1.0 Introduction
1.1 Background of Study
In Cameroon, the banking sector plays a crucial role in the economy, facilitating growth through financial intermediation and capital allocation. Among the various factors influencing the sustainability and profitability of commercial banks, dividend policy stands out as a critical determinant. Dividend policy decisions affect shareholder value, capital structure, and overall financial health, thus impacting the long-term sustainability of these institutions.
The banking sector in Cameroon, like in many developing economies, plays a pivotal role in economic development by channeling savings into investments and facilitating economic growth. Commercial banks are vital institutions within this sector, providing essential financial services to businesses and individuals alike. In recent years, the sustainability and profitability of these banks have come under scrutiny, particularly concerning their dividend policies.
Dividend policy refers to the decisions made by a company regarding the distribution of profits to shareholders as dividends or retaining them for reinvestment. For commercial banks, these decisions are critical as they affect shareholder returns, capital adequacy, and overall financial stability. In Cameroon, where the banking sector faces unique challenges such as regulatory pressures, economic volatility, and competition, understanding the impact of dividend policies on bank sustainability is crucial.
Research on dividend policy dates back several decades and has primarily focused on its implications for shareholder wealth and firm valuation across various industries. Studies in the mid-20th century laid foundational theories such as Modigliani and Miller's dividend irrelevance theory, which argued that dividend policy does not affect the value of a firm in a perfect market without taxes or transaction costs. As research evolved, scholars began to examine how dividend policies specifically affect financial institutions, including commercial banks. Studies in the late 20th century and early 21st century started to highlight the unique challenges and considerations banks face regarding dividend decisions, such as regulatory capital requirements, risk management, and investor expectations.
Dividend policy has been adjudged to be the catalyst for the financial performance of firms/companies. The issue of dividend payout is a very important one in the current business environment and more especially on the performance evaluation of firms/companies. Dividend payout is the regulations and guidelines that a company uses to decide whether to make dividend payments to shareholders or not. The dividend payment decisions of firms are the primary element of any corporate policy which is basically the benefit of shareholders in return for investing their money in the organization. These factors include financing limitations, investment chances and choices, firm size, pressure from shareholders and regulatory regimes (Ajanthan, 2013).
The dividend payout of firm’s is not only the source of cash flow to the shareholders but it also offers information relating to firm’s current and future performance. The dividend policy remains one of the most important financial policies not only from the view point of the company, but also from that of the shareholders, the consumers, employees, regulatory bodies and the government. Shareholders wealth is margin influenced by growth in sales, improvement in profit margin, capital investment decisions and capital structure decisions (Azhagaiah and Priya, 2008).
A company’s dividend policy dedicates the amount of dividends paid by the company to its shareholders and the frequency with which the dividends are paid out. When a company makes a profit, they need to make a decision on what to do with it. They can either retain the profits in the company (retained earnings on the balance sheet), or they can distribute the money to the shareholders in the form of dividends.
Dividend decision are important because they determine what portion of a firm’s profits is to be distributed to investors and what portion is to be retained by the firms for further investment (Ross, Westerfield & Jaffe, 2002). The financial manager has to come up with dividend policy that will be beneficial to both the firm and the shareholder.The objective of dividend policy should be to maximize the shareholder's return so that the value of investment is maximized (Akinsulire, 2011). There has been variety of opinion exist on the dividend policy issue as to whether claims on dividends are relevant. The patterns of corporate dividend policies differ over time and across countries, especially between manufacturing firms in developed and emerging economies (Amidu, 2007).
Dividend policy is primarily concerned with the decisions regarding dividend payout and retention. It is a decision that considers the amount of profits to be retained by the company and that to be distributed to the shareholders of the company (Watson and Head, 2004). Theoretically, there are different types of dividend policies. These include constant payout, progressive policy, residual policy, zero policy and non-cash policy. Investors are seen to belong to a particular group or clientele. This is because they tend to pitch their tent with a particular policy that might suite them. This is the clientele effect of dividend policy.
Therefore, in Cameroon where the research was carried out, the activities that was conducted is to know the Effect of Dividend Policy on Commercial Banks Sustainability.
1.2 Statement of Problems
Investigation revealed that the dividend policy of a bank can influence investor perceptions of its financial health and stability. In Cameroon, where investor confidence plays a crucial role in capital markets, understanding how dividend decisions affect market competitiveness is essential. Also, the dividend policies adopted by commercial banks in Cameroon may impact their financial stability. High dividend payouts could lead to reduced retained earnings, potentially affecting the banks' ability to maintain adequate capital levels.
Furthermore, Compliance with regulatory requirements regarding capital adequacy is crucial for banks' sustainability. Dividend policies must align with these regulations to ensure banks maintain sufficient capital buffers in line with regulatory standards. The economic environment in Cameroon, characterized by factors such as inflation, exchange rate fluctuations, and economic growth rates, can significantly impact the appropriateness of dividend policies for banks. Hence, it is against this backdrop that this study aims to examine the effect of dividend policy on commercial banks sustainability in Cameroon.
