The Dividend Payout Policy of Conventional Banks in Pakistan

THE DIVIDEND PAYOUT POLICY OF
CONVENTIONAL BANKS IN PAKISTAN
By
Khurram Maqbool
Sahira Batool
Farwah Batool
Muhammad Asim Khan
MBA
In
Management Sciences
Faculty of Management Sciences
Balochistan University of Information Technology,

Engineering and Management Sciences (BUITEMS),
Quetta
Spring 2020
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THE DIVIDEND PAYOUT POLICY OF CONVENTIONAL BANKS
IN PAKISTAN
MBA Thesis submitted to
BALOCHISTAN UNIVERSITY OF INFORMATION TECHNOLOGY

ENGINEERING & MANAGEMENT SCIENCES (BUITEMS), QUETTA
For the fulfillment of the requirements for the degree of
MASTER OF BUSINESS ADMINISTRATION (MBA)
In
MANAGEMENT SCIENCES
By
KHURRAM MAQBOOL
SAHIRA BATOOL
FARWAH BATOOL
MUHAMMAD ASIM KHAN
Supervisor
DR. BILAL SARWAR
Faculty of Management Sciences, BUITEMS.
0/11/2020
ACKNOWLEDGEMENTS
Firstly, we are grateful to Almighty Allah for the good health and wellbeing that
were necessary to complete the research work.
Secondly, we are very grateful to our supervisor Dr. Bilal Sarwar for his continuous guidance
throughout this thesis which improved our knowledge of the research process and built
computing skills through hands-on practice on statistical software.
We also want to mention Miss Khalida Durrani & Sir Wahab for their time, effort, and
guidance that they put for us in this process which kept our work integrated to the timelines and
deadlines.
AUTHORS’ DECLARATION
We hereby state that our MBA thesis entitled “The Dividend Payout Policy of conventional
banks in Pakistan” is our original work and has not been submitted previously by us for the
award of any degree from the Balochistan University of Information Technology, Engineering &
Management Sciences, Quetta or elsewhere in the country/world.
At any time, even after our graduation, if the above statement is found incorrect, the university
has the right to withdraw our MBA degree.
Name of Students and signature:

Khurram Maqbool ______________
Sahira Batool ______________
Farwah Batool ______________
Muhammad Asim Khan _________
Date:
PLAGIARISM UNDERTAKING
We undertake that research work presented in the thesis titled “The dividend payout policy of
conventional banks in Pakistan” is our research work with no significant contribution from any
other person. Small contribution/help wherever taken has been duly acknowledged and that
complete thesis has been written by us.
We understand the zero-tolerance policy of the HEC and Balochistan University of Information
Technology, Engineering & Management Sciences, Quetta towards plagiarism. Therefore We, as
the author of the above-titled thesis, declare that no portion of our thesis has been plagiarized and
any material used as a reference is properly referred /cited.
We undertake that if found guilty of any formal plagiarism in the above-titled thesis even after
awarding of MBA degree, the University reserves the rights to withdraw/revoke our MS degree
and that HEC and the University has the right to publish our name on the HEC/University
website on which names of students are placed who submitted plagiarized thesis.
Student Signature: ______________

Names:
Khurram Maqbool
Sahira Batool
Farwah Batool
Muhammad Asim Khan
CERTIFICATE OF APPROVAL
This is to certify that the research work presented in this thesis, entitled “The dividend payout
policy of conventional banks in Pakistan” was conducted by Khurram Maqbool, Sahira
Batool, Farwah Batool & Muhammad Asim Khan under the supervision of Dr. Bilal Sarwar.
No part of this thesis has been submitted anywhere else for any other degree. This thesis is
submitted in the fulfillment of the requirements for the degree of Master of Business
Administration in the field of Management Science in the Department of Management
Sciences, Balochistan University of Information Technology, Engineering and Management
Sciences (BUITEMS), Quetta.
Khurram Maqbool (40383) Signature: ______________

Sahira Batool (40189) Signature: ______________
Farwah Batool (40278) Signature: ______________
Muhammad Asim Khan (40126) Signature: ______________
MBA Scholars
Department of Management Sciences
Dr. Bilal Sarwar

Supervisor Signature: ______________
Hadi Hassan Khan (Chairperson)

Department of Management Sciences: Signature: ______________
Dr. Syed Munawar Shah (Dean)

