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Dividend payout policy of Islamic vs conventional banks: case of Saudi Arabia
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Lama Tarek Al-Kayed,

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Dividend payout policy of Dividend

payout policy
Islamic vs conventional
banks: case of Saudi Arabia
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Lama Tarek Al-Kayed 117

Department of Business Administration,
Princess Nourah bint Abdulrahman University, Riyadh, Saudi Arabia Received 16 September 2015
Revised 15 May 2016
6 October 2016
Accepted 17 January 2017
Abstract
Purpose – This paper aims to identify the factors that affect dividend payments for Saudi Arabian Islamic
and conventional banks and to test whether the factors that affect Islamic banks’ dividend policy differ from
the factors affecting conventional banks’ dividends.
Design/methodology/approach – Panel regression was run on data for six Islamic banks and six
conventional banks.
Findings – The paper found that profitability, lagged dividends and leverage are all significant
determinants of Islamic Banks’ dividend policy. Lintner’s (1956) model applies to Islamic bank’s dividend
policy, as Islamic banks who payout dividends commit to their payments. All factors included in the study
(profitability, liquidity, leverage, growth and lagged dividend) are found to be significant determinants of
conventional banks’ dividend payments.
Research limitations/implications – Future research should include ownership variables in the
regression to test the agency theory regarding dividends. Ownership variables were not included in the study
because of data availability issues.
Practical implications – The results of this study have practical implications for analysts, investors and
regulators. For Islamic banks to compete in the local and global deposit markets, their management must
carefully decide upon their dividend policy. As conventional banks are distributing stable dividends, it is time
for Islamic banks to plan for a stable dividend policy to send positive signals to the market. As newcomers to
the market Islamic banks should avoid spontaneous and inconsistent dividend distributions that do not carry
any signals to the market. It will be difficult for Islamic banks to raise capital or attract investors because of
their lower dividend yields compared to conventional banks. Boards of directors of Islamic banks should use
dividends as an agency monitoring device; large-scale retention of earnings encourages behaviour by
managers that does not maximize shareholder value. Dividends, then, are a valuable financial tool for these
firms because they help firms avoid asset/capital structures that give managers wide discretion to make
value-reducing investments.
Originality/value – This is the first study – up to the author’s knowledge – to investigate the financial
institutions (banks) dividend policy in Saudi Arabia.
Keywords Islamic banking, Panel regression analysis, Conventional and Islamic banks,
Dividends and emerging markets
Paper type Research paper

1. Introduction
Since the financial crisis of 2008, there has been international interest in Islamic banking
because of the way they outperformed conventional banks during the crisis (Beck et al.,
2013; Hasan and Dridi, 2010). This attention has caused an academic stampede in International Journal of Islamic
and Middle Eastern Finance and
investigating the differences between Islamic and conventional banks (Merchant, 2012; Management
Vol. 10 No. 1, 2017
Khan et al., 2012; Kamaruddin et al., 2008). However, only a few studies paid attention to pp. 117-128
the dividend policy practices of Islamic banks and how they differ from conventional © Emerald Publishing Limited
1753-8394
ones (Yahya and Hadi, 2013). DOI 10.1108/IMEFM-09-2015-0102
 IMEFM Dividend policy is important because the intrinsic model holds that a stock’s price is the
10,1 present value of its future dividends (Dickens et al., 2002). Signalling theory predicts that
dividends can signal management’s view of a firm’s condition. Therefore, owing to
dividend’s impact on firm value, the factors that determine those dividends deserve
investigation. The aim of this paper is twofold: first, to examine the determinants of Saudi
Islamic Banks’ dividend policy; and second, to investigate the differences in dividend policy
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118 between Islamic and conventional banks in Saudi Arabia.

The paper is organized as follows: motivation of the study is discussed in Section 2;
background theories on dividend policy are presented in Section 3; a literature review is
presented in Section 4; Section 5 presents data and methodology; the results are reported in
Section 6; the paper concludes in Section 7; and Section 8 provides policy implications.

