THE IMPACT OF THE NUMBER OF DIRECTORS ON THE BOARD AND THE NUMBER OF INDEPENDENT DIRECTORS ON THE BOARD ON THE FINANCIAL PERFORMANCE OF LICENSED COMMERCIAL BANKS IN SRI LANKA

Abstract

The Banking Act No. 30 of 1988 in Sri Lanka delineates two primary categories within the banking sector: Licensed Commercial Banks (LCBs) and Licensed Specialized Banks (LSBs). LCBs hold a paramount position, wielding the largest market share of financial system assets and exerting a dominant influence over the industry. Consequently, the stability and effectiveness of LCBs significantly influence the overall health of the Sri Lankan financial system. To ensure sound governance within these pivotal financial institutions, the Central Bank of Sri Lanka (CBSL) introduced Banking Act Direction No. 11 in 2007, establishing specific minimum standards for corporate governance. Section 3(2) of this directive outlines the requisite board composition standards. This paper seeks to delve into whether the number of directors on the board and the number of independent directors on the board has an impact on the financial performance of Licensed Commercial Banks in Sri Lanka. The financial performance of the LCBs was measured using “Return of Assets” and “Return on Equity”. This study concludes that the number of directors on the board and the number of independent directors on the board has a strong positive relationship with the financial performance of LCBs.