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THE EFFECT
OF DIVIDEND POLICY ON THE GROWTH OF MICRO FINANCE
CHAPTER ONE:
Introduction
Micro-finance
refers to financial services such as cash loans, deposit savings accounts, and
insurance made available in relatively small amounts to poorer populations
throughout the developing world. Microfinance basically relates to all
financial intermediation services such as savings, credit, funds transfers,
insurance, pension and remittances among others by financial institution in
both rural and urban areas to low income earners (Robinson, 2001). Microfinance
promises both to combat poverty and to develop the institutional capacity of
financial systems, through finding ways to cost-effectively lend money to poor
households (Morduch, 2000). Three features distinguished microfinance from
other formal financial products: the smallness of loans offered or savings
collected the absence of asset-based collateral and the simplicity of
operations (Seyed, 2011) . Loan repayment which measured portfolio quality was
an essential ingredient for sustainability of MFIs. Loan repayment indicators
included Portfolio at risk (PAR), credit risk measured by the sum of the level
of loans past due 30 days or more (PAR>30) is negatively and significantly
related to MFI sustainability (Cooper, A. Jackson, M. J . Patterson, G. A.,
2003). Increased exposure to credit risk resulted to lower MFI sustainability,
given that credit granting was the principal source of revenue for these
institutions. There was a positive influence of
the
collection of deposits from clients in form of savings and also shares.
Microfinance is primarily a cash-based operation and involves member’s savings.
However, to make the sorts of investment that stimulate endogenous economic
growth, one needs access to financial capital that comes either from savings or
from borrowing, which is difficult in environments where the formal means of
either saving or borrowing are typically absent. Traditional communities had
informal mechanisms for savings. For example, voluntary rotating savings and
credit associations of various sorts are proliferating across Southeast Asia
and Africa allowed individuals to receive periodic payouts from group
contributions (Anthony, 2005).
1.1 Background of the Study
Dividend
policy is the regulations and guidelines that a company uses to decide to make
dividend payments to shareholders (Nissim & Ziv, 2001). Dividend, which is
basically the benefit of shareholders in return for their risk and investment,
is determined by different factors in an organization. Firms ought to
distribute their earnings to shareholders if they cannot identify suitable
investments which would bring higher returns than those expected by the
shareholders Mizuno (2007) .Dividend policy also affected MFI performance in
that it encouraged members to increase their deposits because in the end of the
year the profits arising from the performance was shared in form of dividend.
The more the savings the more dividends received. Dividend policy is the
decision to pay out earnings versus retaining and reinvesting them. Dividend
policy was considered to be one of the most important financial decisions that
corporate managers encounter (Baker & Powell, 1999). It had potential
implications for share prices and hence returns to investors, the financing of
internal growth and the equity base through retentions together with its
gearing and leverage (Omran & Pointon, 2004). The research seeks to
investigate the effect of dividend policy on the growth of microfinance institutions.
1.2 Statement of the Problem
Dividend
policy is the regulations and guidelines that a company uses to decide to make
dividend payments to shareholders (Nissim & Ziv, 2001). Dividend, which is
basically the benefit of shareholders in return for their risk and investment,
is determined by different factors in an organization. Firms ought to
distribute their earnings to shareholders if they cannot identify suitable
investments which would bring higher returns than those expected by the
shareholders Mizuno (2007). The amount of dividends is distributed to
shareholders or members in cash. These distributions should be made from
Retained Earnings. The main goal of every Microfinance Institution (MFI) is to
operate profitably in order to maintain its stability and improve growth and
sustainability. But this often affected by the real factor condition under
which the firm operates, when there is uncertainty of earnings, unsuccessful
business operations, lack of liquid resources, and fear of adverse effects of regular
dividend on the financial standing of the company a policy of irregular
dividends is adopted where earnings are unstable and management considers that
shareholders are entitled to dividend only when the earning and liquidity
positions of the banks warrant it. The larger the earning higher the dividend
and vice versa .According Moh’d, Perry, and Rimbey (1995) firms with unstable
earnings
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It was a great article with all the concepts clearly explained. The dividend is all about the distribution of profit to its shareholders. It is paid in the form of cash or stock. The organization has its own dividend policies which are affected by various factors.
ReplyDeleteFactors affecting Dividend policy of a firm