THE EFFECT OF TAXES ON DIVIDED POLICY OF BANKS IN NIGERIA (A STUDY OF FIRST BANK OF NIGERIA PLC ENUGU
This research work is concerned with the Effect of Taxes on
Dividend Policy of Banks in Nigeria. Nigeria banks operate in an environment
that is rarely the same with their foreign counter – parts. Thus the purpose of
this study is to reveal how propounded dividend policy models could apply to
banks in Nigeria and the impact of taxes on dividend payout in the banks. The
research methodology used in this research was the quasi-experimental design,
while the sampling procedure adopted was basically the simple random sampling
The analysis of data in this research was based on certain
statistical tools including the chi-square (X²).The findings showed that taxes
have a great influence on the dividend pay-out of companies. It also showed that shareholders are normally
concerned about the payout ratio of their companies. It was therefore
recommended that companies should not neglect the payment of taxes as this
would lead to enhanced business environment and profitability in the long –run.
Government on its own part should also make policies that would not lead to
multiple taxation so that these indigenous banks can grow. This growth will
lead to economic stability.
1.1 OVERVIEW OF
Tax is a
compulsory levy imposed by government on the incomes of individuals and
corporate organization for the performance of its duties of social welfare and
security. In other words, it is a levy imposed by the government against the
income, profit or wealth of the individuals, partnership and corporate
organization. (Ochiogu 2001:1). For government it is dispensable for it to
provide all the important amenities which are needed to make life worth living.
Some of the services performed by government include: maintenance of law and
order, defense, basic education, health services, pipe-borne water, road
construction etc. If any of these services is not provided, our lives and
economy (i.e. business environment) would become worse off. Therefore the
government tries to generate the funds to carry out these activities through
Every corporate organisation is expected as a requirement to
pay taxes as one of its corporate social responsibilities. Dividend policy on
the other hand forms a major financial decision often faced by management of
corporate organisations in their pursuit of maximizing the value of their
organisation. Dividend policy allocates the earnings between payment to
shareholders and reinvestment in the firm. A lot of controversies regarding
taxes ad dividend policy have attracted many academic interests. Some scholars
are of the opinion that taxes affect organisational corporate dividend policy.
If this speculation is true, changes in corporate dividend policy would be
expected whenever the government changes its income tax policy (Wu 1996).
However, this is not the case in the banking business. Linter (1996:12)
asserted that the major determinants of dividend policy are the anticipated
future earning and the pattern of past dividend.
The banking sector is of interest to this research because
of the structure of its dividends. Dividends are usually paid to owners or
shareholders of a business at specific periods. This depends largely on the
declared earning of the firm and the recommendation of the directors.
Therefore, if no profit is made, dividends will not be declared. But when
profits are made, the company is obligated to pay corporate tax and other
statutory taxes to the government. The taxes no doubt reduces the profit
available for disposal by the organisations either to be retained or
distributed as dividends to shareholders of the company.
For many years, several postulations and assumptions have
been made regarding whether such taxes paid by organisations actually affects
firms pattern of dividend policy. Dividend policy is the trade-off between
retaining, earning and paying out cash or issuing new shares to shareholders
tax liability, it does not, in general alter the taxes that must be paid
regardless of whether the company distributes o retain its earnings (Brealey,
Myers and Marcus 1999).
Based on this assumptions, regarding dividend policy, this
study is directed at evaluating the effects of taxes on the dividend policy of
banking in Nigeria, focusing in three banks in the financial industry.
1.2 STATEMENT OF
Problems are inevitable in achieving an end. The problem of
whether or not there is any fundamental impact of taxes on dividend payout
(policy) spurred this research study. This is of considerable importance not
only to management of those financial institutions but also to investors
planning portfolio trying to develop a flow of investments.
