Income Diversification on Human Capital and Banks Financial Performance: Evidence from Sri Lanka

Abstract

Existing empirical literature and theories on human capital fail to offer a conclusive explanation for its relationship with income diversification and bank financial performance. Consequently, this study fills the gap by investigating whether income diversification moderates the relationship between human capital and bank financial performance in Sri Lanka. This understanding of how income diversification influences the relationship between human capital and bank financial performance, benefits researchers, practitioners, and policymakers alike. This study employs a deductive research approach and quantitative methodology, analyzing panel data from 2010 to 2022 across a sample of 19 banks. Findings confirmed a significant relationship between human capital, income diversification, and bank financial performance. Thus, competencies, knowledge, and skills of bank's employees play a crucial role in determining its overall success. Additional results indicate that a skilled and capable workforce significantly contributes to a bank's ability to broaden its revenue sources, thereby strengthening its financial stability and resilience. However, it fails to identify a moderating impact of income diversification on the relationship between human capital and bank financial performance. Nonetheless, it underscores the crucial role of human capital in shaping bank financial performance and the strategies of income diversification adopted by banks. This study contributes to the existing literature by investigating the moderating role of income diversification on the relationship between human capital and bank financial performance within the Sri Lankan context, as an aspect often overlooked in previous studies that primarily focused on the direct effects of human capital and income diversification on bank performance.