Asian Business Review

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Asian Business Review, Volume 4, Number 1/2014 (Issue 7)

ISSN 2304-2613 (Print); ISSN 2305-8730 (Online) 0

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ASIAN BUSINESS REVIEWPrint ISSN : 2304-2613; Online ISSN: 2305- 8730

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ASIAN BUSINESS REVIEWwww.jabr.weebly.com

Vol. 4, No. 1/2014 (7thIssue)

Editorial Board

Editor-in-Chief

Dr. Alim Al Ayub AhmedFaculty of Business, ASA University Bangladesh

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Irawan FebiantoDepartment Management and Business, Universitas Padjadjaran, Indonesia.

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Dr. Bilkis Raihana, Asian University of Bangladesh, Bangladesh (Economics)

Dr. Ataur Rahman, North South University, Bangladesh (Economics)

Dr. Lawrence Arokiasamy, Quest International University Perak, Malaysia (HRM)

Dr. R. Swaroop, University of Nizwa, Sultanate of Oman (HRM)

Dr. Jagpreet Kaur, Punjabi University, India (Accounting and Finance)

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Dr. Mohinder Chand, Kurukshetra University, India (Tourism and Hotel Management)

Dr. Ravi Kant Sharma, Charan Singh University, India (Marketing & International Business)

Dr.V.Mahalakshmi, Annamalai University, India (Industrial and Labour Law)

Md. Mahabbat Hossain, Bangladesh Institute of Bank Management (BIBM), Bangladesh (Accounting and Banking)

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Asian Business Review (ABR)Blind Peer-Reviewed International Journal

Vol. 4, No. 1/2014 (7thIssue)Print ISSN : 2304-2613; Online ISSN: 2305- 8730

Page

No.

1 Relationship between Ownership Structure and the Modes of Dividend

Payment: A Study on Dhaka Stock Exchange

Mohammad Ruhul Amin;

Md. Abdullahel Kafi; &

Md. Mahabbat Hossain

07-11

2 Credit Characteristics and Business Performance: A Survey of Women

owned Microenterprises in Tanzania

Paul J. Salia &

Jonathan S. Mbwambo

12-18

3 The Dimensions of Industrial Growth in Tamil Nadu, India: Three

Decades of Experience

Dr. A. Sankaran &

Dr. P.Rajkumar

19-23

4 Foreign Direct Investment (FDI) in Bangladesh: Prospects and Challenges

and Its Impact on Economy

K. M. Anwarul Islam

24-36

5 Investment Performance of Islamic Bank: An Empirical Study

Evana Nusrat Dooty &

Mohammed Syedul Islam

37-40

6 Volatility Estimation in the Dhaka Stock Exchange (DSE) returns by Garch

Models

Md. Shawkatul Islam Aziz &

Md. Nezum Uddin

41-49


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Relationship between Ownership Structure and the Modes of

Dividend Payment: A Study on Dhaka Stock Exchange

Mohammad Ruhul Amin1; Md. Abdullahel Kafi

2; & Md. Mahabbat Hossain

3

1Assistant Professor of Finance, Southeast University, Bangladesh2Assistant Professor of Accounting, Northern University Bangladesh, Bangladesh3Faculty Member, Bangladesh Institute of Bank Management (BIBM), Bangladesh

ABSTRACT

This paper investigates whether percentage of ownership controlled by the directors of companies has anyassociation with types of dividend declared by them. Based on the data for the years 2006 to 2009 from the DhakaStock Exchange, this paper found that most of the companies provided stock dividends rather than cashdividends. Using Yates Continuity Correction Chi-square Test, this study has found existence of a significantrelationship between the percentage control of ownership and types of dividend declared. Furthermore, the studyindicates that the companies having 50% share controlled by the directors are 3 times more likely to offer stockdividends than companies having


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found that Chinese investors appear to favor stockdividend over cash dividends. There are manyhypotheses explaining why firms pay out stockdividends. The signaling and retained earningshypotheses, which are closely linked and relate stockdividends to a firms good growth or investmentpotential, appear to be the leading contenders inexplaining stock dividend policies of firms in the U.S.(Baker et al, 1995).Thus, it is important to analyze correlation between thedirectors control of the shares and the modes ofdividend payment by the firms. It may suggest tradingstrategy that can be devised based on the nature of therelationship. For this, we have chosen an emergingmarket in Asia, namely the Dhaka Stock Exchange (DSE).An extensive search of literatures also justifies the needto do because there is a dearth study on this market onthe subject matter.