Faculty of Management Sciences: Signature: ______________
Table of Contents
Chapter 1. Introduction................................................................................................................2
Problem Statement.......................................................................................................................3
Research Objective......................................................................................................................4
Research Questions......................................................................................................................4
Definition of terms.......................................................................................................................5
Significance of the study:.............................................................................................................6
Chapter 2. History of Banking.....................................................................................................6
Chapter 3. Literature Review.....................................................................................................11
Hypothetical Background..........................................................................................................11
Empirical Review.......................................................................................................................13
Determinants of Dividend payout strategy................................................................................14
Chapter 4. Research Methodology & Framework...................................................................17
Research Design.........................................................................................................................17
Sources of Data..........................................................................................................................17
Tools of the study.......................................................................................................................17
Data............................................................................................................................................17
Theoretical framework and Hypothesis.....................................................................................18
Hypothesis of variables:...........................................................................................................18
Theoretical Framework..............................................................................................................19
Research Model..........................................................................................................................20
Details of variables.....................................................................................................................20
Chapter 5. Data Analysis and Results........................................................................................21
Results........................................................................................................................................21
Regression Analysis...............................................................................................................21
Discussion..................................................................................................................................22
Conclusions and Recommendations...........................................................................................25
References.....................................................................................................................................26
List of Tables
Table 1:……….……………………………………………………………………………….
Table 2:………………………………………………………………………………………...
Table 3:..........................................................................................................................................
Abstract
Banking Industry plays a vital role in economic growth and is considered the backbone of the
financial sector. The term dividend policy refers to the decisions of the company regarding what
amount of its earnings to be distributed as a dividend and what amount to be kept for other
financial needs. The aim of this research study is to examine the determinants of dividend payout
policy and extends our knowledge by taking an empirical investigation of determinants of
dividend payout policy of top conventional Banks of Pakistan. The banks which are included in
the study are Muslim Commercial Bank (MCB), United Bank Limited (UBL), Habib Bank
Limited (HBL), Allied Bank Limited (ABL), Bank Alfalah Limited (BAFL), Askari Bank,
Faysal Bank, & Bank Al-Habib Limited. Data was gathered from audited annual reports of banks
from the period December 2015 to December 2019. The dividend payout ratio was treated as a
dependent variable while 5 independent variables were Profitability, Financial Leverage,
Revenue Growth, Lagged Dividend, and Cash flow. The collected data is analyzed by using
Stata. Panel regression analysis with the fixed and random effect is used to check the causal
relationship among IVs i.e. financial leverage, profitability, revenue growth, lagged dividend,
cash flow, and DV i.e. dividend payout ratio. Secondly, a Unit root test is used to check the
stationarity of the data. The study concludes that Lagged dividend, cash flow, and profitability
are important and highly significant factors that determine the decisions whether to pay
dividends or not. The negative relationship of profitability and cash flow with the dividend
payout ratio shows that banks pay dividends regardless of their liquidity and profitability, this
might be due to the structure of Pakistan’s banking industry which is still in the developing
phase. The lagged dividend also indicated a negative relationship with the dividend payout ratio
which shows the inconsistency of dividend policy among banks. However, revenue growth and
financial leverage showed insignificant results which means that these factors are not or less
considered while deciding the payments of dividends in conventional banks of Pakistan.
Keywords: Lagged Dividend, Cash Flow, Profitability, Dividend Payout Ratio, Financial
Leverage,
Chapter 1. Introduction
The term dividend policy refers to the decisions of the company regarding what amount of its
earnings to be distributed as a dividend and what amount to be kept for other financial needs.
The aim of this research study is to examine the determinants of dividend payout policy and
extends our knowledge by taking an empirical investigation of determinants of dividend payout
policy of top conventional banks of Pakistan.
Dividends are of different forms like property, stock, and cash. The Board of Directors of any
company decides what amount to be paid as a dividend. A dividend is an amount which the
investor directly receives against his investment in firms that are publicly traded. Therefore, the
disbursement of funds among the stockholders in the form of dividends is considered to be a
major decision that is taken by the company’s management that is why the management attempts
to establish strategies that aids in the distribution of dividends among the stockholders. The main
question is what the factors or the determinants are that could impact the dividend payout policy
of Pakistan’s banking sector. Every banking industry in any country performs a key part in its
economic activities. At present, no economy can continue its operations without an adequate and
well-structured banking system.
Through economic activities, every firm earns a profit which is further distributed among the
investors. Dividend policy is determined as the amount of the earning which is distributed among
the shareholders and the amount to be kept in the firm. The mechanism through which this
earning is distributed is different from company to company as it depends upon the growth
opportunities and financial policy of the companies. For the financing of the company’s growth
retained earnings are an important internal source in the company (Barclay, 1995). Dividends
may look attractive from a shareholder perspective because they want to increase their actual
returns. This is the share of profit between shareholder expenses as well as reinvestment in the
company (Lashgari & Ahmadi, 2014).
One of the key components of shareholder returns is dividend payment, and by paying dividends,
a signal is sent to the investors from the company that its good compliance with good corporate
governance practices (Lashgari & Ahmadi, 2014). On the other hand, a wrong signal may be sent
by a company to its investors which adopts to pay low dividends, as it shows the company’s low
level of management and it will lower the confidence of investors in the prospects of the
company (Pandey 1991). According to Kapoor (2009) The managers, lenders, and investors are
all connected with the firm’s dividend policy and it does have implications for them. For
investors, whether the dividend is declared today or provided at some future time is a key and
major input in a firm’s valuation and not just a mode of regular payment of income. For lenders
also dividend policy is a matter of interest, as the higher the amount of dividend payout, the
lower would be the number of funds available for the recovery of their claims. Finally, the
flexibility of decisions taken by the managers for investment projects depends on the sum that is
distributed as a dividend, as if more funds are distributed among the stockholders, lesser funds
would be available in business for other investment purposes.
A dividend is a reason for bringing discipline and managerial efficiency within the company, so
the investors would rather like to invest in those firms which pay a higher dividend (Jensen &
Meckling, 1979; Tariq, Kharal, Abrar, Ahkam, & Khan, 2014). Basically, the decision of
dividend policy directly impacts the financing options of the company and the perceptions of
investors about the firm’s prospects. All key factors should be considered before establishing a
dividend policy. A state of the balance must be established and maintained between a
shareholder’s interest and that of a company (Kuria, 2001)
According to Ahmed et al., (2018) the way toward characterizing what measure of benefit to be
dispersed among the investors and how it could be conveyed is known as dividend policy. The
dividend payout strategy's fundamental concern is the choice in the amount of income that can be
paid by the company as dividends and the sum that could be saved (Kehinde, 2015). The
dividend payout policy of any business refers to its disbursement strategy, which the managers of
the company follow in determining the type and the scale of the fund to be supplied to its
shareholders (Kapoor, 2009). The company’s strategy that focuses on payment of salaries in the
form of dividends instead of keeping them for the purpose of reinvesting in the business is
dividend policy. Further, it can also be explained as the plan of actions by the management of the
company whenever they face a choice (Aduda & Kimathi, 2011).
This approach contrasts from nation to nation because of the administration charge strategies and
guidelines in money markets. Evidence suggests that developing a strategy on dividend
payments is one of the main issues that the management of any company faces (I. Ahmad &
Muqaddas, 2016). Therefore, to explore key factors in Pakistan's banking sector which derive
dividend payout policy is of a great and significant need. The goal of this research study is to
examine the determinants of the dividend payment policy of conventional banks in Pakistan.
Moreover, the determinants used in this study are the following variables: Financial leverage,
Profitability, Revenue growth, Lagged Dividend, and Cash flow that have been selected from
extensive literature.
Problem Statement
Every successful company that earns a profit determines what portion of its income can be used
to pay out dividends to its stockholders and what portion can be used for other purposes or
financial needs (Epaphra & Nyantori, 2018). Dividend policy is a key consideration for a firm’s
manager as in long run it can affect the firm’s other financing and investment programs.
Nadeem, Bashir, & Usman (2018) stated that cash dividend when given out to shareholders also
influences the firm’s liquidity.
A researcher Ahmed et al., (2018) identified another important role of a company’s dividend
payout policy as it attracts the investors to invest in specific shares of a company. The main
motive of an investor is to earn a profit whenever he invests in a stock, these profits are the
capital gains and the dividends that are paid by the companies. According to Indriani (2019), the
positive change in the stock price of a company from its initial price is the return of an
investment made by an investor, which is interpreted as a capital gain. When a company
distributes its profit among its shareholders, it plays a key role in maintaining a strong relation
between the company and the investors (Indriani, 2019).
Whenever a company is setting up its dividend payout policy many factors are influencing this
decision. According to Baker & Weigand (2015) and Nadeem et al., (2018) as there are a lot of
factors like market and company’s characteristics and other types of dividends which can affect
the decision of paying a dividend that’s why there does not exist any universally accepted and
applicable determinants.
Although many researchers have investigated this area still things are unclear about this
phenomenon. According to Nadeem, Bashir, & Usman (2018), the phenomenon of dividend is
one of the top 10 issues of corporate finance that is unresolved. Many studies have been
conducted to investigate the factors that could influence the dividend payout policy in first-world
countries like UK and USA etc., but very few studies have been conducted in third world
countries like India and Pakistan, etc., (Nadeem et al., 2018). Therefore, there are many factors
which banks need to consider while establishing their dividend payout policy. The problem in
this research is to identify the factors that have a significant impact on the dividend payout policy
of quoted companies.
Research Objective
 To determine the impact of financial leverage on dividend payout policy of top-
performing conventional banks of Pakistan.
 To investigate the impact of profitability on dividend policy of top-performing
conventional banks of Pakistan.
 To examine the impact of lagged dividend on dividend payout policy of top-performing
 To determine the impact of cash flow on dividend payout policy of top-performing
 To investigate the impact of revenue growth on dividend payout policy of top-performing
Research Questions
 Does financial leverage have any impact on the dividend payout policies of Pakistan’s
top-performing conventional banks?
 Does Profitability of Pakistan’s top-performing conventional banks have any impact on
its dividend payout policy?
 Does the lagged dividend have any impact on the dividend payout policy of top-
performing conventional banks of Pakistan?
 Does the cash flow of Pakistan’s top-performing conventional banks have any impact on
its dividend payout policy?
 Does revenue growth have any impact on the dividend payout policy of top-performing
conventional banks of Pakistan?
Definition of terms
Dividend Payout ratio
The dividend payout ratio is the proportion of the net income of the firm which is distributed to
its shareholders based on their ownership. In this study, it is calculated through dividends paid/
net income.
Financial Leverage
The amount of borrowed capital/debt used by a firm to finance its investment, projects, or any
assets generally pays a dividend at lower rates to its stockholders, as the firm has to pay back the
charges along with the principal amount borrowed. In this study, financial leverage is calculated
through the debt ratio (total debt/ total asset).
Profitability
The Profitability of a company can be defined as the effectiveness of a firm at generating
revenue. Firms or organizations with stable income tend to pay more dividends to their
shareholders than a firm with unstable income. To measure Profitability, return on asset (ROA)
is used.
Revenue Growth
Revenue growth can be defined as the increase in a firm’s sales from one period to another. It is
shown in a percentage. Revenue growth portraits increase and decrease over time by identifying
company trends. Future performance is associated with sustainable earnings, we also expect
companies with stable revenue growth and earnings to perform better in the future (Ghosh, Gu,
& Jain, 2005).
Lagged Dividend
Cash dividends paid to the shareholders or investors by the firm earlier to the year under
consideration can be referred to as lagged dividend. The dividend development so far is
significant enough to influence the current dividend payment so that management can pursue a
stable dividend policy.
Lagged dividend = Divt-1 (dividend paid last year)
Cash flow
Cash flow is the total amount of cash and cash equivalent that is transferred into the business or
out of it. In this paper cash flow/ liquidity is calculated as cash and cash equivalent/ net total
assets.
Significance of the study:
 The aim of this study is to examine what factors determine the Pakistan’s banking
system's dividend payment policy and to explore the relationship between variables and
dividend payment policies. It will be useful for stakeholders inside and outside the
banking sector. The entire banking sector of Pakistan will receive assistance in its
dividend distribution policy by identifying factors that have a significant impact on
dividend distribution policies.
 It will also benefit the management of KSC-listed banks of Pakistan from the findings as
they might get help through the recommendations of the study on how to develop
dividend payout policies and decisions. As the management will see how their company’s
dividend policy works as compared to other firms that are similar in size and are
operating in the banking industry.
 This study will also help the policymakers which include the government of Pakistan as
well to develop effective dividend distribution policies . The government will discover
how its tax policies affect a company's dividend decision and will therefore be able to
prepare a tax policy that can improve stock market activities.
 It will also assist the researchers and academicians to use the findings of this study as a
basis for conducting their future research. This will be an addition to the existing body of
literature regarding dividend payout policies.
Chapter 2. History of Banking
Origin of Banking and Evaluation
The first proper bank started at the time of ancient Mesopotamia where the bank was not
providing money as lending but providing seeds to the farmer which they will have to repay
when they harvest their crops. According to Roussakis, (1997) the early lending practices and the
drawn of merchants banks traced to the early twelfth century in Italy when the restrictions from
the church had been somehow relaxed during that time when the coastal cities started their
business activities with some European countries. The merchant bank came to facilitate them and
started their activities in Europe to dominate international finance during the period from the
twelfth through fifteen century. The Group of merchant banks started accepting deposits,
financing foreign trade, made a market in foreign exchange, and provided loan facilities to the
businesses, government, and new entrepreneurs. During the 14 th century, two of the largest
banking houses were Bardi and Peruzzl however the most prominent bank during the mid of
fifteen century was Medici bank it had its branches within Italy and also outside of Italy,
however, the Medic bank branches started a collaboration with major firms and other branches,
and earned a 50% income of the all-time high at that time, To earn more fund of Profitability for
employees the bank took high risk due to which bank faced bad loss and the major portion of
bank collapsed much like its precursor Bardi and Perruzzl (Roussakis, 1997).
As the Economic growth commences in north Europe, the German merchant banks got their
importance and dominated the international finance market during the sixteenth century. The
German banks raised importance because of the production and consumption centers of Europe
after finding out the south Asian trade route, the German banks moved their activities into
southern Asia. The most important banks of that time were Fugger, the Walser, and Hochstetler
doing the same activities performed by Italian banks. The German banks were somehow funding
or investing in Hapsburg through which they earned a good income but later on, they suffered a
big loss as they had to lower their interest rate and settle off the debt of Hapsburg due to which
the German banking industry fell (Roussakis, 1997).
According to Roussakis, (1997) seventeenth and eighteenth-century belonged to Dutch banks as

