The highest dividend ceiling for top-performing banks will be increased to 35% from the existing 30% by revising the new dividend policy.
The decision was made at a meeting between the Bangladesh Securities and Exchange Commission (BSEC) and the Bangladesh Bank at the former's headquarters on Monday.
In response to a BSEC proposal, the central bank at the meeting assured the securities authorities of revisiting the new dividend policy by increasing the dividend ceiling by 5%, said Mohammad Rezaul Karim, executive director of the BSEC.
Meeting sources said the 5% increase would be considered only for banks that would be able to maintain the Capital Adequacy Ratio (CAR), the ratio of a bank's capital to its risk, above 15%.
Of the 35% dividend, banks will be allowed to declare 17.5% cash and the rest will be stock, according to the decision.
Earlier on 7 February, the Bangladesh Bank issued a permanent dividend policy for banks raising capital requirements for declaring the highest 30% dividend.
According to the policy, banks require to maintain at least 15% or above CAR to declare a maximum of 30% dividend, including 15% cash.
Banks can announce the highest dividend maintaining the required capital only if they do not take any provisioning or capital deferral facility.
The capital market experienced a downturn in share prices of the banking sector after limiting the highest dividend.
Following that, the BSEC proposed that the central bank raise the dividend ceiling only for banks that are the best performers in terms of maintaining the capital base and earning profits.
Only 12 out of 30 listed banks in the country have the capacity to declare a maximum of 30% dividend for last year, complying with the dividend rule.
In 2010, when the market was booming, half of the listed banks declared dividends as high as 30-95%, while 11 banks declared over 20%.
After the market debacle, the dividend declaration of the banking sector declined gradually as their financial health weakened.
However, cash dividend declaration increased from the year 2019 to avoid additional taxes on stock dividends imposed in the FY20 budget.
According to the Finance Act 2019, a company will have to pay 10% tax if its stock dividends exceed cash dividends.
The government also imposed 10% tax on retained earnings and reserves exceeding 50% of the paid-up capital – the amount of money earned from shareholders in exchange for shares – of companies.
The Bangladesh Bank will urge the National Board of Revenue (NBR) to withdraw the tax to encourage banks to declare more stocks than cash.
The decision was made at the same meeting held at the BSEC on Monday.
Though the government imposed taxes to encourage banks to give more cash dividends, the decision is not appropriate in the current situation as banks need to hold more cash to strengthen their capital bases to tackle the unforeseen risk in the post-Covid-19 era.