RESEARCH OBJECTIVES

The objective of this paper is to examine existingrelationship between ownership structure and modes ofdividend payment, while it will also try to find outindustrywise dividend payment for the years 2006-2009.Specifically, the paper is going to examine whether thepercentage of directors ownership has an impact on thedividend declaration of companies under differentindustries. If any, what types of dividend (equity orcash) is relevant with the majority (or minority)ownership shareholders.

LITERATURE REVIEW

Qiao, Y. and Chen, Y. (2001) found evidence of positive

statistical relationship between dividends and mixdividend policies of firms in Chinese stock markets. Theirstudy showed that the market was not sensitive with cashdividends but was reactive to stock dividends. On theother hand, Chen, Wei et al (1999) Empirically analyzedthe dividend policy of different companies listed inShanghai Stock Exchange by method of CumulatedAbnormal Return (CAR) and studied the existence andcharacter of the signaling effect of dividend policy. Thestudy found different degrees of CARs resulted fromdifferent dividend policies. The CARs of right issues werehigher than that of cash dividend but lower than that ofthe bonus issues. Kalay and Loewenstein (1985) found a

strong positive relation between dividend changes and afirms ability to generate future earnings and cash.Authors showed that dividend loses its informationcontent in explaining firms future performance whenearning and earning related variables (such as earningsforecast) are released simultaneously. A new view is thetunneling perspective, which argues that cash dividendsmay be used as a tool to re-direct firm resources to benefitlarge shareholders and top management at the expense ofminority shareholders. A number of studies explore thereason for and the impact of issuing stock dividends.

Proposals to explain stock dividends include the signaling,trading range, liquidity, cash substitution, and retainedearnings hypotheses. Foster and Vickrey (1978) reportedthat stock dividend generates positive abnormal returnson the declaration date rather than on the ex-date and thatsize is not a determinant of market reaction, supporting asignaling function of stock dividends. Authors reportsignificant abnormal returns around the announcement ofstock dividends, suggesting that stock dividend issue is asignal for future cash dividends, cash flows, and earnings.In an examination of responses from chief financialofficers, Eisemann and Moses (1978) found themsupporting for signaling, liquidity, cash substitution, orretained earnings hypotheses. Whereas, Baker and Philips(1995) reported evidence from a managers surveysupporting signaling and retained earning hypotheses.Cash dividends and stock dividends have been arguedsubstitutes for one another. As discounting a dividendpayment would likely produce a negative marketreaction, firms usually issue stock dividends rather thanpaying out cash dividends that might lead to a cashshortage for internal use. Ghosh and Woolridge (1985)found that issue of stock dividends can mitigate thenegative market reaction due to reduction or omission ofcash dividends, which provides evidence for the cashsubstitution hypothesis. Fung and Leung (2001) provedthat reinvestment by plowing back earnings should beviewed positively; as it indicates profitable opportunitiesin firms. If firms indeed have good investment prospects,shareholders prefer stock dividends in order to preservecash for investments; seasoned equity financing is notreadily available for future funding needs because ofregulatory constraints in China. Thus, the

underdevelopment of Chinas financial market impliesthat rational Chinese stockholders would generallyprefer stock dividends to cash dividends, supporting theretained earning hypothesis. Huang and Fung (2004)found that if dividend policy serves as a signal to themarket, firms values (prices) will change as a result.Price appreciation will not translate into financial gainsfor the controlling stockholders whose shares cannot betraded through the stock exchanges. Thus, they wouldprefer cash dividend to realize an immediate financialgain. Mitton (2002) found no significant associationbetween insider ownership and stock price performancefor a sample of East-Asian companies. Furthermore,

studies regarding the association between insiderownership and managerial misbehavior are found tohave mixed results. Recent studies on the relationshipbetween dividend policy and level of ownership by thedirectors include Wang (2006), Lee J. (2006) and Andres,C. (2008). Wang provided evidence that familyownership is associated with higher earning quality, afinding consistent with the alignment effect of familyownership. Jim Lee (2006) studied on S&P and fortune500 companies where a comparison based on net profitmargin, employment, revenue and gross income growth


