Investors can get two type of return in holding a share which is dividend and capital gai. As the diffusion of Malaysia unit trust sector, investors were more alert dividends as their return (Mohamed, Wee, Omar, Abdul Rahman, Mastuki, Abdul Azis & Zakaria, 2008). In fact, dividend is the distribution of a firm's partly profit to their existing shareholders whether in the form of cash, stock dividend or even other type of goods. However, the Board of Director is the parties who make the decision of whether distribute or not and how much to pay to shareholders as dividend (Yiadom & Agyei, 2011). According to Chaw and Susela (2009), there are no particular set of laws in Malaysia governing the allocation of dividend. While Companies Act 1965 (section 365) only stated that dividend should be distributed from profits, it does not specify the profits should be accumulated profits or current profits (Subramaniam & Susela, 2011). Hence, firms are generously to make a decision on the allocation of dividends.
In Malaysia, there is a unique combination of Islamic and Non-Islamic banks. After the case of Asian financial crisis, Malaysian authorities are trying hard to develop a better banking management. For instance, Malaysia has implemented a strategy in the banking restructuring program which is to merge the local banks and finance companies into small groups (Ameer, 2008). Malaysian top five banks are Maybank, Commerce International Merchant Bankers (CIMB) group, Public Bank, Rashid Hussein Bank (RHB) Capital Berhad, and AMMB Holding. All of them possess 61.5% of the total banking system assets. Banks in Malaysia are well capitalised with risk-weighted capital ratio of 12.5% with an average asset size of RM91.6 billion. As time passed, Malaysian financial sector contributes a huge increase in gross domestic product (GDP) from 9.2% in 2000 to 11% in 2008 (Bank Negara Malaysia, 2011). Table below showed the 8 local commercial and 2 local Islamic banks in Malaysia.
Table 1.0: List of Local Commercial and Islamic banks
Local Commercial banks
1. Affin Bank Berhad
2. Alliance Bank Malaysia Berhad
3. Ambank (M) Berhad
4. CIMB Bank Berhad
5. Hong Leong Bank Berhad
6. Malayan Banking Berhad
7. Public Bank Berhad
8. RHB Bank Berhad
Local Islamic banks
9. Bank Islam Malaysia Berhad
10. Bank Muamalat Malaysia Berhad
Source as cited in Bank Negara Malaysia, 2009
After the hurts of Asian financial crises, dividend payout of Malaysia firms decrease to an extremely low level. For example, many banks did not pay dividend at all during years 1999 to 2000. Yet, started from 2001 to 2005 the banks' dividend policy has changed by observing more banks were increasing their dividend payments. During 1995 to 2005, approximately 44% of the dividend rise while 38% of the dividend paid by banks drop. This statistical result shows that banks find their dividend policy very flexible. Whereas, during 1998 to 2000, almost 33% of the dividend that distributed by banks dropped and 10% of the entire dividend rose. After year 2000, dividend payments became more common. For example, more than half of the 38% of dividend growth was made by domestic banks during 2001 to 2005. This showed that domestic banks might have been more innovative than foreign banks (Ameer, 2008).
In addition, when consider the product market competition, irrespective of the bank ownership whether domestic or foreign, 34% of the dividend rise and 43% of all the dividend drops were made by banks selling both non-Islamic and Islamic banking products. While for the banks that selling only non-Islamic banking product, 62% of all the dividend rises and 53% of the dividend drop. This imply that banks that selling only non-Islamic banking products have higher chances than banks selling both non-Islamic and Islamic banking products to decrease the dividends. However, banks that selling only non-Islamic banking products pay liberal dividends when deals with dividend reinitiating. Another reason is they could have higher optimal dividend payout ratio. Comparing with domestic banks payout policy, the foreign banks' dividend policy has the highest dividends payout (Ameer, 2008).
Let go through some of the local banks dividend payout history. Public Bank plan to preserve a high cash dividend payout of their net profit although there is no precise dividend payout plan, which subject to Bank Negara Malaysia's approval and new development from the Basel III framework. In year 2009, public banks paid 25 cent as their interim cash dividend and 57% is the cash dividend payout which higher than year 2008 that only 53%. Thus, chief operating officer of Public Bank, Leong Kwok Nyem said that they will intend to preserve the dividend payout ratio in the region of 50% level (Bernama, 2010). Moreover, Public Bank declared a 33 cent cash dividend which consists of a franked dividend of 25 cent less income tax and a single-tier dividend of 8 cent per share in year 2010. Nevertheless, the total gross dividend payout of Public Bank's for the year 2010 was 58 cent per share (Chua, 2011).