2. Motivation of the study

As Saudi Arabia gradually approaches financial reform, it opened its stock market
(Tadawul) to Qualified Foreign Investors on 15 June 2015 (USA-Saudi Arabian Business
Council, 2016). This was a remarkable step in the oil-rich kingdom’s economic reform efforts
that could attract a rush of overseas investment in the coming years (Kerr, 2015). Tadawul,
the region’s largest and most mature capital market, with a capitalization of more than $560
billion, is expected to be upgraded from frontier to emerging market status by 2017. The
opening of the Tadawul to foreign investment will provide greater market sophistication,
increase institutional investors’ participation and reduce the role of retail investors
(USA-Saudi Arabian Business Council, 2016).
The central motivation of this study is to bridge the existing gap in the literature by
exploring the factors influencing dividend policy for Islamic and conventional Saudi banks.
This research has important implications for both theory and practice. It will extend the
literature on dividend policy by identifying for the first time the determinants of dividend
policy for Saudi Banks. Banks and financial institutions are usually excluded from dividend
analysis because of their special financial structures, accounting methods and corporate
governance. Understanding dividend policy not only enhances the forecast of dividend
payments and the choice of appropriate valuation models but also provides better insight
into the interrelationship among operating, financing and investing activities (Jabbouri,
2016).
The entry of foreign institutions will help Tadawul mature into a respected emerging
market commensurate with its size (Kerr, 2015). An in-depth study of dividend policy will
enhance valuation model forecasts, increase investor’s confidence and boost market activity.
This research helps provide stakeholders with relevant information for policy decisions by
investigating one of the most debated issues in corporate finance. A better understanding of
dividend policy and its determinants on the Saudi stock exchange should contribute to the
establishment of a well-functioning financial market.

3. Background theories on dividend policy

Dividend policy is a paramount decision for a company because it is not only a source of
income for investors, but it also reflects the firm’s performance. Dividend policy has been one
of the most significant topics in financial literature; the concern with respect to the dividend
policy decision focuses on how much earnings can be paid out as dividends and how much
can be retained (Alzomaia and Khadhiri, 2013). A number of theories explain the factors that
managers should take into consideration when making dividend payout decisions.
Bhattacharyya (2007) has summarized the literature on dividend policy. There are four main
theories that try to explain the dividend payouts of firms. The classic paper by Miller and
Modigliani (1961) proposed dividend irrelevance. Their model is a one-period model under
 conditions of certainty. According to their model, the dividend policy of the firm is irrelevant Dividend
to its value because a higher dividend would necessitate more sale of stock to raise finances payout policy
for the investment program. As Miller and Modigliani’s (1961) dividend-irrelevance
argument did not explain why companies actually pay dividends, subsequent theories tried
to explain the dividend puzzle through one or more violations of Miller and Modigliani’s
(1961) assumptions (Bhattacharyya, 2007).
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The bird in the hand theory presumes that uncertainty with respect to future cash flows 119
leads to a preference of cash dividends by investors over retained earnings. A higher
dividend payout, therefore, will reduce the required rate of return and increase the firms’
value (Gordon, 1963; Lintner, 1962). The signalling theory presumes that the dividend
payout ratio signals information to investors about the future performance of firms. Firms
that anticipate an increase in their net earnings would send signals to the market in the form
of dividends. Conversely, dividend cuts are perceived as “bad news”, as it sends a negative
message to investors about the future earnings of the company (Miller and Rock, 1985).
Clientele theory proposes that different clienteles prefer different dividend payout
policies. For instance, some investors prefer high dividends, while others prefer otherwise.
Miller and Modigliani (1961) observed that in the presence of taxation, investors will form
clienteles with specific preferences for particular levels of dividend yields. The specific
preference for dividends may be determined by the marginal tax rates faced by the investor.
Also, if dividend income is taxed at a higher rate than capital gains, investors in high tax
brackets may prefer low dividend paying stocks or stocks paying no dividend at all.
Empirical studies that present evidence on the clientele theory include (Pettit, 1977) and
(Allen et al., 2000) who advanced a theory based on the clientele paradigm to explain firms’
options between dividends and share repurchases.
Jensen (1986) introduced the agency theory, which predicts manager–shareholder
conflicts that lead to agency costs and hurts shareholder value. Previous literature has
proposed numerous mechanisms, including both dividends and institutional investors that
mitigate agency costs (Chang et al., 2016). Dividends can be used as a monitoring device that
reduces agency costs, including managers’ consumption of perks and overinvestment
(Chang et al., 2016).