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companies we find very similar dividend ratesirrespective of the percentage control by the directors ofthe firms. For cement industry, cash dividends weremainly declared and the higher percentage of dividendswent to the companies with primarily under thedirectors control. However, pharmaceutical industrydeclares mainly cash dividends, where companies withless than 50% controlled by the shareholders during theyears 2006, 2007 and 2009. Nevertheless, it has beenchanged during 2008 when a little larger dividend wasdeclared for the favor of directors controlled shares.

Table 2: Comparison of Average Dividends for 50% &


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CONCLUSION

This paper has tried to investigate the relationshipbetween directors control of ownership and modes ofdividend payment. It found that, in general, most of theindustries would like to provide stock dividend ratherthan cash dividend. Using Yates Continuity CorrectionChi-Square, this study has found existence of asignificant relationship between the percentage controlof ownership and types of dividend declared.Furthermore, the study indicates that companies having50% control of ownership by directors are less likely tooffer cash dividends than stock dividends comparedwith


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Credit Characteristics and Business Performance: A Survey of

Women owned Microenterprises in Tanzania

Paul J. Salia1& Jonathan S. Mbwambo

2

1Assistant Lecturer, Institute of Accountancy Arusha, Tanzania2Sokoine University of Agriculture, Development Studies Institute, Tanzania

ABSTRACT

This article provides assessment of the effects of four credit characteristics including size, interest rate, repayment period andborrowing experience on business performance. The article makes use of survey data collected from 217 women microcreditclients from Arusha, Dar es Salaam and Mwanza regions in Tanzania. Bivariate correlation analysis was used to find outspecific effect of each of those four credit characteristics on three business performance measures namely total sales revenue,net profit and business net worth. The combined effect of all four credit characteristics on business performance was estimatedby a multiple linear regression model. The findings revealed that size of credit was positively correlated with total salesrevenue and business net worth at significant level. Interest rate was negatively correlated with all three measures of business

performance at significant level. It was also found out that repayment period was positively correlated with all three businessperformance indicators at significant level. Furthermore, the study established that borrowing experience was positively

correlated with total sales revenue at significant level but not with other two indicators. The model accounted for 25% of salesrevenue, 9% of net profit and 28% of business net worth.

Key words:Size of credit, interest rate, repayment period, borrowing experience and business performance JEL Classification Code: E51, E43

1 INTRODUCTION

redit is an important source of capital to financewomen owned microenterprises in Tanzania.This is particularly so given that most of thoseenterprises are capital constrained (Martijn and

Daan, 2012). Evidences from a study by InternationalLabour Organization (ILO, 2003) show that 67% of womenenterprises in Tanzania use their meagre savings to start uptheir businesses. Amidst this situation, women owners ofmicroenterprises can hardly secure loan from thecommercial banks which offer relatively low interest ratesbecause have no control over the conventional collateralslike land or houses. This view is supported by Nchimbi(2002) and Olomi (2001) when they observe thatmicroenterprises owners, especially women, cannot easilyborrow from commercial banks due to lack of collateralswhich are demanded in the process of asking for financialsupports.

Since women owners of microcredit cannot access creditfrom the mainstream financial system, their only remedyare the Microfinance Institutions (MFIS) and moneylenders, who unfortunately attach their loan products withstringent conditions including high interest rate, shortrepayment period and limited amount to borrow. Thispaper therefore is set to assess how those stringent lendingconditions affect business performance in terms of totalsales revenue, net profit and business net worth.

