COMPARATIVE STUDY ON DIVIDEND POLICY OF

SIDDHARTHA BANK LTD AND KUMARI BANK LTD

A Proposal

By:

Dhruba Bhandari

Public youth campus

Exam Roll No: 1976/17

T.U Registered No: 7-2-704-28-2012

Concentration: Finance

Submitted to:

Research Department

Public Youth campus

Faculty of Management

Tribhuvan University

In partial fulfillment of the requirements for the Degree of

Masters in Business Studies (MBS)

Kathmandu, Nepal November 13, 2019

1).Introduction

Dividend policy is the policy used by a company to decide how much it will pay out to
shareholders in dividends. In your financial accounting course, you learn that after deducting
expense from the revenue, a company generates profit. Part of the profit is kept in the company
as retained earnings and the other part is distributed as dividends to shareholders. From the share
valuation model, the value of a share depends very much on the amount of dividend distributed
to shareholders. Dividends are usually distributed in the form of cash (cash dividends) or share
(share dividends which are beyond the remit of this article). When a company distributes a cash
dividend, it must have sufficient cash to do so. This creates a cash flow issue. Profit generated
may not be in the form of cash. Corporations earn profits – they do not distribute all of it. Part of
profit is ploughed back or held back as retained earnings. Part of the profit gets distributed to the
shareholders. The part that is distributed is the dividend. The ratio of the actual distribution or
dividend, and the total distributable profits, is called dividend payout ratio. How much of its
profits should a corporation distribute? There are several considerations that apply in answering
this question. Hence, companies have to frame and work on a definitive policy of dividend
payout ratio. Of course, no corporate management can afford to stick to a fixed dividend payout
ratio year after year – neither is such fixity of dividend payout ratio required or expected.
However, management has to broadly decide its policy on its broad attitude towards distribution
– liberal dividend payout ratio, or conservative dividend payout ratio, etc. If one were to ask this
question in context of debt sources of capital – for example, how much interest should a
corporation pay to its bankers, the answer is straight forward. As interest paid is the cost of the
borrowing, the lesser the interest a corporation pays, the better it is. Besides, companies do not
have choice on paying of interest to lenders – as the rate of interest is contractually fixed. Rate of
dividends may be fixed in case of preference shares too. However, in case of equity shares, there
is no fixed rate of dividends. It cannot be said that the dividend paid is the cost of equity capital –
if that was the case, corporations may try to minimize the dividend distribution.
2). Background of the study
Reforms introduced in the financial sector of Nepal over the past decades including
liberalization of interest rates, creation of a basic regulatory framework and development of
longer term government securities, market have led to some significant improvements in the
financial sector. Like in other sectors, active involvement of private sector in financial sector will
play an important role in the economic development of the country. In order to enhance the role
of this sector in economic activities, it is essential to flow financial resources easily and in a
simple manner which would, in turn, help to achieve desired results from the economic
development. Though the present development and expansion of financial sectors are directed
towards the same objective, the country has not been able to realize the desired outcomes. For
this, there might be various responsible factors; one of them is the poor capital market condition.
Capital market is the general barometer that measures the proper collection and channelization of
saving for investment in productive and income generating assets.
Capital market is the market place through which the entrepreneurs accumulate the long term
capital by mobilizing individual and institutional saving either directly or indirectly. In a capital
market, all firms operate in order to generate earnings. Shareholders supply equity capital
anticipating share in their earnings either directly or indirectly. When a company pays out a part
of its earnings to shareholders in the form of dividend, the shareholders benefit directly. If
instead of paying dividends, the firm retains the funds to exploit other growth opportunities, the
shareholders can expect to benefit indirectly through future increases in the price of their stock.
Thus shareholders wealth can be maximized through either dividends or capital gains.
The total net profit of Commercial banks increased from Rs. 48.61 billion to Rs. 51.86billion
(increment of 6.26%) in FY 2017/18. The net profit of non-state owned banks increased by
1.35%, whereas, that of state owned banks grew only by 35.32%. The total interest income,
which is the largest component of total gross income, showed robust growth of 32.13%.
However, total net interest income rose only by 19.82% because of significant increase in
interest expense that resulted from increased fixed deposit in the deposit mix. The operating
profit increased by 10.34% in the review period.
 3). Statement of Problem

Small investors have already suffered much from the investment in equity shares. Investment in
government securities also has become a low yield investment portfolio. As such, degree of risk
has gone up in each of the investment areas. In such a situation, an investor has to take much
precaution in deciding investment portfolios. Global and national economic slow-down has
immersed many investment opportunities.