they dominated the finance market. Dutch banks introduced new concepts of acceptance and
loans to foreign governments. Furthermore, in the eighteenth-century, the Dutch banks
introduced the new concepts of bill guaranteed in which the one give acceptance known as
acceptance house which helped traders to flourish trade with other countries. Security
underwriting is another concept introduced by Dutch Banks. Due to great financial skills Dutch
ruled and had a huge portion of wealth. At the end of the eighteenth century, British royal
families learned business skills from the Dutch and arose banking business in the 19 th century
(Roussakis, 1997).
As the large scale industry flourished and huge capital was needed than the British banking
industry started challenging the banking sector and started their growth and the journey towards
dominating the finance market after the world war 1. The British banking era offered short-term
and long-term finance along with equity financing which was the most important need for
business at that time in London. In the 19th century, the British banking system established a
significant number of British banks for financing trade transactions (Roussakis, 1997).
Herstatt Bank was established in 1955 and faced bankruptcy due to the incident of risk
settlement in international finance which highlighted systematic risk related to international
banks within the country and became the reason for establishing the Basel Committee (Mourlon-
Druol, 2015). Petter Cokee from the Bank of England proposed the idea of the Basel committee
and in 1988 the committee provided a set of guidelines named Basel 1 which restricted banks to
the 8% target minimum ratio of loans, New Guidelines Basel 2 implemented in 2006, and Basel
3 in 2010.
Evaluation of banking sector in Pakistan

