THE EFFECTS OF DIVIDEND POLICY ON COMMERCIAL BANKS SUSTAINABILITY IN CAMEROON: CASE STUDY ECOBANK

Abstract

The study analyses the effect of dividend policy on commercial bank sustainability. Dividend policy here refers to how much of the total profit a firm should pay to its stockholders and how much to retain for investment so that the combined present and future benefits maximize the wealth of stockholders as well as the sustainability of the bank. Conflicts exist between distributions and investment decisions made by financial managers on whether to pay a large dividend to stockholders or returning a high profit for investment. A trade off must be established by financial managers by understanding factors that influence dividend policy in commercial banks in order to still attain high profit retentions and yet still able to pay of shareholders who expect their dividend. This study period was carried out for a six-year period from 2013 to 2018. The objectives of this study was to evaluate the factors that influence dividend payout in ECOBANK, evaluate the dividend amount paid by ECOBANK and to determine the effect of dividend payment to profitability in ECOBANK. Panel secondary data of ECOBANK a commercial bank in Buea was collected and analysed using SPSS version 21 to generate statistics using person’s correlation coefficient and the trend and relationship between EPS and ROE, DPS and ROE and DGR and ROE. A correlation was equally carried out to test for the relationship that dividend payments have on the profitability of ECOBANK in other to statistically accept or reject the null hypothesis which stated that dividend payment has no significant effect on the profitability of ECOBANK. Results from study revealed that dividend per share (DPS) has a strong positive relationship with the return on equity of the company (ROE) of 0.88 with a insignificant given a p-value of 0.177 which is greater than 0.05 level of significance at 95% confidence interval at such the null hypothesis was accepted which means there exists a significant positive relationship between Dividends and the profitability of the company. Dividend policy of banks has a relationship with its profitability at such financial managers should consider factors influencing dividend share in their management strategies for financial sustainability of banks.

CHAPTER ONE

INTRODUCTION

1.1 Background Of The Study

In the past years, dividend has been an interesting factor in the field of finance that has attracted investors and the issue of dividend has attracted the attention of managers so as to gain investors for them to invest in their businesses. Investors are mostly interested in going back at the end of the day with much money as dividend at the end of investment project. That is their reward for taking the risk to invest in the business. (FONKAM 2017). This brings us to a famous quotation by fisher black (1976) which says; “The harder we look at the dividend pictures the more it seems like a puzzle with pieces that just don’t fit together”. Dividend payout has been an issue of interest and many have brought forth theories relating to how managers should consider when making dividend policy decisions. This leads us to the definition of what dividend is all about in order to better understand the concept. Dividend policy is the regulations and guidelines that a company uses to decide to make dividend payments to shareholders (Nissim & Ziv, 2001). Also Dividends are the distribution or call it the appropriation of profits to the shareholders of a company. Those regulations set are what helps governs the daily operations and activities. We will dive right into the evolution of banking and how commercial banks came about.

Banks have been around since the first currencies were minted perhaps even before that, in some form or another. People could exchange one good for another but the came a time when they needed to acquire foreign goods and thus needed a different form of payment, thus the introduction of coins, and needed to be kept in a safe place. The Romans, great builders and administrators in their own right, took banking out of the temples and formalized it within distinct buildings. During this time, moneylenders still profited, as loan sharks do today, but most legitimate commerce and almost all governmental spending involved the use of an institutional bank. The Roman Empire eventually crumbled. Many people started realizing the strengths of banks and powers began to take loans to make up for hard times at the royal treasury, often on the king’s terms. This easy finance led kings into unnecessary extravagances, costly wars, and an arms race with neighboring kingdoms that would often lead to crushing debt. Then came Adam Smith in 1776 with his “invisible hand” theory. Empowered by his views of a self-regulated economy, moneylenders and bankers managed to limit the state’s involvement in the banking sector and the economy as a whole. This free market capitalism and competitive banking found fertile ground in the New World, where the United States of America was getting ready to emerge. In the beginning, Smith’s ideas did not benefit the American banking industry but eventually they adapted to it. Most of the economic duties that would have been handled by the national banking system, in addition to regular banking business like loans and corporate finance, fell into the hands of large merchant banks, because the national banking system was so sporadic. During this period of unrest that lasted until the 1920s, these merchant banks parlayed their international connections into both political and financial power. These banks included Goldman and Sachs, Kuhn, Loeb, and J.P. Morgan and Company. Originally, they relied heavily on commissions from foreign bond sales from Europe, with a small backflow of American bonds trading in Europe. This allowed them to build up their capital. At that time, a bank was under no legal obligation to disclose its capital reserve amount, an indication of its ability to survive large, above-average loan losses. This mysterious practice meant that a bank’s reputation and history mattered more than anything. While upstart banks came and went, these family-held merchant banks had long histories of successful transactions. This banks emerged to commercial banks possessing the characteristics and functions of commercial banks with time. As large industry emerged and created the need for corporate finance, the amounts of capital required could not be provided by any one bank, and so initial public offerings (IPOs) and bond offerings to the public became the only way to raise the needed capital. The crisis of the 1970s affected every economy in the world took different majors in order to solve the crisis and one of the actions was to adjust the dividend payable to shareholders and World War II may have saved the banking industry from complete destruction. WWII, and the industriousness it generated, lifted the U.S. and world economies back out of the downward spiral. Banks have come a long way from the temples of the ancient world, but their basic business practices have not changed. Banks issue credit to people who need it, but they demand interest on top of the repayment of the loan. Although history has altered the fine points of the business model, a bank’s purpose is to make loans and protect depositors’ money