2.LITERATURE REVIEW

Lack of enough capital is one of the major constraintsagainst growth of women owned microenterprises. It is onthis background Coleman (2001) observes that without

sufficient capital, micro and small firms are unable todevelop new products and services or grow to meetdemand. However, microcredit has always constitutedsmall-size-loans (Mosley and Hulme, 1998; Morduch 2000;Ghatak and Guinnane, 1999) which can hardly suffice theactual business needs to grow or expand.The contribution of optimally large size of loans to theperformance of microenterprises cannot beoveremphasised. According to Godquin (2004) there islinear relationship between size of loan and profit that afirm can make as a result of borrowing. She underscore thecontribution of size of loan particularly focusing on whatthe same can do increase business returns and investment.

She notes as the net return is an increasing function of thesize of the loan, the borrower always prefers bigger loansand therefore asks for the largest loan size she may applyfor given the set of projects within her reach as defined byher own characteristics, those of her environment, and thoseof her lending group (Godquin, 2004:1911).Vogelsang (2001) studied the impact of loan size on theperformance of the clients enterprises in Bolivia using datafrom one of the microfinance institutions called Caja LosAndes. Basing on the information from 76,000 clients and

C


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28,000 rejected loan applicants; the author found out thatclients with average higher loan size generated higherrevenues than those with lower loan size. Accordingly, thestudy found out that those with average higher loan size hashigher level of assets than those with lower average loan size.Coleman (1999, 2001) studied microfinance programs inThailand and found out that those programs hadinsignificant or negative impact on the borrowershousehold wealth. According to him, those loans hadnegative effect because were too small in size to makeinvestments in business and thus were used forconsumption. The borrowers because even poorer becausehad to turn to money lenders to finance the repayment thefact that lead the borrowers into a vicious cycle of poverty.Otieno et al., (2011) conducted as study in Kisii County inKenya to assess the effect of provision of micro finance on theperformance of microenterprises focusing particularly onmicroenterprises under Kenya Rural Enterprise Program (K-REP). The study, which involved a total of 86 enterprises,found out that the size of loan given to majority of borrowerswas inadequately small to facilitate significant investment inbusinesses. The study also found out that loan amountsdisbursed to the majority of applicants (respondents) wereless than the amount applied for. The authors concluded thatdue to inadequately small loans, youth microenterpriseswere not able to grow to small and medium size enterprises.At this point it is important to note that all of the abovestudies confirm to the fact that financial constraints, due tolimited loan amounts by MFI, prevent firms from makingenough investment in their businesses thus leading todepressed growth, productivity and eventually theirsurvival (Carreira & Silva, 2010; Musso & Schiavo 2008;Parker & Van Praag,2006). Cognizant of the contribution of

size of credit in business performance, this study establishesthe following hypothesis.H1. The performance of microenterprises with large loan size is

significantly higher than those with small loan size.Microenterprise operators, especially in the developingcountries, have limited access to credit from formal sources.Banks, which offer relatively low rates compared to MFIs andmoney lenders, continue to favour large-scale business andneglect the poor potential entrepreneurs on the basis thathave no the conventional collaterals to guarantee for the loanthey request. A study by Banerjee and Duflo (2006) coveringa total 13 developing countries revealed that only 6% of theborrowings of poor people came from formal sources.

According to them 94% of the borrowed funds by the poorcame from money lenders, friends and merchants. Given thissituation, it turns out that the only viable sources of credit towomen owners of microenterprises are the microfinanceinstitutions (MFIs) and sometimes money lenders.However, it might be important to note that MFI loans havealways been attached to high interest rates. Specifically, highinterest rates on microcredit are typical in the so called newwave MFIs where financial services have been commercialized(Huq, 2004). Bateman (2009) found out that women borrowers