Pre-Partition Era:
Before the partition of India, the British banks dominated the financial sector of India. Charter
Bank and Grindlays Bank were the oldest banks providing services in India. Indigenous Bank
was the largest bank and was playing a dual role as a commercial and state bank of India. At that
time Habib bank which was established in 1941 was owned by Muslims. Muhammad Ali Jinnah
who was the leader of the All-India Muslim League realized the need for another bank for
Muslims and demanded it just a few months before partition, For which Muslim Commercial
Bank was established in 1947(Rammal, 2008).
Post-Partition Era:
According to Rammal, (2008) after partition, both Habib and Muslim Commercial bank moved
their offices in Pakistan. According to Khalabat (2011) the banking system in Pakistan began
very differently as compared to other countries. Even after a year of partition, there was no
central bank in the country Habib bank filled this gap and served as a central bank. Later, the
State Bank of Pakistan was established on 1 st July 1948. Regulation of bank notes issue, Bank
reserves, Monetary stability and better use of funds was the duties assigned to the State Bank of
Pakistan (Rammal, 2008). After the State Bank of Pakistan’s establishment, the banking industry
flourished, and many branches of different banks started their operations. According to Ahmed et
al., (2018), Allied Bank, Habib Bank, and National bank started their operations along with the
collaboration or under the guidance of SBP in order to flourish the trade industry. During the
period of the 1st era total of 25 banks along with 195 branches started their business (Khalabat,
2011).
Nationalization Era
In 1974, the government of Zulfikar Ali Bhutto announced the nationalization policy. According
to Rammal (2008) under this policy, no foreign banks were affected, all the companies of life
insurance, both foreign and Pakistani were now controlled by the government. Under the policy
of nationalization 1974, the government consolidated thirteen banks into government banks
which were five in number and brought them under the supervision of the government.
According to Zafar Sana (2013), the nationalization process was divided into different phases;
Phase 1: It includes the merging of Bank Bahawalpur with NBP, the consolidation of MCB with
Premier Bank Limited, and also Allied Bank was combined with Pak Bank Limited and Sarhad
Bank Limited.
Phase 2: UBL and Commerce Bank limited were merged in the second phase.
Phase3: In this phase, HBL and Standard Bank limited were combined.
In the same year, the Pakistan Banking Council was also established to control and monitor the
nationalized banks and marginalizing the role of SBP as a regulator.
Bad Loan Era
The financial industry served politicians, large corporate businesses, and the government during
the 1980s. The hiring of Chief Executive Officers and Board of Directors were politically
influenced. During this era, billions of funds were leaving the financial industry in the form of
“bad loan”. Mostly, those loans which were less profitable were drawn, and also they had a very
little contribution regarding the expansion of financial and banking sector (Ahmed et al., 2018).
During the same era, amendments were made in regulations of financial service to establish an
interest-free structure and this duty of transforming an interest-bearing financial system into a
non-interest-bearing financial system was assigned to SBP.
Financial deregulation and financial liberalization

The act of nationalization of banks was amended in 1991 and 23 new private banks were
established, in which 10 banks were licensed. According to, Ahmad et al., (2010) In the 1990s
financial deregulation and financial liberalization motivated the national investors and stimulated
international banks to start functioning in Pakistan. The expansion of the banking sector
encouraged competition among banks. These new 23 banks begin their operations and were
trying to attract maximum customers. Government banks had been discouraged by slow financial
growth, low profitability, and low economic growth. (La Porta, Lopez-De-Silanes, & Shleifer, 2002).
The Muslim Commercial Bank was privatized in 1991, and by 1993 the Allied Bank’s more than
half owners were transferred to its management. Further significant is the implementation of a
program for selling government securities, restructuring of interest rates, and the lowering of the
bank-wise credit limit. By 1997 four government banks were still there in Pakistan but were
facing serious rivalry from 27 foreign and 21 domestic banks (Ahmed et al., 2018).
Post-privatization and introduction of Islamic banking
When the banking sector was privatized, the authority of the State Bank as the regulator was
restored after the modification in the 1962 ordinance of the banking companies and the 1965 Act
of the State Bank of Pakistan. Subsequently, it improved the regulatory framework, corporate
governance, and the internal control system. In 2001, legal deficiencies and the gap in recovering
the bad loan were restructured. Also, the prudential legislation of 1989 was strengthened,
allowing banks to take exposure to the previously untapped market. Banks were open to small
and medium-sized firms and were helping to expand small businesses in the economy (Ahmed et
al., 2018). The inception of the 21st century made banks more competitive in terms of service
efficiency to attract consumers for greater productivity. Islamic banking operations had spread
around the world to encourage the different sectors of the economy. In 2001, The State Bank of
Pakistan established specific criteria and Meezan Bank was declared as the very first Islamic
bank of Pakistan in 2002.
In the same year, Islamic banks started operations in Pakistan and faced tough competition from
both their competitors and mainstream banks. It created a sense of mutual well-being through
sharing risk between stakeholders (A. Ahmad et al., 2010).
Liquidity Crisis to Date

According to Ahmed et al., (2018) in the current era adequate banking system had played an
important role in the economic activity of any country. According to Awan (2009), Islamic
banking grew very fast worldwide specifically in Pakistan. In 2010, 6 foreign banks, 5 public
sector banks, In the county served 4 specialized banks and 25 domestic banks and at the same
time, the total number of branches was 9348 (Ahmed et al., 2018). The Islamic banking system
has done better than the traditional banking system at the time of global economic crises which
started in 2007 in terms of credit, asset growth, and Profitability (Phulpoto et al., 2012, Shafique
et al., 2012). In 2010, 80% of the banking assets of Pakistan were privately owned (A. Ahmad et
al., 2010). Nowadays Islamic banking has moved from a specific group of people to the
mainstream market (A. Ahmad, 2017). According to Akhtar (2019) in 2018, the assets of Islamic
banking grew by Rs. 148 billion and stood Rs. 2482 billion from April to June, deposits were
also increased, and it reached Rs. 2033 billion in the same period. The market share in the overall
banking industry of asset and deposit reached 12.9% and 14.8 % at the end of June 2018, also
Islamic banking earned a Dividend of Rs. 15 billion as compared to the previous year.
Chapter 3. Literature Review
Dividend strategy assumes an essential job for financial specialist and association since it
increments the abundance of speculator and effect on the presentation of the firm (Eng, Yahya,
& Hadi, 2013). The wrangle on determinants of Dividend strategy started crafted by Lintner
(1956) when he distinguished that Dividend is a most significant thing for any association In his
work he talked with 28 directors of USA Firms and raised the significance of Dividend (Nadeem
et al., 2018)
Hypothetical Background
Dividend Irrelevance Theory
The Dividend unimportance hypothesis was proposed by Modigliani and Miller in 1961(Ang &
Ciccone, 2011). As indicated by Residual Dividend Policy and aggregate equity returns, (2017)
According to this theory’s recommendation there is zero effect of dividend on the exhibition or
estimation of firm anyway the venture choices, current and future incomes of the firm will
choose its worth yet dividend paid or not is unessential in immaculate economic situations. The
theory expresses that the lone imperatives on the company's estimated worth are the company's
investment strategy, not the dividend strategy that a firm follows since investment strategy is
liable for the organization’s future benefits. This hypothesis concludes that the estimation of the
firm is reliant on the firm's current and future free cash flow and that the sum or level dividends
to be paid or paid has no impact on the estimation of the firm since firms, as a rule, amplify their
incentive through investment (Residual Dividend Policy and aggregate equity returns, 2017)
Bird in hand Theory

