Bank Characteristics and Dividend Payout of Tier One Commercial Banks in Kenya
Loading...
Date
2023
Authors
Mwangi, Simon Kirembu
Journal Title
Journal ISSN
Volume Title
Publisher
Kenyatta University
Abstract
Commercial banks have been identified as one of the priority sectors that would remarkably
participate in attainment of Kenya’s Vision 2030 since they perform a critical part in enabling and
transforming the economy through mobilization of savings. However, dividend payout for Tier I
banks in Kenya has remained relatively stagnant over the years even with improved financial
performance. Central Bank of Kenya reports show that Kenya’s banking sector is very profitable
with the average return on asset being about 2.6 per cent for the years between 2016-2021. During
the same period, commercial banks have been registering improving financial performance. Firms
can be differentiated from one another based on distinct characteristics which can be financial or
non-financial. Studies done on this area observed significant correlation between various firm
characteristics and dividend payout. However, there are gaps on academic literature and studies
on large financial institution characteristics as well as replicating the same in the Kenyan context.
Thus, this study sought to determine the effect of bank characteristics on dividend payout of Tier
I banks in Kenya. The study specifically aimed at objectively quantifying effect of bank size,
liquidity, and profitability on dividend payout of Tier I banks in Kenya. Profitability indicators
were used as performance indicators and specifically earnings per share. The study was directed
by several theories including Fama-French theory, pecking order theory, free cash flow theory and
dynamic trade-off theory. Positivism philosophy, descriptive statistics and inferential analysis
were employed for empirical evaluation of data. Descriptive statistics employed comprised of
mean and standard deviation which are measures of central tendency and maximum values and
minimum values. Inferential analysis comprised of regression analysis and Pearson’s correlation
analysis. Target population was all nine (9) Tier I banks listed at the Nairobi Securities Exchanges
(NSE). Secondary data was acquired from audited and published financial reports of the nine (9)
banks for the period between 2016-2021 using document review guide. Descriptive analysis and
panel regression were applied for data testing. Independent variables were bank size, liquidity, and
profitability while dependent variable was dividend payout. Market capitalization was used as a
measure for bank size, book-to-market value as a measure for liquidity and earnings per share as
a measure for profitability. Results indicated liquidity had negative statistically significant effect
on dividend payout while both bank size and profitability had negative statistically insignificant
effect on dividend payout. The study thus determined that bank characteristics had insignificant
effect on dividend payout for Tier I banks. The study therefore recommends that bank management
ought to focus on increasing their profitability through growth of interest income, non-funded
income as well as employ cost cutting measures and making investments on innovations and latest
technologies that increase efficiency. Additionally, the study recommends that prospective
investors ought to invest in commercial banks with higher profit margin, with relatively lower
liquidity which indicate strong future profit projections, with better policies on retained earnings
and with better efficiencies including better credit and reputational risk management policies. The
study also recommends that CBK consider reducing Cash Reserve Ratio (CRR) and NSE consider
an alternative stock classification system which will categorizes stocks in same sector based on
size which will give a clear insight of the risk-return trade off characteristics at the NSE. The study
recommends more research should be done to establish effect of bank characteristic on dividend
payout on Tier 2 and Tier 3 banks in Kenya then a comparison can be made to this study which is
on Tier 1 banks.
Description
A Research Project Submitted to the School of Business in Partial Fulfilment of the Requirement for the Award of Degree in Master of Business Administration (Finance) of Kenyatta University, Novermber 2022
Keywords
Bank Characteristics, Dividend Payout, Tier One Commercial Banks, Kenya