The Central Bank of Kenya’s Decision on Dividend Payout for Banks: Using Case of Listed Banks at Nairobi Securities Exchange
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Date
2021-05
Journal Title
Journal ISSN
Volume Title
Publisher
Daystar University, School of Business and Economics
Abstract
Dividend per share is the yield that a company pays for the ordinary shares that are held by the shareholders. The dividend is calculated by dividing the total dividends paid out by the company, including interim dividends, over a period of time, by the number of outstanding ordinary shares issued (Miller and Modigliani, 1961). Actually, dividend is the part of profit or reserves that is distributed to shareholders. Dividend decisions are taken by the finance manager and approved by company directors. Dividend payout and policy remains one of the most controversial and unresolved issues in corporate finance. The management is in dilemma about to pay a large or small percentage of their earnings as dividends or even just retain the earnings. The reason is that the management must satisfy the needs of the shareholders. According to Maclaney (2016), the dividend payout ratio is the amount of dividends paid to shareholders relative to the amount of total net income of a company. The amount that is not paid out in dividends to shareholders but is held by the company for growth is known as retained earnings. Key decisions are how much and when to distribute dividends considering:
1. The size of the business
2. The stability of the firm
3. The dividend policy adopted by the management
4. The frequency of dividend payments
The Central Bank of Kenya (CBK) sent out a circular dated August 14, 2020, to all banks. The circular citing the critical role played by banks during the Corona Virus (COVID-19) pandemic by ensuring maintenance of banking operations, provision of credit and availing relief to borrowers by way of restructuring loans. In view of this and as a result of the effects of the pandemic, Central Bank highlighted that as a consequence, commercial banks and mortgage finance companies would require further interrogation and evaluation regarding ways to address the impact in the immediate term (Central Bank of Kenya, 2020). The Circular further enumerated that in order to remain resilient banks would need to pay particular attention to bank balance sheets through additional capital and adequate liquidity. Subsequently, it was noted that those that would take precautionary measures would be resilient enough to better support post-pandemic economic recovery (Central Bank of Kenya, 2020). The Central Bank mandate of bank supervision guides that the CBK has the final say on whether or not the capital levels arrived at by each bank is feasible. Banks are required to assess and maintain on a regular basis capital that is considered adequate to cover risks to which they are/might be exposed. The determination is made upon endorsement by the Central Bank of a bank board’s decision to pay out dividends (Cytonn, 2020). Minimum capital requirement is considered imperative for banks as they need to maintain limits that can meet credit, market, and operational risks (Farid, 2010). That notwithstanding, CBK reported that the banking sector experienced a drop in pre-tax profit for the year ended 2020 to Kshs.112.9 billion compared to Kshs.159.1 billion the previous year – marking an 8-year low (Mwaniki, 2021).
The CBK mandate of bank supervision consists of ensuring financial stability by the maintenance of a functional banking system. Ensuring that commercial banks and mortgage companies implement internal procedures and systems to maintain adequate capital resources is essential to forestall economic shocks in the future. Notably, the banks went ahead to declare dividends that would be sustainable such as Kenya Commercial Bank declaring Kshs.1 dividend per share in contrast with Kshs.3.5 the previous year.
Description
Financial Management and Control Course
(FIN 611X)
Keywords
Dividend Payout, Banks Listed in Nairobi Securities Exchange
Citation
Kagwaini, D. M., Opiyo, A., Kamau, A., Kinyanjui, W., Ireri, W., Nzioka, J., Onjula, R., Okutu, C., Wesonga, D. K., Wanyanga, A., Okuku, B., Mutua, J., & Kiiru, J. (2021). Dividend Payout For Banks Listed In Nairobi Securities Exchange. Daystar University, School of Business and Economics