As per Residual Dividend Policy and aggregate equity returns, (2017). In (1962) Gordon
proposed the Bird in hand Theory. The theory suggested that there is a positive link between
companies worth and dividend henceforth dividend is pertinence to the association's
value(Residual Dividend Policy and aggregate equity returns, 2017). The theory further stated
that investors mostly prefer the cash dividend as compare to retained earnings because of the
uncertainty of future cash flows the higher dividend payout ratio increase the firm's value
(Marfo-Yiadom & Agyei, 2011). Al-Kayed (2017) argued that vulnerability as for future
incomes prompts an inclination of money dividends by speculators over retained earnings. A
higher dividend payout, in this manner, will lessen the necessary pace of return and increment
the organizations' worth.
Signaling Theory:
Bhattacharya (1980) and John Williams (1985) proposed the Signaling Theory(Saeed, Riaz,
Lodhi, Munir, & Iqbal, 2014). Signaling theory is imperative to portray the conduct of two
gatherings in a circumstance when they do have an abundance of data that in this circumstance
how one gathering imparts the data and others decipher that information(Connelly, Certo,
Ireland, & Reutzel, 2011). The theory suggested that offer cost don't legitimately affect the
dividend payout proportion, it impacts the general firm choices anyway the information financial
specialist does have about the firm will adjust his perspectives about future possibilities of an
organization (Marfo-Yiadom & Agyei, 2011). Besides Eng et al., (2013) contended association
spread data into advertising as indicated by their desires the individuals who have foreseen
increment in net procuring spread the data on the off chance that any firm expected decrease
won't prefer to impart data to investors. Al-Kayed (2017) contended that cut in dividend is
considered as terrible news for any association and lead financial specialist to consider
association future income.
Tax preference Theory

Tax Preference theory was proposed by Robert H. Litzenberger and Krishna Ramaswamy in
1979. Marfo-Yiadom & Agyei (2011) said that the firm stock worth can be expanded by giving
low dividend financial specialist favor those organizations which hold dividend in light of the
assessment advantage. Yuriy Smirnov (n.d.) asserted that dividend strategy straightforwardly
sways the speculator conduct because of the contrast in tax assessment from dividend and capital
addition. Marfo-Yiadom & Agyei (2011) asserted that due to burden points of interest, financial
specialists may want to have organizations that hold the majority of their procuring provided that
this if so, at that point low installment organizations than in any case comparative higher-
installment organizations would be liked.
Agency Theory
Agency theory was introduced by Stephen Ross and Barry Mitnick in 1973. Agency theory is
generally significant to determine the issues or clashes between principle (Shareholder) and
agent (Manager). Residual Dividend Policy and aggregate equity returns (2017) argued that it is
consistently hard to screen agent work that the choices he takes will prompt advantage
shareholders or managers because the interest of manager and shareholder are not aligned due to
which they are not working for a shared objective. Manager and investor clashes hurt investor’s
esteem which legitimately influences the firm value (Al-Kayed, 2017). The key push of the
agency theory is that supervisor may take activities as per their advantage which may not
generally be advantageous to investors accordingly the payment of a dividend is viewed as a
method for decreasing the measure of overabundance cash accessible to the administrator which
may not be utilized to the greatest advantage of investors (Marfo-Yiadom & Agyei, 2011).
Empirical Review
A Study by Chukwuebuka & Okonkwo, (2020) inspected the relationship of dividend strategy
and money related influence between non-monetary firms enrolled in Nigeria stock trade while
utilizing auxiliary information gathered from yearly reports during the timeframe 2011 t0 2018,
distinct insights and least square relapse were utilized to investigate the information. The
investigation recommended that there is a huge connection between long haul advances and
Dividend payout proportion then again transient credit has no huge effect on firms.
Nadeem et al., (2018) analyzed determinants of dividend strategy in the Pakistan banking area
the wellspring of information assortment was auxiliary and board information methods were
utilized on the information between timespan 2005 to 2015. The study recommended that
gainfulness, venture and a year ago dividend are decidedly huge to dividend strategy and
advance and development are contrarily critical, the study also proposed that there is no huge
distinction in factors influencing when the money related emergency.
Nancy & Sahi, (2018) explored the determinants of open segment banks in India the
investigation utilized auxiliary information from the period 2003 to 2017. Moreover, the study
recommended that gainfulness and P/B esteem proportion had a hugely positive effect on
separated while chance had a negative huge connection with a dividend.
Residual Dividend Policy and aggregate equity returns (2017) looked to comprehend the
dividend strategy of recorded firms at the Nigerian stock trade. The investigation explored the
hypotheses of dividend to clarify the principle topic of dividend strategy. The study proposed
that dividend payout, firm size, and method of dividend installment are emphatically huge and
sway on the estimation of the firm while on other hand obligation proportion contrarily
noteworthy to the dividend strategy besides, the study suggested that recorded firms ought to
painstakingly and successfully embrace or create dividend strategy to expand the estimation of a
firm.
Al-Kayed (2017) inspected the components influenced the dividend payout of Islamic and
customary banks in Saudi Arabia while utilizing auxiliary information and board relapse
approach the investigation recommended that factors like a benefit, slacked dividend and
influence are noteworthy in Islamic banks on the other hand all factors remembered for study, for
example, liquidity influence development are huge to regular banks. Moreover, the study
proposed that Islamic banks to contend in this market should cautiously choose their dividend
strategy.
I. Ahmad & Muqaddas (2016) explored the effect of money related effectiveness, wellbeing,
hazard, and benefit on separated approach while utilizing the board information technique for the
timeframe of 9 years of auxiliary information of 10 business banks recorded in Pakistan stock
trade. The examination recommended that there is a positive connection between dividend
payout with wellbeing and benefit yet hazard and budgetary productivity adversely influence the
dividend payout, besides banks winning higher benefit and less non-performing credits will
deliver more dividends.
Saeed et al., (2014) completed an exact investigation of money related area of Pakistan
concerning dividend payout on recorded firms in Karachi stock trade the examination utilized
board information technique and factors, for example, gainfulness, liquidity, size, incomes,
resource substance, and winning every year to gauge dividend payout proportion. The
examination proposed that income have negative while procuring per share has a positive huge
relationship with dividend payout.
Eng et al., (2013) examined the determinants of dividend strategy in the financial sector of
Malaysia by examining both Islamic and Conventional banks while utilizing board informational
index procedure. The study proposed that ordinary banks appropriate higher dividend when they
get higher gainfulness then again Islamic banks for the most part follow the previous dividend
strategy just slacked dividend noteworthy to Islamic financial segment.
Determinants of Dividend payout strategy