from one of Mexicos MFI called Compartamosbanco werepaying a high interest of around 90-100%.Literature suggests that MFIs associate their loan productswith high interest rates in order to meet the operating costsand to achieve financial sustainability. In order to achievefinancial sustainability and, arguably be able to reach morepoor people with microloans, MFIs have to attach their loanproducts with high interest rate so as to gain profit(Roodman, 2011; Rosenberg et al., 2009, Ruben, 2007).According to Roodman (2011), the impact of high interestrates has to be judged against the possible harm of poorpeople having no access to credit at all. Explaining why smallloans should be attached to high interest rate; Rosenberg,Gonzalez and Narain (2009:1) note lending $100,000 in 1,000loans of $100 each will obviously require a lot more in staffsalaries than making a single loan of $100,000.Ruben (2007) in his work titled The Promise ofMicrofinance for Poverty Relief in the Developing Worldexplains the reason why MFIs have to attach their loan withhigh interest rates. He argues that MFIs have to hinge thecredit products with high interests so as to be able to meetthe high administrative costs associated with small loans.According to him, the interest rates of 30 to 50% or moreoffered by MFIs are low compared to that which is offeredby local money lenders. While this is classic explanationaround high interest rate offered by MFIs, the argument Iput forward here is that those rates are too high to reallymake it possible for borrowers to expand their businessthrough increased volume of tradable goods and services,investment on productive assets and eventually earn profit.High interest rates can prevent the poor from borrowing.This may happen when those interest rates preventinvestment on activities that produce high returns (Fernando,2006). This is clear when he notes that only those who cangenerate a sufficiently high surplus of funds can afford highinterest rates on microcredit. More specifically, a borrower'srealized rate of return on investment needs to be greater thanthe interest rate to service the loan (Ferdinando, 2006:7). Infact, loans with high interest rates can have devastatingimpact on the borrowers when the same are used to facilitateconsumption than business investment (Stewart et al. 2010).For instance, women owners of microenterprises are likely tobe unable repay loans with high interest rates given that theyare tend to invest the borrowed money in other activities likehealth, education and basic needs than in business.Further empirical evidences suggest that high interest ratesoffered by MFIs have been reason why microfinance serviceshave not been able to improve the clients wellbeingparticularly in Sub-Saharan region (Stewart et al, 2010). Theauthors observe that the poor borrowers are made poorer notricher and because their businesses do not produce enoughprofit to compensate for the high interest rates and that due tohigh interest rate, the poor do fail to repay loan and may fallinto a debt trap (Stewart et al., 2010: 49). Higher interest rateswere one of the causes of indebtedness among MFI borrowers.In a study conducted in Ghana by the Centre for EuropeanResearch in Microfinance, Schicks (2011) found out that high


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interest rates were one among highly mentioned reasons forborrowers indebtedness in the interviews. In Tanzania, highinterest rate on microloans has been found to constrainfinancial stability of microenterprises. For instance, Kayunze etal., (2005) list high interest as one of the constraints againstborrowing other than lack of collateral by the poor.However, poor people go on borrowing from MFIs in spiteof the high interest rates. Engagement in loans with high

interest rates means that women borrowers would havelittle returns on their businesses the fact that will in turnlimit business performance in terms of investment on assets,profit and hired labour force. On the basis of thesearguments, the study establishes the following hypothesis.H2. The performance of microenterprises whose owners are servicing

loans with low interest rates is significantly higher than thosewhose owners are servicing loans with high interest rates

Generally, the beneficiaries of microcredit schemes,especially where Grameen banks solidarity group lendingapplies, experience short repayment time most often oneweek after loan disbursement. Hulme and Mosley (1996)note that frequent repayment scheme is used by MFIs to

reduce repayment insecurity. According to them,advantage of this scheme is that it screens out theundisciplined borrowers, thus giving early warning to loanofficers and group members. However, short repaymentperiod means that borrowers have to make returns beforemaking any investment. In the same vein, Armendriz andMarduch (2005) argue for tight repayment scheduleshowing that flexible repayment contributed to high defaultrate among microcredit clients in Bangladesh.Scanty literature available on the role of repayment periodand business performance suggests that there is positivecorrelation between more flexible repayment period andbusiness performance. Field and Pande (2008) conducted a

study to evaluate the effect of weekly repayment in amicrofinance institution called Village Welfare Society inCalcuta India. In this study, borrowers were randomlyassigned to one of three conditions: usual weeklyreimbursement starting immediately after loandisbursement, monthly reimbursement, or weeklyreimbursement starting a few weeks after the loan started.The findings revealed that the group which was given a gapof a few weeks was more likely to start a business, andwhen they started they were more likely to make a biggerinvestment than one that only started paying after a while.Particularly, women borrowers who started loanrepayment after a few weeks were less likely to buy saris for

resale and more likely to invest on productive assets likeacquire a sewing machine. In another study involving 845clients of a microfinance institution called Village FinancialServices in Kolkata India, Field et al., (2011) found out thatimmediate repayment obligation distorted investment inmicroenterprises financed through credit. The study furtherfound out that longer grace period had positive effect onprofit and investment in business but could increasedelinquency.