1.3 Aim and Objectives of Study
The aim of the study is to investigate the effect of dividend policy on commercial banks sustainability in Cameroon. In achieving this aim, the following specific objectives were laid out as follows:
- To investigate how dividend policy affects the capital adequacy, liquidity, and overall financial stability of commercial banks in the study area;
- To examine the dividend payout ratios, dividend stability, and other factors influencing dividend policy decisions in the banking sector;
- To assess how dividend policies align with regulatory requirements and corporate governance practices in the banking sector of Cameroon;
- To examine investor perceptions and market reactions to dividend policies; and
- To provide recommendations for commercial banks in Cameroon to enhance their dividend policies, thereby improving sustainability and long-term financial performance.
1.4 Research Questions
The study came up with research questions so as to be able to ascertain the above stated objectives. The specific research questions for the study are stated below as follows:
- How do dividend policies affect the liquidity positions of commercial banks operating in Cameroon?
- How do dividend payout ratios vary among commercial banks in Cameroon, and what factors influence these variations?
- How do investor perceptions and market reactions differ based on the dividend policies adopted by commercial banks in Cameroon?
- To what extent do regulatory requirements influence dividend policy decisions in the banking sector of Cameroon?
- How do economic factors such as inflation, exchange rate fluctuations, and Gross Domestic Product (GDP) growth rates impact the appropriateness of dividend policies for banks in Cameroon?
- What strategic recommendations can be proposed to optimize dividend policies for enhancing the sustainability and profitability of commercial banks in Cameroon?
1.5 Research Hypothesis
In order to pursue the objective of this study, the following generalized statements have been designed to guide and aids in obtaining the result for the experiment to be conducted. For this work, the null hypothesis will be represented with H0 while the alternative hypothesis will be represented with hypothesis H1.
Hypothesis One
- H0: There is no significant relationship between dividend payout ratios and the financial stability of commercial banks in Cameroon
- H1: There is a significant relationship between dividend payout ratios and the financial stability of commercial banks in Cameroon
Hypothesis Two
- H0: Banks that comply strictly with regulatory requirements regarding dividend policy do not exhibit higher sustainability in Cameroon
- H1: Banks that comply strictly with regulatory requirements regarding dividend policy exhibit higher sustainability in Cameroon
Hypothesis Three
- H0: Dividend policy decisions do not impact shareholder value creation in the banking sector of Cameroon
- H1: Dividend policy decisions impacts shareholder value creation in the banking sector of Cameroon
Hypothesis Four
- H0: There is no significant relationship between dividend policy adherence to regulatory requirements and bank sustainability in Cameroon
- H1: There is a significant relationship between dividend policy adherence to regulatory requirements and bank sustainability in Cameroon
1.6 Significance of Study
The study on the effect of dividend policy on commercial banks' sustainability in Cameroon holds significant importance to the following stakeholders:
- Management: It will be of immersed benefit to management of organizations as it points out the desirability of dividend policy at various economic situations. The knowledge of these findings will better equip them to make better dividend policy decisions.
- General Public: The stakeholders of any firm come from the public and the operation of firms have direct effect on members of the public, hence, the need for them to be aware of the dividend policy of the firm.
- Business Practitioners and Investors: This group comprises of the equity investor, bondholders and all other persons who invest in businesses. They need to understand the effect of their decisions.
- Students and Researchers: This research will further contribute to the ongoing issue of dividend policy in Nigeria. Students and researchers in the field of finance will find it very useful and valuable to widen their knowledge about the issues in dividend policy.
1.7 Scope of Study
The scope of the research is focused on the Effect of Dividend Policy on Commercial Banks Sustainability in Cameroon.
1.8 Limitations of the Study
During the course of this study, many things militated against its completion, some of which are:
- Time Constraint: The time frame given to accomplish this project was very short due to school academic calendar and it was carried out under pressure which made the researcher not to implement some necessary features.
- Financial Constraint: Insufficient fund tends to impede the efficiency of the researcher in sourcing for the relevant materials, literature or information and in the process of data collection (internet, questionnaire and interview).
1.9 Definition of Terms
Dividend Policy:
It refers to the strategy or framework used by commercial banks to determine how much of their profits will be distributed to shareholders as dividends versus retained for reinvestment in the business.
Sustainability:
In the context of this study, sustainability refers to the ability of commercial banks in Cameroon to maintain their financial health, operational stability, and growth trajectory over the long term.
Financial Stability:
It is the condition where a commercial bank in Cameroon maintains adequate capital reserves, liquidity, and profitability to withstand economic fluctuations and operational risks without jeopardizing its ongoing operations.
Capital Adequacy Ratio:
A regulatory measure that evaluates a bank's capital in relation to its risk exposure, ensuring it has enough capital to support its operations and absorb potential losses.
Investor Confidence:
The trust and belief investors have in the financial soundness and future prospects of commercial banks in Cameroon, influencing their willingness to invest and hold shares in these institutions.
Regulatory Compliance:
Adherence to laws, rules, and regulations set forth by regulatory authorities in Cameroon governing dividend distributions, capital requirements, and overall financial governance.