4. Literature review
Much of the empirical research on dividend policy has been applied to non-financial
companies, while the number of empirical papers that examine the determinants of dividend
stability in financial companies are relatively few. On the other hand, empirical studies
regarding the determinants of dividend policy of Islamic banks are scarce. Hassan et al.
(2003) were the first to shed light on dividend policy in the Islamic interest-free banking
system. They found that the dividend signalling hypothesis was able to explain the
phenomenon of asset concentration in short- and medium-term investments. Islamic banks
have distinguishing features, as they are unlevered firms that are interest free and do not
make loans (Hassan et al., 2003). Equity holders use their capital jointly with investment
depositors to generate cash flows and profit surplus. Profits or losses are then shared
between them depending on the equity ratio. Equity holders are considered insiders to banks,
whereas investment depositors (mudarabah and musharakah account holders) are
considered outsiders. As Hassan et al. (2003) noted, four factors distinguish insiders from
outsiders. Insiders can access capital markets to sell their shares, have a voting right in the
firm, claim all earnings generated from financial services provided by Islamic banks except
investment earnings and have more information about the firm than outsiders.
 IMEFM Because the return on investment deposits is not released until the realization of profits,
10,1 dividends of Islamic banks are the only information available to outsiders (investment
depositors) and the public (Hassan et al., 2003). Managers of Islamic banks find dividends to
be the only tool to signal profitability to the outsiders of bank investment, which makes the
determinants of dividend policy a crucial area of investigation.
Studies of dividend payouts in Saudi Arabia are scarce. Two studies – to the author’s
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120 knowledge – examine determinants of dividend policy for the non-financial industry.
Alzomaia and Khadhiri (2013) found current earnings per share and past dividend per share
of the company to be significant determinants in setting dividend payments for 105
non-financial Saudi Arabia listed firms. Al-Ajmi and Abo Hussain (2011) examined the
characteristics of dividend paying and non-paying firms in Saudi Arabia; they concluded
that firms have more flexible dividend policies because they are willing to cut or skip
dividends when profits decline, and firms do not pay dividends when losses are reported.
Dickens et al. (2002) were the first to test banks’ dividend policy by adapting the Barclay
et al. (1995) model. Using ordinary least squares estimation, they found a negative
relationship between dividend payments and investment opportunities, signalling,
ownership and risk. A positive relationship was found with size and dividend history. Yahya
and Hadi (2013) studied the determinants of dividend policy in Malaysian Financial
Institutions by looking at both the conventional and Islamic banking sectors. Using panel
data, the results showed a statistically significant positive relationship between dividend
payout and revenue growth for conventional Malaysian Financial Institutions, while only
lagged dividend showed a positive significant relationship with dividend payouts for Islamic
financial institutions in Malaysia. Islamic banks in Malaysia only look at past dividend
payments to determine their future dividend payments. Zameer et al. (2013) investigated the
determinants of the dividend policy in the Pakistani banking sector. They applied stepwise
regression analysis and found variables (liquidity, profitability, last year’s dividend and
ownership structure) having a highly significant relationship with the dividend payouts of
Pakistani banks.
In terms of dividend determinants in non-financial companies, numerous empirical works
have focused primarily on developed markets, and since the beginning of this century, there
has been increased interest in examining the dividend behaviour in emerging countries
(Botoc and Pirtea, 2014; Anil and Kapoor, 2008; Ben Naceur et al., 2006; Mitton, 2004;
Aivazian et al., 2003). The results of Botoc and Pirtea (2014) find support for the residual cash
flow theory; agency costs and signalling using the generalized method of moments system
technique. Their results conclude that when investor protection is high, cash needs are more
important in explaining dividend payouts; when investor protection is poor, liquidity seems
to be more important. Ben Naceur et al. (2006) studied the dividend policy of 48 firms listed