Like all economies, Cameroon banking sector has suffered from the crisis of the 80s which contributed to the closure of many commercial banks and led to the transfer and or sell out of most commercial banks like the development bank, bank of credit and commerce in Cameroon and rural development fund bank.  The recovery of the Cameroon economy after the economic crisis of years 1980 and 1990 led to the creation of BEAC central bank for all CEMAC countries; Cameroon, Central Africa Republic, Congo Brazzaville, Chad, Equatorial Guinea and Gabon to better enhance the growth of commercial banks in Cameroon. BEAC was created on the 22nd November, 1972. BEAC uses three instruments to fulfill its macroeconomic and microeconomic roles. BEAC serves as a bank for all commercial banks and so far since the creation has gone a long way to better the policies and regulations of commercial banks in Cameroon. It is said nothing is perfect, so is BEAC. Cameroon banking sector still faces some challenges inclusive the commercial banks. In 2005, 7 out of 11 banks in Cameroon, were found to be in a good or solid standing. Commercial banks indeed have emerged and can be summarized; In the practical performance of banks function, this was a limited activity in service Banks and commercial processes. Later, it came to They possess financial power and ability to create commercial loans. They possess financial power and ability to create loans. As the banking systems commercial banks had developed, they are no longer restricted to the role of being financial and service organizations, but have become money market within the public sector. Furthermore, they follow up monetary flows and banking securities, by playing the positive role of providing the organized money market with enough information about commercial activities. In addition, as a financial mediator who has adequate statistics about other economical units, besides its main role in creating successful development plans, and riskless investment. It is obviously clear that there is no unify picture as regarding the dividend payout ratio of an institutions. Even if the future takes banks completely off your street corner and onto the internet or has you shopping for loans across the globe banks will still exist to perform this primary function. The more profitable the banks are the more internal finance they will have hence larger dividend.

1.2 Problem Statement

In the real world major conflicts have existed between distributions and investment decisions of financial managers. There are always faced with the problem of paying a large dividend or returning a high profit. This trade off must be established in order to still attain high profit retentions and yet still able to pay of shareholders who expect their dividend. Dividend policy is a very widely used phenomena which every financial or non-financial institution uses and should be well managed because it is linked directly to the profit making.  Dividend policy has an impact on the commercial banks performance and has led to increasing global attention. Never the less if the banks value affect dividend, it is of importance that the banks shareholders are aware of the factors that’s affects the dividend payout, and the determinant of these factors. Many countries and their institutions have faced issues with dividend payouts and may not be fully aware of the determining factors that influence it, Cameroon a developing economy is not immune to these developments. Thus the issue of dividend policy is a very important one in the current business environment and should be taken seriously in order to maximize shareholder’s wealth and make abnormal profits yet plough back some profits. Besides famous studies presented by Miller and Rock (1985) argued that dividend provide a signal to investors that the profitability of banks will increase in the future. As such, the company’s growth according to Miller and Rock is an important determinant of the dividend payout. Even though, there have been a number of studies on dividend policy especially in developed countries. Most of the studies examined dividend policy in general without focusing on a particular sector. But this research is out to focus on the banking sector. The research Is out to help solve problem of the effects dividend payout highly affects commercial banks and how if not handled can be detrimental to the bank. With the view of how important dividend policy is to commercial banks, the most pertinent question the research stands to answer are how do we evaluate the factors that influence dividend payout?, what dividend amount is to be paid out by the bank?, and lastly the effect of that dividend payment on the profitability of the bank?.

1.3 The Objectives of the Study

Main objective of this study is to determine the effects of dividend policy on commercial banks sustainability with ECOBANK been the case study

The specific objective will include:

1. To evaluate the factors that influence dividend payout in ECOBANK
2. To evaluate the dividend amount paid by ECOBANK
3. To determine the effect of dividend payment to profitability in ECOBANK

THE EFFECTS OF DIVIDEND POLICY ON COMMERCIAL BANKS SUSTAINABILITY IN CAMEROON: CASE STUDY ECOBANK