THE CORRUPTION AND TRANSACTION COST IN THE FINANCIAL SECTOR IN SRI LANKA. (WITH SPECIAL REFERENCE TO COLOMBO SUB URBAN AREA)

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.