on the Tunisian stock exchange. Their study found that Tunisian firms rely on both current
earnings and past dividends to set their dividend payments. Profitable firms with more
stable earnings were found to pay larger dividends in Tunisia. Anil and Kapoor (2008) found
that higher earnings lead to higher dividends in the Indian information technology sector,
and the results indicate that dividends are not used as a medium to mitigate agency conflicts,
nor are they used to signal information to shareholders. Aivazian et al. (2003) found support
for the residual cash flow theory, as they found that dividend policy is explained by factors
such as profitability, debt and market-to-book ratio. Mitton (2004) found, looking at 19
emerging countries, that there was a positive link between corporate governance and
dividend payouts in countries with strong investor protection and a negative link between
growth opportunities and dividend payouts for firms with better governance.
 4.1 Research hypotheses Dividend
Academics have proposed many theoretical and empirical models describing the factors that payout policy
managers should take into consideration when making dividend payouts. Empirical
research has identified the following factors to be significant determinants of dividends:
• Profitability: Baker et al. (2001) investigated the views of corporate managers of major
US firms about the factors influencing their dividend policy. They found that current
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and expected future earnings and the pattern of past dividends as superior. Profitable 121
firms pay more dividends compared to less profitable companies. A number of studies
have concluded that profitability is a major factor affecting dividends (Al-Malkawi,
2007; Shirvani and Wilbratte, 1997). Based on Lintner (1956), the hypotheses would be
as follows:
H0. No relationship exists between profitability and dividends.
H1. A positive relationship exists between profitability and dividends.
• Cash flow/Liquidity: Cash flow is a measure of a firm’s disposable income. According to
the agency theory, firms may overcome the misuse of free cash flow by management
through dividend distributions (Jensen, 1986). Cash flows are considered a superior
determinant of dividend policy compared to net earnings. Based on the above
considerations, it is hypothesized that:
H0. No relationship exists between cash flow and dividends.
H2. A positive relationship exists between cash flow and dividends.
• Financial leverage: Banks with a higher leverage ratio face larger regulatory pressures;
thus, they are restricted from paying higher dividends (Dickens et al., 2002, from
Yahya and Hadi, 2013). To a certain extent, the high level of debt may legally restrict
firms from distributing dividends, as they are liable to make fixed payments to cover
their debt. A number of studies support the negative relationship between leverage
and dividend payouts (Gugler and Yrtoglu, 2003; Aivazian et al., 2006; Crutchley and
Hansen, 1989). The hypotheses, therefore, are as follows:
H0. No relationship exists between financial leverage and dividend payouts.
H3. A negative relationship exists between financial leverage and dividend payout.
• Revenue growth: Firms with growth opportunities distribute fewer dividends to retain
a greater portion of their earnings to finance their growth (Rozeff, 1982). It is
hypothesized that dividend payouts are negatively correlated with the growth rate of
revenues. Chen and Dhiensiri (2009) found a negative relationship between dividend
payouts and growth opportunities; therefore, it is hypothesized that:
H0: No relationship exists between revenue growth and dividend payout.
H4: A negative relationship exists between revenue growth and dividend payout.
• Lagged dividend: Lintner (1956) argues that most managers are unwilling to reduce
their companies’ dividend payments because they feel such a decision would hurt their
companies’ stock prices. Lagged dividend refers to cash dividends paid to investors
one year prior to the year under consideration. Because companies prefer a stable
dividend policy, the past dividend trend is significant enough to influence current
dividend payments, and thus, the variable has been included as an important
 IMEFM determinant of Islamic banks’ dividend policy. Based on the findings of Dickens et al.
10,1 (2002) and Theis and Dutta (2009), it is hypothesized that:
H0. No relationship exists between lagged dividends and dividend payouts.
H5. A positive relationship exists between lagged dividends and dividend payouts.
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122 5. Data and methodology

