Abstract:
Corruption and bribes are dishonest behavior by those in positions of powers in government and
private financial institutes. Corruption is also partly responsible for emerging unstable economies
and it is mostly evidenced as one of the modern evils in many countries including Sri Lanka. A
significant number of economists argue that corruption has a negative impact upon the banking
system, and it’s cost of borrowing. The study focuses mainly on the link between corruption and
transaction cost in financial institutions in Sri Lanka. Under specific objectives, this study
focused on the institutional reasons for corruption in financial institutions and their impact on the
increase in the transaction cost of the customers of financial institutions i.e, banks and
microfinance institutions in Sri Lanka. The study was mainly based on the primary and
secondary data sources. The primary data were gathered through structured questionnaire and
interviewing method. The data were mainly analyzed by using quantitative and qualitative
techniques. Firstly, the data were analyzed by using data tabulation and charts. The Kendal-tau-b
tests, chi square tests and cross tabulation were used to find the relationship between variables
associated with corruption factor. The non-parametric test (Mann Whitney test) was used
measure the relationship between two ordinal variables. People of Sri Lanka have an assurance
about banks and its transactions. They believe that corruptions are taking place in the financial
institutions and banks in small scale, but the corruption happens in providing large scale loans to
customers and thus increase cost of transaction. As measures of minimizing the bad activity the
law enforcement should be strengthened first within judicial and institutional systems. Law
enforcement should be implemented for those who found guilty in such transactions. The
segregation work duties of the institutes need to be assigned to officers without conflicting
authority levels. Collective decisions and approvals in financial transactions at committee levels
are recommended.
