Essay: Factors Effecting Dividend Payout Ratio: Evidence from Listed Shariah Compliance (Independent Variables)

NOTE: This Essay is just for an Educational Purpose

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The role of dividend in financial management field is very essential and it is one of the most controversial subjects. Arnott and Asness (2003) made several studies in order to know the effects of dividend on the growth of organizations. The main purpose of their investigation was to understand whether companies can grow and secure their future through dividends or not. The results of their studies concluded that the future earnings of an organization is found to be fast and increasing if the dividend payout ratio is high, and if the payout ratio is low, the future earnings are decreasing and slow (Parsian and Koloukhi, 2013). Making dividend policies is one of the most important decisions, which are necessary to be made by the organizations and these decisions are responsible for the stability and growth of any organization (Ouma, 2012).

The presence of Islamic laws and shariah in the financial institutions, such as stock markets banks, has made several changes in the teachings and rules of modern business. According to Islamic shariah, the financial institutions are allowed to perform their actions as instructed by Allah, the almighty and involvement of any kind of interest is completely forbidden (Usman and Khan, 2012). Islamic capital market is essential for the future growth of Islamic economy. It supplies fund anthology to well-organized economic origins. It helps various Islamic financial institutes to generate cheap and simple funds and it helps in defining the behavior of Islamic financial institutes, however, it is mandatory for these institutes to follow shariah compliance (Ardiansyah and Qoyum, 2012). 

The financial ratios and weekly stock prices from 2001 to 2013 were collected of several companies in the Australian Stock Exchange. Fifty companies were running on conventional stocks and the remaining fifty were working according to the shariah. On results, it was revealed that companies following the shariah compliance were earning same profits as compared to the conventional based organizations (KR and Fu, 2014). A study was made in which the data was collected of conventional and Islamic shariah financial institutions. 2956 banks were studied of total 144 countries and it was revealed that the banks, which were following Islamic shariah compliance, were more methodical as compared to the conventional banks. The capitalization ratios were higher than the conventional bank.  However, the services and products of these two types of institutions were similar. The cost income ratios and operating costs are lower of Islamic shariah institutions as compared to the conventional institutions (Beck, Kunt and Merrouche, 2013). Since Islamic shariah compliances have entered in the field of business, it is seen that the shariah following companies are able to generate higher profits through smooth earnings. In order to find out whether shariah compliance companies are earning more than the conventional companies, a research was made in which 315 shariah compliance organizations were studied and it was revealed that these companies are earning much more than the organizations, which are not following the shariah (Saringat, Haron and Tahir, 2013). Studies and researches have revealed that in India, the shariah compliance companies and conventional companies are on the same page of earning profits, and results were obtained observing the stock market of India from the year 2007 to 2011 (Natarajan and Dharani, 2012).

Tax is levied on every person so that he can help the government to fulfill the financial needs of the country. Every citizen has to pay tax to its government and the amount of tax he has to pay is according to the income or properties of the person. The tax system is not new to the world and it has a deep history. In Islam, tax is not based on the income, but it is based on the total wealth of an individual. This shariah has made lives easier for several individuals because they have to pay taxes according to the wealth they keep, such as the quantity of properties. Taxation in Islam is just not related to the working class, but also all the big and small organizations are required to pay taxes according to their wealth. Malaysia is one of the popular Islamic countries, which has several shairah compliances companies and they all pay their taxes according to the teachings of Islam. It is observed that the opposition of Islamic taxes has no negative effects on the Malaysian economy, in fact, the economy is found to be growing and more businesses are now following the Islamic taxation system. It is revealed that, the Islamic taxation system has no negative impact on the dividends and the organizations are growing faster than before (Awang and Mokhtar, 2011). Zakat is one of the main pillars of Islam and also it is a part of tax. There is a fix percentage of paying Zakat in Islam on which an individual or a business has to pay tax on the annual basis. It is mandatory for the shariah compliant organizations to pay 2.5% tax on their accumulated annual wealth. Similarly, an individual or an organization has to pay the land tax (Kharaj) and head tax (Jizya) (Tax Justice, 2017).

Sale is one of the important factors, which helps any organization to grow. There are several conventional and shariah compliant organizations, which are always dependent on the sales of their products and services because they help them to grow in every aspect. This is the reason that various financial institutes are always finding the ways to grow sales so that they can earn maximum profit. It is seen that the sales growth has an impact on dividends and this is why organizations make flexible strategies to achieve the sales target because it helps them grow (Deitiana, 2015). Islamic law is important to understand the growth of sale (Hassan, 2007). Since the Islamic laws have captured the stock markets and several organizations, it is found that the companies have gained their desired sales growth by following the shariah. As the concept of interest (riba) is forbidden in Islam, it is found that banks and stock markets, which are based on the Islamic principles of commerce, have more customers as compared to the other financial institutions. The consumption of the products and services of shariah compliance organizations are found to be increasing because the costumers are free from paying any interest, which saves their income. Several studies have also revealed that inflation can be overcome through shariah and also it the shariah compliant organizations can help in maintaining a strong GDP, which affects the economy in a positive way (Imam and Kpodar, 2015).

Firms in the market are found in various sizes (Guiso and Rustichini, 2011). According to Jensen and Meckling, if a firm is small, the expenses of that firm will also be small, whereas, if the firm is big in its size, then the expenses will also be according to it. In order to decrease this expense, a firm has to research various ways to eliminate unnecessary actions, which are expanding the expensive, and also the firm has to make several strategies to overcome this problem. According to the research of Rahmawati, Haryanto and Mutmainah, it is found that the exposure scale is affected by the size of a firm and also it effects the Islamic corporate (Herwiyanti, Wulandari and Rosada, 2015). If a firm based on shariah is willing to grow its size and if the debts are high than its tangible assets, then the firm should make strategies to decrease the debts before it proceeds for size expansion (Haron and Ibrahim, 2012). The concept of Islamic debt is found to be increasing and it is revealed that many Malaysian and Indonesian companies are growing its size due to this policy. It is seen that before the presence of shariah in business, many firms were unable to grow because they had to pay interest, which created many challenges for them. The reason for the wide acceptance of shariah in the corporate world is that it enables the small companies to grow faster, without paying any interest to the financial institutions such as Islamic banks (Locke and Foo, 2013).

 According to many Islamic corporate experts, it is revealed that shariah has made the stocks available to everyone. In other words, any small organization can also take part in the stock market in order to grow. The stock indices are found to be in better position because of its particular features such as ratio and ethical screenings, prohibition of financial sectors and highly leveraged firms, limitation of leverage, which is based on interest and by eliminating complex financial products, toxic assets and derivatives. It is observed that even at the times of global financial crisis, Islamic stocks were strong as compared to the conventional stocks and it will remain to be resilient. It is found that there are major and positive effects of shariah on leverage, which is why investors are now more interested in the Islamic products as compared to the conventional markets (Saiti, Bacha and Masih, 2014).

Shariah is playing an important role in the corporate world and it is helping various companies to grow its size. It is also revealed that after shariah has entered in the business world, it has been accepted by several stock markets and there is an increase in the sales of Islamic products in the stocks. As shariah has no acceptance and tolerance for interest, it is found that it companies and general public are enjoying benefits of shariah, as they have no pressure of paying interest. Shariah has increased earnings and made taxation easy and it is also increasing growth and sales of various shariah compliance firms and affecting leverage positively.

References

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