The pertinent data are taken from the Saudi Arabian banking industry for a period of four
years, from 2011 to 2014. In total, there are 13 banks operating in Saudi Arabia, 12 of which
are listed on the stock market. Data for six Islamic banks and six conventional banks were
gathered. The banks in the sample are listed on the stock market and were chosen based on
data availability. A regression model constructed based on the research hypotheses was
tested:
Dividend yield ⫽ f[Profitability(⫹), Liquidity(⫹), Financial Leverage(⫺), Revenue
Growth(⫺), Lagged dividend(⫹)].
Using appropriate proxies we can write the model as follows:
Dividend yield ⫽ f[Return on assets(⫹), Cash flow(⫹), Debt-to-Asset(⫺),
Market-to-book(⫺), Lagged dividend yield(⫹)]:

DYit ⫽ ␤0 ⫹ ␤1ROAit ⫹ ␤2CASHit ⫹ ␤3LEVit ⫹ ␤4MTBit ⫹ ␤5LAGDIVYit⫺1⫹u

Where:
DYit ⫽ Dividend yield in year t
ROAit ⫽ Profitability in year t
CASHit ⫽ Cash flow in year t
LEVit ⫽ Financial leverage in year t
MTBit ⫽ Investment opportunities (growth) is in year t
LAGDIVYit ⫽ Dividends in year t–1
u ⫽ Random disturbance term
␤ ⫽ Regression coefficients
Panel data analysis was used because it allows for the control of unobservables that would
otherwise bias regression estimation (Startz, 2013).

5.1 Proxy of measures for variables

Dependent variable
• Dividend Policy (dependent variable) is represented by dividend yield (DY) ratio.
DY equals dividend per share divided by market value per share for bank i in
time t.

Independent variables
• Profitability is represented by return on assets (ROA), which equals net income
divided by total assets for Bank i in time t.
• Lagged Dividends, which equals dividends paid last year (Divt-1) for Bank i in
time t.
• Growth is represented by investment opportunities, which equals market value
per share divided by book value per share.
 • Financial Leverage is the ratio of total debts over total assets (measured in book Dividend
value terms) for Bank i in time t: payout policy
• Cash Flow or Liquidity is the ratio of cash and cash equivalent over net total assets
for Bank i in time t.

The data collected was analysed using E-Views software to identify the determinants of
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dividend policy among Islamic and conventional banks in Saudi Arabia.

123

6. Results
Data for six Islamic banks and six conventional banks were gathered. Table I lists the names
of the banks included in each group:
National Commercial bank was only listed in the year 2004. Table II shows descriptive
statistics for Islamic and conventional banks:
The mean dividend yield for conventional banks (5.7 per cent) was higher compared to
Islamic banks (1.9 per cent) because only two Islamic banks (Al Rajhi and Saudi investment
bank) paid dividends in each year of the four-year period included in the study. Alinma bank
did not pay dividends at all during the sample period, while the remaining three banks paid
dividends in only one year out during the four-year period. Islamic banks’ profitability was
slightly higher than conventional banks (2.34 per cent compared to 2.25 per cent), and their
growth opportunities in terms of market-to-book ratio were also higher (1.85 compared to 1).
Both types of banks were close in terms of leverage, while the liquidity of conventional banks
was slightly higher compared to Islamic banks (12 per cent compared to 9.8 per cent).
A panel data FE model was used in the study because it has several benefits; first, it controls
for individual heterogeneity. Time-series and cross-section studies that do not control for
individual heterogeneity run the risk of obtaining biased results. Using panel data enables us to
control for bank and time invariant variables. Second, panel data have more variability, less
co-linearity among the variables (because the cross-section dimension adds a lot of variability,
along with the variation for each cross-section over-time), more degrees of freedom and more
efficiency (Baltagi, 2001). Furthermore, panel data increases the sample size (number of
observations), which increases the precision of the estimators and gives test statistics more power
(Wooldridge, 2009). The Hausman test is used to differentiate between the FE model and the
random effects (RE) model in the panel data. In this case, RE model is preferred under the null
hypothesis because of higher efficiency, while under the alternative FE model is at least
consistent and thus preferred. The chi-square statistic was found to be 10.56 with a probability of
0.0608; thus, the null hypothesis was rejected and the FE model was used. Tables III and IV show
the results of the panel least squares regression for Islamic and conventional banks.
Table III shows that profitability (ROA) and lagged dividend yield (LAGDIVY) are
significant determinants of dividend payouts for Islamic Banks at the 1 per cent level, which
is in line with Al-Ajmi and Abo Hussain (2011), Alzomaia and Khadhiri (2013) and Zameer

