Dividend Payout, Retention Policy and Financial Performance in Commercial Banks: Any Causal Relationship?

Abstract

Dividend policy remains one of the top ten unresolved issues in corporate finance including in the banking sector. Hence, this study explores data from 250 commercial banks in 30 Sub-Saharan African countries to establish the causal relationship between the use of two major dividend policies in the sector and financial performance for the period 2006 to 2015. The empirical results of the vector error correction block exogeneity Wald test and Pairwise Granger causality test reveal that only retention policies Granger cause performance (ROA), even though both major policies posit a positive relationship with performance (ROA) in the Vector Error Correction Model estimate. Therefore, commercial banks in Sub Saharan Africa and also in the entire world should use their free cash flows wisely by exploring all available viable investment opportunities. By doing this, not only owners' profit but wealth is fully maximised such that their survival, value creation, and future growth is fully justified. JEL classification: G21, G35.

Do Bank Size Moderate Relationship between Banks’ Portfolio Diversification and Financial Performance of Commercial Banks in Kenya?

“…It is, therefore, imperative to strengthen the portfolio mix of the banks. Olarewaju, Migiro, and Sibanda (2018) concurred with other authors' theoretical prescriptions among them (Kazan & Uludag, 2014;Markowitz, 1952;Meressa, 2017)by stating that all these diversification avenues such as sectoral credit, assets, deposit types, and income streams are avenues in banks to make use of to be able to exploit new viable ventures to add to their intermediation services that are regarded as traditional to accrue market power and as well withstanding stringent growing competition. Empirical literature on size of bank dated back to 1984 where it was stated that sizeable firms are seen to be extra efficient and profitable than in the case of smaller firms as a result of their superiority in terms of efficiency as outlined by the hypothesis of relative efficiency (Clarke, Davies, & Waterson, 1984).…”

“…After in-depth analysis using explanatory, inferential statistics and multiple regressions, the study made conclusions that a majority of banking institutions, along the years had in tandem adopted insurance investment, government securities, shares from exchanges, as well as bonds to enhance their profitability and subsequently better returns to their shareholders. Olarewaju et al (2018) did scrutiny on the impact of operational diversification on banking performance using the pooled, FEM, REM, and System GMM for a duration ranging from 2006 to 2015 and were across two hundred and fifty commercial banks from 30 nations in the region of Sub-Saharan Africa. As a result of strength of robustness of SYS-GMM, it was revealed in the outcome of this assessment that using Herfindahl Hirschman index, every component relating to operational diversification that included; deposit, revenue, asset, liability, and deposit inclusive of control variables like bank size, ratios of liquidity, loan-loss ratio, cost-income ratio and the lagged return on average asset were deemed significant at 1% level having only deposit diversification (HHIde), which had a negative link with ROAA.…”