Again, there is the problem associated with the fact that
empirical studies on the effect of taxes on dividend policy of banks have not
reached a definite conclusion. For example Masculis and Trueman (1988:10)
posited that taxes affect organisational corporate dividend pay-out. Linter
(1958:7) on the other hand, is of the opinion that the major determinants of
dividend policy are the anticipated level of future earnings and the pattern of
Thus the problem of a clear cut empirical analysis and
findings on the effects of taxes on the dividend policy of bank stimulated this
1.3 PURPOSE OF
Most literature and empirical works on dividend policy are
largely based on foreign models, which may not be applicable in Nigerian
context. Obviously, Nigerian banks operate in an environment that is rarely the
same with that of their foreign counterparts. Thus the purpose of this study is
to reveal how propounded dividend policy models could apply to banks in Nigeria
and the impact of taxes on dividend pay-out (policy) in the banks.
Other objectives of this study are:
To identify the optional pay-out ratio adopted by banks to
To identify the reasons for adopting the identify optimal
To ascertain the major factors that are considered in
determining the optimal dividend pay-out ratio for a firm’s dividend policy.
To determine how the optimal pay-out ratio so chosen is
affected by taxation.
To identify the problems associated with taxation and their
impact on dividend policy.
following research questions will be answered in the course of this study to
ascertain the impact of taxes on the dividend policy of banks:
Does taxes have any effect on dividend pay-out of banks?
Will a change in tax policy lead to a change in dividend
policy of firms?
Do shareholders ever bother about how earning are distributed?
Do investors and management benefits form taxation?
How can optimal pay-out ratio be determined?
Do shareholders influence the pay-out ratio?
How does taxation affect dividend policy of banks?
Te following research hypothesis shall be tested in the
course of this study:
H0: There is no
significant relationship between taxes and dividend policies of banks in
H1: There is a
significant relationship between taxes and dividend policies of banks in
Every research work is expected to be significant in a
variety of ways. This one is not an exception. The value attached to decisions
involving dividend policy of banks can not be over emphasised. Therefore,
management of banks need this information to harmonise the general direction of
the firm with a view to achieving the short and long term objective of the firm
with regards to dividend payment. In essence, this study adds to the knowledge
of managers on the tax measures and their effect on dividend pay-out (policy),
of firms. This study is also significant in the following ways:
It helps to determine whether taxes are necessary in the
development of dividend policy of a firm.
It helps to enhance decision making with regards to how much
of the firm’s earning should be distributed and retained in the firm.
It indicates the method to be adopted in computing the pay
Finally, his study contributes to the existing stock of
knowledge on the concept of the effect of taxes on dividend policy and will, therefore,
serve as a data base for those seeking empirical information on the impact of
taxes on dividend pay-out banks in Nigeria.
1.7 SCOPE OF THE
This study has a very wide scope: it is supposes to over all
bank in Nigeria but, to carry out a realistic
study on all these banks is a difficult task, unrealistic time consuming
and would involve enormous resources financially. Thus, this study is
restricted to three selected banks in Nigeria. All inference and deductions are
based on the study of these selected banks and conclusions drawn there from.
1.8 LIMITATION OF
always the case in every human endeavours, this research work is not without
limitations. Some of these limitations are:
Time: A long time interval is require to carry out and
extensive study on all selected banks. The time available to achieve this is
too short, making it a major limitation.
Money: The money available for this research is not
sufficient. As a student, to finance this expansive venture was difficult since
so much is to be expected. So finance was another major constrain of this
1.9 DEFINITION OF
TAX: Compulsory levy imposed by government on the income of
individuals and firms to raise funds.
DIVIDEND: The portion of corporate earnings (profit after
tax) paid to shareholders of affirm as part of benefits accruable to them
(shareholders) for investing their money in the firm.
DIVIDEND POLICY (PAY-OUT): This is the determination of the
earnings to be distributed to shareholders and the amount to be retained in the
business (firm) for reinvestment.
PAY-OUT RTIO: This is the ratio of dividend per share to the
earning per share of a firm.
It is calculated using the formula
Pay-out ratio (POR)
= Dividend per share X 100
Earning per share