Islamic Banks Conventional Banks

Al-Rajhi Bank Arab National Bank

Alinma Bank Banque Saudi Fransi
Bank Albilad Riyad Bank
Bank Aljazira Samba Financial Group
National Commercial Bank Saudi Hollandi Bank Table I.
The Saudi Investment Bank The Saudi British Bank Sample banks
 IMEFM DY ROA CASH MTB LEV
10,1
Islamic Banks
Mean 0.019439 0.023474 0.098395 1.852348 0.837041
Median 0.000000 0.015948 0.098476 1.458476 0.863608
Maximum 0.078329 0.058345 0.210433 5.498000 0.907473
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124 Minimum 0.000000 0.007786 0.037235 0.805450 0.567902

SD 0.024157 0.015633 0.037669 1.106076 0.082064
Conventional Banks
Mean 0.056714 0.022501 0.119010 1.004082 0.857762
Median 0.044532 0.020703 0.111056 0.961560 0.860486
Maximum 0.178261 0.038626 0.173824 1.650111 0.888823
Table II. Minimum 0.014368 0.014146 0.067523 0.539653 0.821011
Descriptive statistics SD 0.038732 0.006520 0.026289 0.337363 0.018893

Dependent Variable: DY
White cross-section standard errors and covariance (no df correction)
Variable Coefficient Standard error t-statistic p

C ⫺0.018403 0.012037 ⫺1.528902 0.1471

ROA ⫺0.281148*** 0.084076 ⫺3.343963 0.0044
CASH ⫺0.011052 0.019031 ⫺0.580731 0.5700
LEV 0.041046* 0.021625 1.898089 0.0771
MTB ⫺1.02E-05 0.001184 ⫺0.008645 0.9932
LAGDIVY 0.675391*** 0.135606 4.980534 0.0002
Weighted statistics
R-squared 0.694632
Adjusted R-squared 0.592843
S.E. of regression 0.019541
F-statistic 6.824213
Table III. Probability (F-statistic) 0.001663
Panel least squares
results for Islamic Notes: *** Denotes rejection of the null at the 1% significance level; * denotes rejection of the null at the 10%
banks significance level

et al. (2013). Leverage (LEV) is a significant determinant of dividend payments at the 10

per cent level, which is in line with Dickens et al. (2002). Profitability, however, has a negative
sign; this is because 67 per cent of Islamic banks did not distribute dividends even though
they were profitable. An increase in profitability by 1 per cent decreases the dividend yield
by 28 per cent, which is inconsistent with the null hypothesis. Leverage also has an opposite
sign to the expectations of the alternative hypothesis; a 1 per cent increase in leverage
increases the dividend yield by 4 per cent. This implies that Islamic banks currently paying
dividends commit to their payments although with an increase in their leverage. Lagged
dividend yields are also significant determinants for Islamic banks who pay out dividends; a
1 per cent increase in lagged dividend increases current dividend yields by 68 per cent. The
sign of lagged dividend is positive, which is in line with the Lintner (1956) model. Other
factors (liquidity and growth) are not significant determinants of Islamic banks’ dividend
payouts.
 Dependent variable: DY
Dividend
White cross-section standard errors and covariance (no df correction) payout policy
Variable Coefficient Standard error t-statistic p

C 0.712986*** 0.106774 6.677508 0.0000

ROA ⫺0.695617*** 0.245615 ⫺2.832140 0.0110
⫺0.070448** ⫺3.341369
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CASH 0.021083 0.0036

LEV ⫺0.671477*** 0.121007 ⫺5.549066 0.0000 125
MTB ⫺0.044998*** 0.002366 ⫺19.01469 0.0000
LAGDIVY ⫺0.204546*** 0.064379 ⫺3.177244 0.0052
Weighted statistics
R-squared 0.743279
Adjusted R-squared 0.671968
S.E. of regression 0.025167
F-statistic 10.42303
Probability (F-statistic) 0.000081 Table IV.
Panel least squares
Notes: *** Denotes rejection of the null at the 1% significance level; ** denotes rejection of the null at the 5% results for
significance level conventional banks