The ideal advantage of tightly short repayment schedule isthat it may screen out the undisciplined borrowers, thusgiving early warning to loan officers and group members(Hulme and Mosley, 1996). However, short repaymentperiod means that borrowers have to make returns beforemaking any investment. Particularly, short repayment timemay not favour women borrowers who do so to start up anew business because repayment has to begin before thereturns on investment. With due consideration of theimportance of reasonably enough grace period andeventually long repayment period in the growth andeventually performance of women owned MEs the studyconsiders the following hypothesis.H3. The performance of microenterprises whose owners are

servicing loans with long repayment periods is significantlyhigher than those whose owners are servicing loans withshort repayment periods

Literature consistently shows that women operators of MEshave limited experience with credit and other microfinanceservices. In essence this is closely related to limited access tocredit among them (Ibru, 2009; Iganiga, 2008; Iheduru, 2002;Kuzilwa, 2005; Lakwo, 2007; May, 2007; Okpukpara, 2009).Limited experience with credit is likely to lead to limiteduse of other related microfinance services (Karnani, 2007).This view is reinforced by Shane (2003) arguing that theability of women to make use of the opportunities providedby microfinance services to ensure enterprises performancedepends on the attitude to risk.The duration of participation in credit scheme, therefore, is animportant factor to consider while assessing the impact ofmicrocredit scheme. However, the available empiricalevidences show mixed results with regard to usefulness ofcredit and duration of participation in credit schemes. A studyconducted in Zimbabwe showed that households of clients

who had participated for long time were likely to fall intopoverty than non-clients (Barnes et al. 2001b). A study inGhana (Adjei and Arun, 2009) reveled that women clients weremore likely to purchase refrigerators and sewing machines butthe duration of participation did not matter. A study by Lakwo(2006) on microfinance, rural livelihood and womensempowerment in Uganda revealed that microcredit didimprove the wellbeing of clients relative to that of non-clientsbut those gains were reducing as time for participationincreased. The study observed further that clients who hadbeen involved for more than three years saw very negligiblevalue-addition to their wellbeing (Lakwo, 2006).However, in this study it is assumed that women operators ofMEs with repeated borrowing experience (i.e. those with higherfrequency of borrowing) are more likely to use credit for effectivebusiness performance. This is particularly so since most of theMFIs do not provide enough and relevant business education totheir clients; especially on the use of credit for businessperformance. With due consideration of the importance of creditexperience, this study puts forth the following hypothesis.H4. The performance of microenterprises whose owners have had

repeated borrowing experiences is significantly higher thanthose whose borrowers have had limited experience.


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Interest rate (interest), Repayment period (repayment) andborrowing experience (experience)respectively.The interpretation of regression analysis was based ongroup statistics (Means and Standard Deviation), PearsonCorrelations, Beta Coefficients, t-values, adjusted R squarevalues, F statistics and significance (P-values).

4.FINDINGS

4.1 Size of credit and business performanceThe findings revealed that there was significant positivecorrelation between loan size (amount borrowed) and totalsales (r = 0.300, p < 0.01). There was also significant positivecorrelation between size of loan and business net worth (r =0.307, p < 0.001). However, loan size was not significantlycorrelated with net profit. The implication of these findingsis that the businesses borrowers with large loan size (i.e.those who borrow a large amount of money) were likely toperform better in terms of total sales and net business worththan of those who borrow little (limited) amount. Thefindings therefore concur with the first hypothesis for this

study that the performance of microenterprises with large loansize is significantly higher than those with small loan size.

4.2 The interest rate per annum and business performanceThe interest rate per annum varied from 5% for borrowersfrom VICOBA) to 600% for borrowers from individualmoney lenders. The average interest rate was 52.19% peryear. The results of bivariate correlation analysis revealedthat interest rate was negatively correlated with sales (r = -0.l78, p = 0.011) and with business net worth (r = -0.137, p

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