This part clarified the distinctive determinant of the Dividend payout strategy. That incorporates
financial leverage, profitability, revenue growth, legged dividend, and cash flow.
Financial Leverage
As indicated by Stephen Yuko Ochieng (2016) obligation is a wellspring of subsidizing utilized
by numerous associations to reinforce their capital thus as to expand their dividend also.
Influence is portrayed in this examination as an absolute obligation to add up to resources.
Moreover, if the influence gets is all around spent it can expand association Profitability. Al-
Najjar & Hussainey (2009) characterized obligation proportion as a level of investor reserves. It
essentially implies that how much the firm is financed through obligation. Aivazian et al., (2003)
said in their diary that the company's influence is a key factor in the dynamic of dividend
installment. He established a negative connection between firm influence and dividend. It
implied that organizations that have a low obligation proportion are happy to deliver more
dividends in contrast with the individuals who have a high obligation proportion. This
investigation is bolstered by Alzomaia (2013) they said an organization with a high influence
proportion deliver a low dividend to their investor because most of their acquiring are utilized to
take care of their liabilities.
Profitability
As indicated by Hosen (2016) profitability is a key factor that impacts dividend strategy. Al-
Najjar & Hussainey (2009) contended in their investigation that profitability is the capacity of an
association in the age of dividends. It gauges the presentation of an association. In this
examination, they gauged profitability as income to add up to resource proportion. Profitability is
considered to be an important determinant of the dividend strategy of associations. (Obembe,
Imafidon, & Adegboye, 2014). The dividend of an organization has a positive relationship with
profitability (Ahmed et al., 2018). Past investigations found that profitable associations deliver a
dividend to pass on the message to their great budgetary presentation (Chang & Rhee, 1990).
Revenue Growth
As indicated by Rozeff (1982) a firm who has development openings deliver less dividend, they
hold a significant segment of their procuring to fund their future development. They established
that income development and dividend payout proportion is contrarily associated with one
another. Kuria John Jorge (2000) additionally located the negative connection between dividend
payout and development rate. Amidu et al., (2006) likewise discovered a huge negative
connection between dividend payout proportion and chronicled deals development. As per
Aivazian et al., (2003) firm development and venture openings are evaluated through the market
to book proportion and have the opposite relationship with dividend payout proportion. Korean
firm with high development opportunity likewise delivers less dividend (Lee, Park, & Lee,
2018).
Lagged Dividend
Lintner (1956) characterized slacked dividends as money dividends paid by the firm to financial
specialist one year before the year viable. Since associations lean toward a consistent dividend
system, the past dividend design is adequately critical to affecting current dividend installment,
and along these lines, the variable has been consolidated as a huge dividend payout procedure
determinant of Islamic banks' dividend methodology. As indicated by Imran., (2011) the
proportion of profitable associations will when all is said the done concentrate on earlier year
and ordinarily need to fabricate the proportion of the dividend from the past level, so the
dividend per share a year back demonstrated a positive relationship with the dividend per share
of the current year. Dickens et al., (2003) showed the positive connection between slacked
dividend and dividend payout strategy. Demirgüneş (2015) showed that the significant
determinants of dividend payment are the envisioned level of future income and the example of
past dividends; and dividend payments are affected by the current and the previous years'
income, the year-to-year changeability of profit, and the development of income, separately.
Cash Flow
As indicated by Abu (2012) income and dividend payment strategy are emphatically related to
one another. It implies a firm with a smooth income has a greater capacity to deliver the dividend
to its investor in contrast with the individuals who have inflexible income. An earlier
investigation of Ho (2003) likewise bolstered that idea, according to him, liquidity is a
significant factor in dividend payout strategy. Further, he contends that a firm who has high
liquidity delivers more dividend as a contrast with the individuals who have low liquidity. This
positive relationship additionally underpins the singling hypothesis of dividend payout strategy.
As indicated by Mirza (2014) liquidity assumes a significant job in the dividend installment of an
association. Anyway, he proposed that the effect of income on the dividend payout differs from
nation to nation. Rehman (2012) discovered a positive connection between dividend payout and
cash flow per share in Malaysia. The Cash flow per share was an important determinant of the
dividend payout in their investigation. Brook et al., (1998) inspected the relationship of cash
flow and dividend payout. The author clarified that expanding cash flows are a huge determinant
of dividends. The organizations with expanding cash flow have a higher tendency of reporting
dividends
This part clarifies the various speculations on dividend arrangements and their impact on
dividend payout proportion. These hypotheses depend on various clarifications climate dividend
strategies impact dividend payout emphatically or contrarily. Those hypotheses included
dividend unimportance hypothesis, fledgling close by hypothesis, flagging hypothesis, charge
inclination hypothesis, organization hypothesis, and customer base hypothesis. This part has
clarified the distinctive determinant that impacts dividend payout proportion. Those determinants
include financial leverage, profitability, revenue growth, lagged dividend, and cash flow.
Chapter 4. Research Methodology & Framework
This segment covers the data, variables, and sample size to recognize the elements which affects
the dividend payout ratio in the top-performing banks of Pakistan.
Research Design
This research focuses on studying the top-performing conventional banks of Pakistan for the
analysis. The banks which are included in the study are Muslim Commercial Bank (MCB),
United Bank Limited (UBL), Habib Bank Limited (HBL), Allied Bank Limited (ABL), Bank
Alfalah Limited (BAFL) Askari Bank Limited, Faysal Bank, & Bank Al-Habib Limited. The
Data gathered for the study is from December 2015 to December 2019 (Ahmed et al., 2018).
The research is explanatory in which the authors have recognized the sort of connection among
dependent and independent variables. Deductive approach was utilized to quantify the effect of
explanatory variables on explained variables.
Sources of Data
The wellsprings of data are secondary in this manner all the data was obtained from the audited
financial statements taken from the annual reports of the selected banks online and state bank
website.
Tools of the study