Table IV shows that profitability (ROA), liquidity (CASH), leverage (LEV), revenue growth
(MTB) and lagged dividend (LAGDIVY) are all significant determinants of dividend payouts
for conventional banks in Saudi Arabia at the 1 per cent level, which is in line with Dickens
et al. (2002). However, neither ROA nor CASH have their expected positive sign, which
indicates that conventional banks pay out dividends regardless of their profitability and
liquidity status. Both financial leverage and investment opportunities (growth) have their
expected negative signs. This is because banks with a higher leverage ratio face regulatory
pressures and those with high growth opportunities prefer to invest their funds rather than
distribute them as dividends. A 1 per cent increase in financial leverage decreases dividend
yields by 67 per cent and a 1 per cent increase in growth opportunities decreases dividend
yields by 4.5 per cent. Lagged dividend yield has an unexpected negative sign; the results
show that a 1 per cent increase in lagged dividend yield decreases current dividend yields by
20 per cent. This is because conventional banks have a flexible dividend policy; the
distribution of dividends in one year does not assure the distribution of dividends (either the
same amount or higher) next year. Commercial banks in the sample lowered their dividend
payouts in several years even with the payout of higher dividends in previous years.
Investors, therefore, should not expect consistent dividend payouts from conventional
banks.

7. Conclusion
This paper has attempted to identify the main determinants of Islamic Banks’ dividend
policy in Saudi Arabia and explore differences between Islamic and conventional banks with
regard to their dividend payouts during the period 2011-2014. Panel data analysis reveals
that for Islamic Banks, profitability has a negative association with dividend payments,
while leverage and lagged dividends are positively related to dividend policy. As for
conventional banks, profitability, leverage, lagged dividend, liquidity and growth
opportunities are all significantly negatively related to dividend policy. The results show
that conventional banks pay out higher dividends even though Islamic Banks are more
profitable. This can be due to the juvenility and higher growth opportunities available for
Islamic banks. The paper concludes that Islamic banks are attempting to commit to a stable
 IMEFM dividend policy, while conventional banks’ dividends are not in the form of a “policy”
10,1 because their payouts are random and arbitrary in their pattern and size. Although the
negative relationship with free cash flow (liquidity) in both Islamic and conventional banks
are not significant, it raises a red flag about serious agency problems and shareholder
expropriation within these institutions. Management in both Islamic and conventional banks
are not using their dividends to signal information to the market. This paper calls on
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126 management in both types of banks to pay a close attention to the critical task of setting their
dividend policy, given the influence dividends have on investors’ decisions.
The results of this study have practical implications for analysts, investors and
regulators. Identifying the main determinants of dividend policy helps analysts and
investors’ build up their dividends forecasts and select the appropriate valuation models
(Jabbouri, 2016). The study reports attempts by Islamic Banks to commit to a stable dividend
policy, which raises the awareness of their shareholders, and gives them reason to follow-up
on the banks’ commitment and investigate the reasons for the no-dividend payout policy
pursued by most Islamic banks in Saudi Arabia. The results should encourage policy
makers, boards of directors, analysts and investors to urge management in Saudi banks to
use dividends as a monitoring device for agency problems and as a signalling mechanism,
especially for Islamic banks where dividends are the only signals for market participants
(Hassan et al., 2003). The study has some limitations because of data unavailability. Future
research should include ownership variables in the regression to test for agency theory
regarding dividends. Future research should also cover more countries where Islamic banks
reside, as this study is limited to only one county.

8. Policy implications
Islamic banks have been put in fierce competition with traditional banks because of the
integration of global financial markets. For Islamic banks to compete in the local and global
deposit markets, their management must carefully decide upon their dividend policy. As
conventional banks are distributing stable dividends, it is time for Islamic banks to plan for
a stable dividend policy to send positive signals to the market, because dividends provide
certainty about the company’s financial wellbeing. As newcomers to the market Islamic
banks should avoid spontaneous and inconsistent dividend distributions that do not carry
any signals to the market. It will be difficult for Islamic banks to raise capital or attract
investors because of their lower dividend yields compared to conventional banks. Boards of
directors of Islamic banks should use dividends as an agency monitoring device, as results
show there is a negative relationship between dividends and free cash flow. Large-scale
retention of earnings encourages behaviour by managers that does not maximize
shareholder value. Dividends, then, are a valuable financial tool for these firms because they
help firms avoid asset/capital structures that give managers wide discretion to make
value-reducing investments.

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Corresponding author
Lama Tarek Al-Kayed can be contacted at: lama.alkayed@gmail.com

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