operational risk had a statistically significant impact on Net Interest Margin (NIM). The result highlights that the overall models are statistically significant. The study found that there is a strong impact of risk management on the financial performance of commercial banks in Sri Lanka. The study also established that credit risk management and operational risk management had a strong relationship with financial performance (ROA and NIM). This study concludes that the ROA model can be used as a best-fit proxy for risk management when measuring financial performance.