The research aims at auxiliary knowledge in this way all the information was obtained from the
bank’s financial reports. The collected information is a mixture of time series and cross-sections.
This study accordingly utilized the panel regression model to recognize the components that
affect the dividend payout ratio. To build the number of perceptions the yearly ratios were
converted to a month to month frequency by using E-views.
Data
Financial ratios of the banks being utilized in the research were computed from their Annual
reports.
In order to measure the dividend payout ratio (Dividend paid/ net income) was taken as
representation ( Maldajian & El Khoury, 2014). The dividend payout ratio was treated as a
reliant variable while 5 independent variables were Profitability, Financial Leverage, Revenue
Growth, Lagged Dividend, and Cash flow. Profitability (Net Income/ Total Assets) was
measured by using a proxy of (Al-Kayed, 2017; Eng et al., 2013; Marfo-Yiadom & Agyei,
2011). For calculating Financial Leverage (Total Debt/ Total Assets) was used as a proxy (Al-
Kayed, 2017; Eng et al., 2013; Maldajian & El Khoury, 2014). Revenue Growth (Current year
revenue – Last year revenue / Last year revenue) was used as a proxy (Eng et al., 2013). For the
measurement of Lagged Dividend ( Dividend paid last year) was used as a proxy (Eng et al.,
2013). For the purpose of calculating Cash flow (Cash and cash equivalent / Net total assets) was
used as a proxy (Al-Kayed, 2017; Eng et al., 2013).
Theoretical framework and Hypothesis
This part incorporates the relationship and hypothesis of variables. The dividend payout ratio is
utilized as a reliant variable while Profitability, Cash flow, Financial Leverage, Revenue Growth,
and Lagged Dividend as independent variables.
The hypothesis of variables:
Profitability
Profitability can be defined as the amount which an organization earned after meeting their
expenses. Organizations with higher profit usually pay in a more distributed manner. Profitability
is viewed as one of the most crucial elements of the dividend payout ratio in banks. Several
researchers have shown a clear positive link between profitability and a dividend payout ratio of
banks (I. Ahmad & Muqaddas, 2016; Al-Kayed, 2017; Eng et al., 2013; Marfo-Yiadom & Agyei,
2011; Nadeem et al., 2018). It is sensible that profitable banks will, in general, deliver more
dividends to the investors hence it is deemed as one of the key aspects of the dividend payout
ratio.
However, dividend policy is not affected by the level of profitability as the profits of large
companies appear to rise per year regardless of the value held. This indicate that firms tend to
retain most of their income instead of rising the dividend whenever the company has a higher
profit (Rizqia, Aisjah, Program, & Java, 2013). This observation is confirmed by Chen & Steiner
(1999), who stated that profitability does not influence the policies of dividend payout ratios.
(Okpara, 2010) stated that firms with more surplus earnings tends to allocate them for company’s
growth.
H1: Bank’s profitability has a significant relationship with the dividend payout ratio.
Financial Leverage
Financial leverage implies the existence of liability in the capital formation of a firm. Al-Kayed
(2017) reported a definite significant link between financial leverage and dividend payout ratio
in banks. Marfo-Yiadom & Agyeie (2011) pointed out that debt is positively impacting the
dividend policy of banks in Ghana. Thus due to large regulatory pressure banks with superior
leverage ratio regulated to pay higher dividends (Eng et al., 2013).
Whereas a negative relationship between financial leverage and dividend payout ratio was
reported by (Aivazian, Booth, Cleary, & Rotman, 2006). The distribution of dividend would be
restricted among those companies which has greater debt burden (Eng et al., 2013)
H2: Bank’s Financial Leverage has a significant relationship with the dividend payout
ratio.
Revenue Growth
Eng et al., (2013) argued that based on Rozeff's assumption higher revenue growth leads toward
higher investment opportunities. When an organization increases its investment budget it directly
affects the dividend payment because the organization is looking for new opportunities and try to
reduce the dividend payment. Arif & Akbar, (2013) pointed out a pessimistic connection among
revenue growth and the dividend payout ratio.
Whereas, according to (Eng et al., 2013) banks with satisfactory and more stable revenue growth
has a greater tendency to pay higher dividends.
H3: Bank’s Revenue growth has a significant relationship with the dividend payout ratio.
Lagged Dividend
Lagged dividend basically known as the previous year dividend is positively significant along
with dividend payout ratio especially in the Islamic banking system many of the Islamic banks
always give preference to the lagged dividend while announcing recent year dividends. Prior
dividend pattern is sufficient to have an impact on the recent dividend payment by the aim of the
board to pursue a stable dividend strategy. This variable has been included as a significant factor
in the greater part of the hypothetical and observational findings (Eng et al., 2013).
Al-Kayed (2017) find out that lagged dividend is positively significant along with the dividend
payout ratio in traditional and Islamic banking system. Nadeem et al., (2018) reported a positive
link among lagged dividend and a dividend payout ratio in the banking system of Pakistan.
H4: Bank’s Lagged dividend has a significant relationship with the dividend payout ratio.
Cash Flow
Cash flows could be a higher priority than net profit in deciding a company's ability to secure
profit installment. Cash flow is viewed as a significant proportion of a company's extra cash.
Liquidity proportion is used as an intermediary to analyze the connection between dividend
policy and cash flow. An organization with more cash flow be likely to pay a greater sum of
dividends.
Eng et al., (2013) found a definite connection between cash flow and dividend payout ratio.
Dewasiri et al., (2019) reported a positive substantial connection among cash flow and dividend
payout ratio. However, Heitor Almeida, Murillo Campello (2013) stated that cash accumulation
has a negative effect on business cash dividends, claiming that businesses facing financial
pressures in the future respond to those possible constraints by collecting cash now, which makes
companies more cash conscious.
H5: Bank’s cash flow has a significant relationship with the dividend payout ratio.
Theoretical Framework
Research Model
The model, which was used to evaluate the influence of Profitability, Cash flow, Financial
leverage, Revenue growth and Lagged dividend on dividend payout ratio from December 2015
to December 2019 is shown in the subsequent panel regression model.
DPOR ᵢ,ₜ = βₒ+β₁*PROFᵢ,ₜ+β₂*LEVᵢ,ₜ+β₃*REVᵢ,ₜ+β₄*LEGDIVᵢ,ₜ+β₅*CASHFLOWᵢ,ₜ+εᵢ,ₜ
Where
DPOR = Dividend Payout ratio
PROF = Profitability
LEV= Financial Leverage
REV= Revenue Growth
LEGDIV = Lagged Dividend
CASHFLOW= Cash Flow
β₁, β₂, β₃, β₄,β₅ = Coefficients
ᵢ,ₜ = Firm and Time Period

εᵢ,ₜ = Error Term
Details of variables
Variables Calculation
Dividend payout ratio Dividend paid/ Net Income
Profitability Net Income/ Total Assets
Financial Leverage Total Debt/ Total Assets
Revenue Growth Current year Revenue – Last year Revenue/ Last year Revenue
Lagged Dividend Dividend paid last year

Cash flow Cash & Cash Equivalents/ Net Total Assets
Chapter 5. Data Analysis and Results

This chapter includes the techniques used to analyze the data and their results. The collected data
is analyzed by using Stata. Panel regression analysis with the fixed and random effect is used to
check the causal relationship among IVs i.e. financial leverage, profitability, revenue growth,
lagged dividend, cash flow, and DV i.e. dividend payout ratio. Secondly, the Unit root test is
used to check the stationarity of the data collected for the given variables.
Results
Table1: Descriptive statistics
Variables Mean Std. Dev Minimum Maximum
Cash Flow 1.209462 .4620753 -.588263 2.518114
Financial Leverage .9027008 .1521026 .022 1.679
Lagged Dividend .566154 .4933903 -1.3876 2.283787
Profitability .0140155 .0160582 -.02 .159387
Revenue Growth .0996416 .1185076 -.178948 .56385
Dividend payout ratio .5740693 .4592254 -.289154 2.283787
Table 1 mentions the descriptive statistics of all variables used in this research study. During the
study period, the dividend payout ratio ranges from a minimum value of -0.289154 to a
maximum value of 2.283787 with a mean of 0.5740693 and a standard deviation of 0.4592254.
Cashflow had the highest average of 1.20, whereas, profitability had the lowest mean that is
0.014. Among all, the variable with the highest standard deviation was lagged dividend with a
value of 0.4933903 and profitability had the lowest standard deviation with a value of
0.0160583. The lagged dividend had the lowest minimum value of -1.3876, while cashflow was
the variable with the highest maximum value of 2.518114.
Regression Analysis
Regression analysis is one of the powerful statistical processes to investigate the relationship
between dependent and independent variables. Commonly, random-effect and fixed-effect
models are used for analyzing the panel data.
Table 2. Panel Regression- Estimation by Random & Fixed Effect Model
Variables Random Effects Fixed Effects
Cash Flow -.1301459*** (-2.87) -.1436443*** (-3.19)
Financial Leverage -.0128565 (-0.64) .0065324 (0.29)
Lagged Dividend -.7870866*** (-20.34) -.8135654*** (-21.10)
Profitability -7.567075*** (-4.70) -9.579634*** (-5.61)
Revenue Growth -.1552033 (-0.81) -.2352522 (-1.24)
Note: (*): significant at 10% level, (**): significant at 5% level, (***): significant at 1% level.
The results in Table 2 show that cash flow, lagged dividend and profitability are statistically at a
1% significance level which means that these are the most important factors that determine the
dividend payout ratio among banks. However, both financial leverage and revenue growth shows
insignificant results which means that these factors are less considered while making dividend
policies.
Discussion
Relationship between Profitability and Dividend Payout Ratio
As the result indicates profitability is at a 1% significance level indicating that it is an important
factor in determining the dividend policy of banks (Al-Kayed, 2017; Maldajian & El Khoury,
2014). It is implied that banks are giving dividends without considering their profits. Okpara
(2010) who supported this logic, concluded that when businesses experience surplus profits,
most of them are retained and allocated for the company’s growth.
Relationship between Financial Leverage and Dividend Payout Ratio