Nepalese commercial banks and public enterprises listed in NEPSE have not been following
suitable dividend policy. There is not any consistency and clear cut policy on distribution of
dividend. There is no limit in identification of the problems about dividend policy and practices
that are occurring in the different listed companies. To sum up this research deal with the
following matters.
 Is there any consistency in EPS, DPS, MPS and DPR?
 What is the relationship between dividends and stock price?
 Is it possible to increase the value of stock by changing dividend policy or payout?
 What are the factors affecting dividend policy?

Objective of the study

Followings are the objectives of the present study.
1. To examine the comparative dividend practice of the banks.
2. To find out the relationship of dividend per share with various important variables such as
earning per share and stock price and the relationship of stock price with price earnings
ratio and dividend yield ratio.
3. To provide suggestions and possible guidelines to overcome various problems on the basis
of findings.

Review of literature
 A literature review is a scholarly paper, which includes the current knowledge including substantive
findings, as well as theoretical and methodological contributions to a particular topic. Literature
reviews are secondary sources, and do not report new or original experimental work. Most often
associated with academic-oriented literature, such reviews are found in academic journals, and
are not to be confused with book reviews that may also appear in the same publication. Literature
reviews are a basis for research in nearly every academic field. A narrow-scope literature review
may be included as part of a peer-reviewed journal article presenting new research, serving to
situate the current study within the body of the relevant literature and to provide context for the
reader. In such a case, the review usually precedes the methodology and results sections of the
work.

Bhandari & Pokharel (2008) elucidated the dividend practices of commercial banks of Nepal.
The main objective of the study was to examining the dividend policy of Nepalese commercial
banks deriving data from 8 commercial banks for the period of 1996/97 to 2006/07. The
correlation analysis and regression model was to analyze the data.
It was found that the asymmetric dividend policy of commercial banks has made predicting
dividend policy an uncertain task. However, banks depend on certain financial indicators while
making decisions on dividend policy. Dividend on share is an important indicator that shows the
performance of banks and thereby attracting the investors.

Pradhan (2010) analyzed the dividend policy of Himalayan bank ltd and Nepal Investment Bank
ltd. The main objective of the study was to probing the dividend policy of HBL and NIBL over
the period of 7 years from 2002 to 2008. The correlation analysis and multiple regression model
was used to crystallize data.
It was found that Dividend payment is not a regular phenomenon. By comparing the DPS of two
sample banks, it is found that HBL has a higher average than NIBL even though the banks are
not paying regular dividend. It is seen that during the seven years period. Average earning per
share (EPS) of HBL is greater than NIBL. By the analysis of coefficient of variation, it indicates
that there is greater fluctuation in EPS of NIBL than HBL.
 Shahi (2009) investigated dividend policy of Everest Bank Ltd and Bank Ltd. The main
objective of the study was to analyzing the dividend practices adopted by these banks over the
period of 6 years from 2003 to 2008. Out of 28 banks, only 2 banks were selected for the sample.
The correlation analysis and least square regression model had been used to analyze the data
It was found that the correlation coefficient (r) between DPS and NP of EBL and BOK is high
degree of positive relationship between EPS and DPS. The relationship between DPS and NP is
significant in EBL and BOK because r is greater than 6PE. While, EBL has high degree of
positive correlation but BOK has low degree of negative correlation.

4).Significance of the Study

The study has multidimensional importance in this particular area of concern. It will benefit
shareholders, brokers, managers and concerned authority for making future plans and policies in
financial decision. The present study will make the shareholders and investors aware of the
dividend policies of the bank. The comparative analysis identifies the dividend practices of these
banks. This study will be beneficial also to the commercial banks. And it is supposed to be useful
for researcher for further study.

