A COMPARATIVE ANALYSIS OF ACCOUNTING AND
FINANCIAL PRACTICES ASSOCIATED WITH
EFFICIENCY OF
COOPERATIVE RURAL BANKS IN SRI LANKA
A dissertation submitted by
Ariyarathna Jayamaha
B.Com (HONS), MCom, ACA
Fer the award of
Doctor of Philosophy
‘School of Accounting, Economics and Finance
University of Southern Queensland
Toowoomba
AUSTRALIA
2010ABSTRACT
In Sri Lanka, the formal rural financial sector comprises a large number of small
financial institutions (SFls) that are highly criticised for weak performance. The
weak performance has been attributed to poor governance. Consequently, the
sustainability of these institutions is uncertain. This uncertainty adversely affects,
economic growth as investment in agriculture and small enterprises by poor rural
households relies on the provision of microfinance services. Hence, the Sri
Lankan Government and Central Bank of Sri Lanka have implemented legislation
to strengthen SFIs. Further. attention to the efficiency of SFIs in Sri Lanka is of
concern to the general public given the recent malpractice-related collapses of
several formal and informal financial institutions.
‘The cooperative rural banks (CRBs) in Sri Lanka provide a comprehensive
network throughout the country and make a substantial contribution to rural credit
activities. As formal SFls, these CRBs have gained an increasing share of
financial assets, which has been particularly helpful for satisfying the growing
demand for loans and advances from people living in rural areas. This study aims
to evaluate the overall efficiency of CRBs in Sri Lanka. The study provides
evidence on the accounting practices and financial practices of CRBs and some
elements in the corporate governance mechanisms of financial institutions,
Data envelopment analysis (DEA) is used to measure efficiency. A comparative
analysis of the efficiency of CRBs operating in Sri Lanka is undertaken. Two
main approaches are used to evaluate efficiency. Input and output variables are
selected for the intermediation and asset approaches. The results from both
approaches show that relatively few CRBs operate efficiently. Further, the
efficiency of CRBs in Sri Lanka has declined during the study period. Variables
for CRBs specific characteristics are also tested for relationships with CRBs size.
The evaluation of accounting and financial practices reveals that most sample
CRBs deviate from the normative benchmarks. Many CRBs provide accounting
information only to fulfil legal requirements rather than with the objective of
uproviding information useful for decision-making purposes. With regards to
financial practices, performance relative to best practice is below the benchmarks
for most sample CRBS. In this context, the level of risk exposure of these CRBs is
very high. As a consequence, the possibility of failure to meet the going concern
criteria is raised, especially at a time when global financial crises are impacting all
financial institutions,
Analysis of the associations of efficiency with accounting and financial practices
shows that efficiency in intermediation is correlated with accounting practices and
indicators of sound financial practice (assets quality, loan portfolio yield,
operating efficiency and operating self-sufficiency). Further, efficiency in asset
transformation is associated with capi
I adequacy, loan portfolio yield and
operational self-sufficiency.
The findings of this study contribute to understanding the underlying problems for
efficiency in particular CRBs in Sri Lanka, Further, they can assist regulators with
the development of policies affecting the small financial institutions generally and
CRBs in particular.