Firstly, the negative relationship is because regulations pressurize all those banks which have
higher leverage. Secondly, the banks whose assets are financed from debt tend to reduce their
dividend payment (Alzomaia, 2013). Despite its negative sign as the result showed financial
leverage is an insignificant factor, which means that it is not an important factor in affecting the
dividend payments. This result is in line with (Alzomaia, 2013; Eng et al., 2013)
Relationship between Revenue Growth and Dividend Payout Ratio

The result showed a negative relationship between revenue growth and dividend payout ratio, it
is because that all those banks which generate more revenue and have more growth opportunities
would like to invest more rather than paying out dividends. However, the result indicates that
revenue growth is an insignificant factor. This result is in line with (Alzomaia, 2013; Eng et al.,
2013).
Relationship between Lagged Dividend and Dividend Payout Ratio

The lagged dividend is at a 1% significance level which means it is an important factor in
determining the dividend policy of banks. This result is in line with the results of (Al-Kayed,
2017; Eng et al., 2013). The negative relation between lagged dividend and dividend payout ratio
is due to the flexibility in the dividend policy of banks and there is no assurance that banks
would pay a dividend every year.
Relationship between Cashflow and Dividend Payout Ratio

The result also indicated a negative but highly significant relation between cash flow and
dividend payout ratio. According to Baker, Veit, & Powell, (2001), the negative relationship
between cash flow and dividend payout means that the more a company pays a dividend the less
would be its cash. However, our result showed that a company would pay dividends regardless
of its liquidity and cash flow. This result is in line with (Al-Najjar & Hussainey, 2009).
Table 3: Variance inflation factor and Tolerance (1/VIF)
Variables VIF 1/VIF
Revenue Growth 1.63 0.614938
Lagged Dividend 1.35 0.741280
Cash Flow 1.31 0.765516
Profitability 1.26 0.794072
Financial Leverage 1.21 0.827109
Mean VIF 1.35
The VIF (Variance Inflation Factor) and Tolerance are used for evaluating collinearity. The
higher the value of VIF the greater would be the collinearity. Hair, Risher, Sarstedt, & Ringle
(2019) recommended that the value of VIF should be lower or equal to 3. Thus, all the VIF
values listed in table 3 are lower than the threshold.
Unit Root Test
The unit root test has been used to check the stationarity of different variables for which the data
was collected. The study’s result will be affected in case if there is no stationarity in the
variables. For each of the factors, the unit root test (Harris) was used to evaluate them (Harris &
Tzavalis, 1999). The table below shows the outcomes of the unit root test.
Table 4. Panel unit root tests

Variables Statistics Z P-Value
Cash Flow 0.9968 2.5079 0.9930
Financial Leverage 0.9231 -1.5097 0.0656
Lagged Dividend 1.0388 4.7974 1.0000
Profitability 1.0967 7.9585 1.0000
Revenue Growth 1.0119 3.3290 0.9996
Δ (first difference)
Cash Flow 0.4786 -25.2944 0.0000
Financial Leverage 0.9231 -1.5097 0.0656
Lagged Dividend 0.6271 -17.3282 0.0000
Profitability 0.7547 -10.4805 0.0000
Revenue Growth 0.7302 -11.7933 0.0000
Using the unit root test to check the stationarity of the data analyzed for the unstable panels, as
implied by (Maddala & Wu, 2000), and when a p-value is higher than 5% it shows that the data
tested is non-stationary. The results in table 4 indicated that non-stationary exists in all variables
which are cash flow, legged divided, profitability, revenue growth except financial leverage and
after taking of 1st difference all the variables are stationary.
Chapter 6. Conclusions and Recommendations
Conclusion
Many researchers have been conducting studies on the factors that determine the dividend policy.
The objective of this study was to investigate the determinants of dividend payout ratio of
conventional banks of Pakistan listed on kse100 from 2015-2019. The study concludes that a
Lagged dividend, cash flow, and profitability are important and highly significant factors that
determine the decisions whether to pay dividends or not. The negative relationship of
profitability and cash flow with the dividend payout ratio shows that banks pay dividends
regardless of their liquidity and profitability, this might be due to the structure of Pakistan’s
banking industry which is still in the developing phase and are seeking more growth
opportunities. The lagged dividend also indicated a negative relationship with the dividend
payout ratio which shows the inconsistency of dividend policy among banks. However, revenue
growth and financial leverage showed insignificant results which means that these factors are not
or less considered while deciding the payment of dividends in conventional banks of Pakistan.
Recommendation
This study recommends that more research can be conducted in this area by adding other
variables like Size, Age of banks. This research was conducted for the time period of 5 years in
the banking sector, further research can be conducted by increasing the time scale and can also
be conducted in other sectors or industries. This research study also recommends that proxies
other than those used in this study can be used for further studies.
Limitation
The research's main purpose was to study the relationship between the dividend payout policies
of banks listed in the KSE 100 Pakistan. The results of this analysis are thus limited to the KSE
listed banks. The research was limited to a study period of 5 years. The limitation of this research
study is that there are very few banks in Pakistan which paid a dividend during the period of 5
years. The study used secondary data that contained accounting ratios, which may therefore be
historical and may not represent current situations.
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The Dividend Payout Policy of Conventional Banks in Pakistan

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THE DIVIDEND PAYOUT POLICY OF

CONVENTIONAL BANKS IN PAKISTAN

Faculty of Management Sciences

Balochistan University of Information Technology,

BALOCHISTAN UNIVERSITY OF INFORMATION TECHNOLOGY

For the fulfillment of the requirements for the degree of

MASTER OF BUSINESS ADMINISTRATION (MBA)

MUHAMMAD ASIM KHAN

DR. BILAL SARWAR

Faculty of Management Sciences, BUITEMS.

Name of Students and signature:

Student Signature: ______________

Khurram Maqbool (40383) Signature: ______________

Dr. Bilal Sarwar

Hadi Hassan Khan (Chairperson)

Dr. Syed Munawar Shah (Dean)

According to Roussakis, (1997) seventeenth and eighteenth-century belonged to Dutch banks as

Evaluation of banking sector in Pakistan

Financial deregulation and financial liberalization

Liquidity Crisis to Date

Bird in hand Theory

Tax preference Theory

Determinants of Dividend payout strategy

Tools of the study

ᵢ,ₜ = Firm and Time Period

Lagged Dividend Dividend paid last year

Chapter 5. Data Analysis and Results

Relationship between Financial Leverage and Dividend Payout Ratio

Relationship between Revenue Growth and Dividend Payout Ratio

Relationship between Lagged Dividend and Dividend Payout Ratio

Relationship between Cashflow and Dividend Payout Ratio

Table 4. Panel unit root tests

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