Malayan Banking Berhad (Maybank), the Malaysia largest bank, has a long-term dividend policy of 40%-60% dividend payout ratio derived from addressed net profit attributable to shareholders (Maybank, n.d.). In year 2003, Maybank paid a highest dividend payout in its dividend payment history which is 35 cent of dividend (Chia, 2003). For the year 2011, Maybank declared a 60 cent of total gross dividend along with 32 cent of the final gross dividend but 24 cent net per share. This explains that the dividend payout ratio of 2011 is 74.9% (Maybank, n.d.). Due to their hard work, Public bank and Maybank were in the list of the Kuala Lumper Stock Exchange (KLSE) Corporate Excellent Awards 2002 (Chia, 2003).
In conclusion, this study is about determinants of dividend payout in Malaysian local banks to further investigate factors will affect the dividend payout. Investors can understand more about the dividend payout and hence make a better decision to get a better return in their investment in local banks.
1.2 Problem Statement
There are quite many previous researchers have carried out their research in banking sector in different countries. For example, Huda and Farah (2011) examined the size, profitability, liquidity, and retained earnings which are determinants of dividend decision of 11 banks in Bangladesh between 2003 and 2010. Furthermore, Ameer (2008) explored the effect of product market competition as well as the parameter on the dividend payout policies of four foreign banks in Malaysia from year 1995 to 2005. However, there is very few researchers conduct the study of the determinants of dividend payout in Malaysian local banks.
In fact, Malaysia banking sector consist of Islamic and non-Islamic banks which is a very special case compare to other countries. This suggests that financial sector in Malaysia is diversification such as Malaysia Islamic banks and conventional banks are operating in parallel (Ameer, 2008). According to Ameer (2008), Malaysian financial system encompasses a diversified range of organization to provide the more various and composite needs of the local economy. As we are Malaysian, we desire to understand more of our country banking industry. This has caused us have interest to study the determinants of dividend payout in Malaysian local banks.
Basically, dividend act as a key indicator of a company's present and future performance as well as potential risk level (Kania & Bacon, 2005). As discussed in research background, Malaysian companies are allowed freely to decide the allocation of dividend as there is no particular rules for the governing of the dividend allocation (Subramaniam & Devi, 2011). As an investor, dividend is serving as a return for investing in those companies. In order to understanding that what will affect the dividend payout, we must consider the determinant of the dividend payout. One of the reasons why investor investing in shares is to have dividend, thus they would be interesting under what condition the companies will assure to distribute dividend.
Apart from that, some of the previous researchers concentrate on both cash and stock dividend. From the research done by Huda and Farah (2011), they have conducted three dependent variables which are cash payout ratio, stock payout ratio and total payout ratio by using revenue, earning per share (EPS), net income, retained earnings and cash equivalents as their independent variables. There are a few dividend distribution methods available such as regular dividends, stock dividends, special dividends, share split, and share repurchases. Among all, regular cash dividends are the most common distribution with dividend target ratio (Huda & Farah, 2011). Hence, we choose final cash dividend as our dependent variable.
Besides, past researcher (Fama & French, 2001; Subramaniam & Devi, 2011; Huda & Farah, 2011; Yiadom & Agyei, 2011) carry out determinant of dividend payout using firm size, profitability, corporate governance, liquidity and leverage. In general, many financial economists think that firm size and dividend payout are positively correlated. Larger and more profitable companies tend to distribute higher dividend than small size and less profitable companies (Lee, 1997; Mohamed et al., 2008). Besides, it is vital to evaluate a company's liquidity position with the dividend payout. Theoretically, a firm will only pay dividend if it has a strong cash position. Hence, profitability and liquidity are the main factors that will influence directors to decide the dividend payout ratio (Mohamed et al., 2008). Moreover, companies that finance their activity mostly with debt reduce liquidity. Debt principal and interest payments of the debt diminish the capability of companies to have residual income to promise dividend payment (Yiadom & Agyei, 2011). So, profitability and leverage are significant factors that affect the dividend payout.
Additionally, Malaysian banks do not take a responsibility in governance. This is due to they can only vote the equity of their clients with the conditions that under their express instruction. In other words, bank is an important minority shareholder and exercises the power over a firm through these voting. Nonetheless, vote for the shares of the client is just a proxy. Its core concern is to enhance their own income from its borrowing and other related activities but not in increasing shareholder value (Thillainathan, 1999). Therefore, firm size, liquidity, leverage and profitability are chosen as the independent variable in this study.
In other words, impacts of dividend payout ratio are being anticipated since panel data method will be employed in the study. Further study on the determinants of dividend payout is discussed for 10 Malaysian local banks from the period of 2000 to 2011.
