High dividend to cost banks high

The Bangladesh Bank has raised the capital requirement for banks to announce dividends for shareholders, aiming to strengthen their capital base and increase lending capacity to support a V-shaped recovery of the pandemic hit economy.

In a permanent dividend policy issued on Sunday, the central banks said banks will require to maintain at least 15% or above capital to declare a maximum of 30% dividend including 15% cash. In May 2020, the capital requirement was fixed at 12.5% through a temporary policy issued by the Bangladesh Bank considering the pandemic situation.

According to the new circular, banks can announce the highest dividend maintaining the required capital only if they do not take any provisioning or capital deferral facility.

The new dividend policy is a good move as it will encourage banks to expand their balance sheets and discourage higher dividend, said Syed Mahbubur Rahman, former chairman of the Association of Bankers Bangladesh (ABB).

He said only those banks having a strong capital base can declare higher dividends.

Mahbubur Rahman, also the managing director of Mutual Trust Bank, said Bangladesh is transforming into a higher middle-income country and banks are required to have a strong capital base as imports and exports will increase significantly in the coming days.

The new dividend policy will gradually prepare banks to face increasing business transactions, he added.

Earlier, there was no capital requirement for dividend declaration. The Bangladesh Bank for the first time issued a temporary dividend policy in May last year to restrain cash-outs from banks amid the pandemic situation.

In the new normal situation, the Bangladesh Bank has come up with the permanent dividend policy to make banks conservative in dividend declaration and increase their asset base, said a senior executive of the central bank.

The new provision will increase banks' capital expenditure on dividend, which will ultimately put pressure on profit, said market insiders. This is because banks will have to spend capital from profit, they added.

According to the new policy, banks that will be able to maintain at least 13.5% capital without taking any deferral facility can announce up to 25% dividend, while the capital requirement in the previous circular was 11.25% for 15% dividend.

Banks that are not under any deferral facility and able to maintain a minimum of 11.87% capital can declare a maximum of 15% dividend including 7.5% cash.

Banks that have a minimum of 12.5% capital base and have enjoyed deferral facility can declare highest 12% dividend including 6% cash.

Banks with a minimum 11.87% capital base can declare a highest 10% dividend with 5% cash.

Banks with less than 10.62% capital base will not be allowed to declare cash dividend but can give a maximum of 5% stock dividend, according to the circular.