The Effect Of Dividend Policy On The Growth Of Micro Finance Institution

The Effect Of Dividend Policy On The Growth Of Micro Finance Institution

Preface: Introduction

Microfinance refers to the provision of financial services, such as small-dollar loans, savings accounts, and insurance, to the impoverished populations of the developing world. Robinson (2001) defines microfinance as all financial intermediation services, such as savings, credit, funds transfers, insurance, pension, and remittances, provided by financial institutions in rural and urban areas to low-income earners. Microfinance holds the promise of combating poverty and enhancing the institutional capacity of financial systems (Morduch, 2000) by finding cost-effective ways to lend money to impoverished households. Three characteristics distinguished microfinance from other formal financial products: the smallness of loans offered or savings accumulated, the lack of asset-based collateral, and the ease of operations (Seyed, 2011). Repayment of loans, as a measure of portfolio quality, was essential to the sustainability of MFIs. Included are loan repayment indicators Portfolio at risk (PAR), credit risk measured by the sum of loans 30 days or more past due (PAR>30), is negatively and substantially associated with MFI sustainability (Cooper, A., Jackson, M.J., & Patterson, G.A., 2003). Given that credit granting was the primary source of revenue for MFIs, an increase in credit risk exposure resulted in a decline in their financial viability. There was a favorable effect of

The accumulation of client deposits in the form of savings and shares. Microfinance is predominantly a cash-based operation that relies on the savings of its members. To make investments that stimulate endogenous economic growth, one must have access to financial capital from either savings or borrowing, which is challenging in environments where formal means of saving or borrowing are typically unavailable. Traditional societies had informal savings mechanisms. In Southeast Asia and Africa, for instance, the proliferation of voluntary rotating savings and credit associations of various types has enabled individuals to receive periodic payments from group contributions (Anthony, 2005).

1.1 Context of the Study

(Nissim & Ziv, 2001) A company’s dividend policy consists of the regulations and guidelines used to determine whether or not dividend payments will be made to shareholders. A company’s dividend, which is essentially the benefit shareholders receive in exchange for their risk and investment, is determined by various factors. Companies should distribute their profits to shareholders if they are unable to identify investments that would yield greater returns than the shareholders’ expectations. Mizuno (2007) .The dividend policy also affected MFI performance by encouraging members to increase their deposits because, at the end of the year, performance-based profits were distributed in the form of dividends. The greater the savings, the greater the dividends received. The dividend policy is the decision to distribute profits rather than retain and reinvest them. According to Baker and Powell (1999), dividend policy is one of the most essential financial decisions faced by corporate managers. It could have implications for share prices and, consequently, returns to investors, financing of internal development and equity base through retentions, as well as gearing and leverage (Omran & Pointon, 2004). The purpose of this study is to examine the impact of dividend policy on the expansion of microfinance institutions.

1.2 Description of the Problem

(Nissim & Ziv, 2001) A company’s dividend policy consists of the regulations and guidelines used to determine whether or not dividend payments will be made to shareholders. A company’s dividend, which is essentially the benefit shareholders receive in exchange for their risk and investment, is determined by various factors. Companies should distribute their profits to shareholders if they are unable to identify investments that would yield greater returns than the shareholders’ expectations. Mizuno (2007). The dividend amount is paid out in cash to shareholders or members. These payouts must be made from retained earnings. The primary objective of every Microfinance Institution (MFI) is to operate profitably in order to preserve its stability, increase its development, and ensure its long-term viability. But this is frequently affected by the real factor condition under which the firm operates, when there is uncertainty of earnings, unsuccessful business operations, lack of liquid resources, and fear of the adverse effects of regular dividends on the company’s financial standing. A policy of irregular dividends is adopted when earnings are unstable and management believes that shareholders are only entitled to dividends when the earning and liquidity positions of the bank warrant it. The dividend increases as earnings increase, and vice versa.According to Moh’d, Perry, and Rimbey (1995), firms with unstable earnings are more likely to fail.