1.3 Research Objectives
1.3.1 General Objective
The general objective of the study is to examine the determinants of dividend payout affect the 10 Malaysian local banks such as Affin Bank Berhad, Alliance Bank Malaysia Berhad, Ambank (M) Berhad, Bank Islam Malaysia Berhad, Bank Muamalat Malaysia Berhad, CIMB Bank Berhad, Hong Leong Bank Berhad, Malayan Banking Berhad, Public Bank Berhad, RHB Bank Berhad.
1.3.2 Specific Objective
The research objectives are:
To study the relationships between firm size and dividend payout of the Malaysian local banks.
To study the relationships between leverage and dividend payout of the Malaysian local banks.
To study the relationships between liquidity and dividend payout of the Malaysian local banks.
To study the relationships between profitability and dividend payout of the Malaysian local banks.
1.4 Research Questions
There are a few research questions that occur based on our research objectives:
What are the relationships between firm size and dividend payout of the Malaysian local banks?
What are the relationships between leverage and dividend payout of the Malaysian local banks?
What are the relationships between liquidity and dividend payout of the Malaysian local banks?
What are the relationships between profitability and dividend payout of the Malaysian local banks?
1.5 Significance of the Study
This study is about how determinants of dividend payout affect the Malaysian local banks. Banking sector is an extremely significant sector since banks affect a country's financial system and economy. This is because of bank channel the fund obtained into lending and borrowing activities that will ultimately influence a country economy (Asenova, 2006). By conducting the research in Malaysian local banks, it can provide a clearer picture for the public to have a better understanding on the performance of local banks in Malaysia by looking at the dividend payment decision. This can at least enhance the basic knowledge of factors that affect dividend. For example, firms that paying high dividend last year tends to distribute high dividend this year (Huda & Farah, 2011).
Besides, dividend gives a quick look of a firm's performance for the stockholders and capital market as demand of the company's share is typically depend on the company's dividend payout pattern (Huda & Farah, 2011). Therefore, investor can make use of this research information as one of the tools to analyze company's performance. By understanding the factors of affect dividend payout, investor can evaluate the company performance by the factors and hence make a better decision in their investing activities. For instance, high profitability firms tend to declare higher dividend than low profitability firms (Imran, 2011; Yiadom & Agyei, 2011).
Furthermore, this study can act as a guide for future researcher. Future researcher can refer to this research paper when they are doing research that relates to dividend payout by Malaysia banking sector. It gives future researcher a better understanding on how each of the relevant variables will influence the dividend payout and the idea to increase dividend payout by manipulating the factors. Besides, this study also can help future researcher if it is related to their study.
Lastly, this study also helps local banks to understand well about the relationships between factors of dividend payout. Therefore, the management team of the bank can maintain or improving their company performance by manipulating the factors that affect the dividend payout. Nevertheless, understanding the factor affects dividend payout that enables the companies to prevent risk of falling drastically in firm value by manipulating the factors. This is due to the announcement of dividend payment may affect the company's share price (Khan, 2009).
1.6 Chapter Layout
Chapter 1 Introduction
This is the introductory chapter which provides an overview of the research background and explains the research problems. Other than that, it also consists of research objectives, research questions, significance of the study, chapter layout as well as chapter conclusion.
Chapter 2 Literature Review
It reviews the literature of past researchers and the theoretical models. It also includes the discussion and evaluation of journals, articles and other studies that relates to our research topic. In addition, the conceptual framework, hypothesis development and conclusion are also presented.
Chapter 3 Methodology
In chapter 3, it provides detailed research methodology which describes how the research has been done in terms of research design, data collection methods, sampling design, research instrument, data analysis and the chapter is ended by conclusion.
Chapter 4 Data Analysis
This chapter mainly covers the analysis of data and explains the overall results. It present and interpret the research results by using tables and graphs in order to provide a clearer explanation for the readers. E-views 6.0 will be used for analysis purposes and ratio analysis will be presented.
Chapter 5 Discussion, Conclusion and Implications
It presents both overall results and analysis from the previous chapter and provides summary of statistical analysis. Besides, major findings and implication of the study are justified concluded in this chapter. Last but not least, the limitations of this research are identified with recommendations for future research.
1.7 Conclusion
Chapter 1 provides fundamental understanding of the research paper. It gives an overall picture of our research project. The research paper has identified the purpose of our investigation as stated in general objective and specific objectives. Next, research questions have been established and to be answered in the next chapter. Significance of the study has been identified and being explained. The pathway has been set and acts as a guideline for the following chapters. Future researcher can refer to this research paper for their further research.
