BIMTECH Business Perspectives

The Role of Bank Lending in Driving Economic Growth: Evidence from Sri Lanka

Ravinthirakumaran Navaratnam¹ and Sasikala Weerasinghe²

First Published 21 Nov 2025. https://doi.org/10.1177/25819542251379960

Article Information

Volume 6, Issue 2 December 2025

Corresponding Author:

Ravinthirakumaran Navaratnam, Department of Business Economics, University of Vavuniya, Northern Province 43000, Sri Lanka.
Email: navaraviecon@vau.ac.lk

¹ Department of Business Economics, University of Vavuniya, Northern Province, Sri Lanka

² Independent Researcher, Vavuniya, Northern Province, Sri Lanka

Creative Commons Non Commercial CC BY-NC: This article is distributed under the terms of the Creative Commons Attribution-NonCommercial 4.0 License (http://www.creativecommons.org/licenses/by-nc/4.0/) which permits non-Commercial use, reproduction and distribution of the work without further permission provided the original work is attributed.

Abstract

This study investigates the role of bank lending in fostering economic growth in Sri Lanka over the period 1991–2023. As a critical financial intermediary, bank lending facilitates the allocation of capital toward productive investment and economic development. Despite its importance, empirical evidence on the causal impact of bank credit on Sri Lanka’s economic performance remains limited. Using the Autoregressive Distributed Lag (ARDL) Bounds Testing approach, the study examines the short-run and long-run dynamics between Gross Domestic Product (GDP) growth and key financial and macroeconomic variables, including bank lending rates (BLR), private-sector credit, credit-deposit ratio (CDR), inflation (INF), labour force participation, trade openness, and gross capital formation. The findings reveal that credit to the private sector (CPS) unidirectionally drives GDP growth (GDPG), while the reverse relationship is not significant, confirming that bank lending is a key driver of economic expansion rather than merely responding to growth. Other variables, such as trade openness, the CDR, and labour force participation, exhibit bidirectional causality with GDP, highlighting complex feedback mechanisms within the economy. These results underscore the importance of enhancing access to credit and improving the efficiency of lending mechanisms. The study concludes with policy recommendations aimed at reinforcing the banking sector’s role in promoting sustainable and inclusive economic growth in Sri Lanka.

Keywords

ARDL bound test, bank lending, economic growth, private-sector credit, Sri Lanka

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