5).Research Methodology
Research methodology is a way to systematically solve the research problem. It is a method or
process of arriving at the solution of problems through a planned and systematic dealing with the
collection, analysis and interpretation of the facts and figures. In this chapter, an attempt has
been made to explain the various sequential steps adopted by the researcher in studying the
problem keeping in mind certain objectives. In other words, this chapter systematically describes
about the process that has been followed in the entire aspect of the study. This study is entirely
based on secondary data. This chapter includes the research design, nature and sources of data,
the model, various tools and techniques and limitations of the study.

This study is based on and secondary data. Secondary data were used to analyze the properties
of portfolios formed on dividends and to examine the relationship between dividends and stock
 prices. Research methodology describes the methods and process applied in the entire aspect of
the study. A focus is given to the research design nature and sources of data, the model, various
tools and techniques and limitations of the study.

6). Research Design

In this study, descriptive and analytical research designs are applied to achieve the research
objectives. The research design is the conceptual structure in which research is conducted. It is
the task of defining the research problem. It is the arrangement of condition for collection and
analysis of data in manner that aims to combine relevance to the research purpose with economy
in procedure. Research design is the plan structure and strategy of investigations conceived so, as
to obtain answers to research questions and to control variance. This study is designed to study
the effects of dividends of common stock prices.

The various variables and their movements in different years are studied. The data for the study
has been collected from the annual reports published by relative banks and the financial
statements regarding banks published by Nepal Stock Exchange Ltd. The balance sheet and
profit and loss account of the banks from year 2013 to 2018 have been compared to analyze the
dividend policy followed by them. Therefore, this study is somehow limited. The collected data
are analyzed by using financial as well as statistical tools.

7). Population and Sample

There are altogether 28 commercial banks operating and listed in the stock market. Based upon
convenient sampling, only two banks have been taken as sample for the study. They are:
Siddhartha Bank Limited
Kumari Bank Limited
8).Limitations of the Study

No, study can be free from its own limitations. So, the present study has also some limitation. Dividend
policy is the most important topic in financial management. There are several aspects of decision
that should be taken by financial manager to achieve the management goal. Area of the financial
management decision is investment, capital structure, liquidity, finance and others dividend and
short term assets decision and short term assets decision. Only dividend is selected in this study
to more specific. This study will interprets and analyze the dividend distribution practices
relationship with earning per share, market price of share, net profit, net worth etc.

a) This study will be limited by following factors:

b) This study will primarily based on the secondary data source such as annual reports of
concerned banks, and other related journals, magazines, book etc. the up to date and
complete data are very difficult to obtain due to inability of providing the required data by
concern authorities.
c) Only those factors will be considered which are related with dividend.
d) The related data consider only cash dividend.
e) The study period only covers six fiscal years.
 Bibliography

Bhandari, B. & Pokharel. T. (2012). corporate dividend policy. Kathmandu: a study of commercial

banks of Nepal

Kothari, V. (2012). dividend policy. New Delhi: Delhi University

Pradhan, R. (2010). comparative study on dividend policy of Himalayan Bank Limited Nepal

Investment Bank Limited. Kathmandu: Shankar Dev Campus

Lee, S.S. (2008). management accounting and finance. Hong Kong: the chinese university of Hong kon

Pant, P.R. (2003). research methodology. (3rd ed.). Kathmandu: buddha academic publishers &

distributors Pvt. Ltd.

Pradhan, R.S. (1986). management of working Capital. New Delhi: national book organization,

publishers distributors.

Pradhan, R.S. (1994). financial management practices in Nepal. New Delhi : vikas publishing house

Pandey, I.M. (1995). financial anagement. New Delhi: vikash publishing house Pvt. Ltd.

Levin, R. (1995). statistics Shahi, S. (2009). Dividend Policy of Everest Bank limited and bank of

Kathmandu Limited. Kathmandu: Shankar Dev campus

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