The International Monetary Fund(IMF) is pushing banks around the globe to withhold payment of dividends to shareholders and instead use the cash to build their capital and liquidity positions.
In a statement appearing on the Financial Times on 21st May, the IMF Managing Director Kristalina Georgieva said this is the only way banks can have adequate buffers to ride the 2020 recession.
“Having in place strong capital and liquidity positions to support fresh credit will be essential. One of the steps needed to reinforce bank buffers is retaining earnings from ongoing operations. These are not insignificant,” said Georgieva.
These recommendations come in the wake of several banks in Kenya cancelling payment of dividends to shareholders, a development that is likely to attract a backlash from shareholders at the Annual General Meetings.
IMF figures indicate that 30 global banks distributed about $250 Billion in dividends and share buybacks in 2019.
Equity Bank Group and Standard Chartered Bank Kenya are among lenders who have already stopped payment of dividends to shareholders. Others like NCBA have opted to issue bonus shares to shareholders instead of dividend payouts.
The IMF Director reckons that shareholders who sacrifice now will prosper when economic growth resumes.
The Fund recommends that banks increase their prudential buffers of high-quality capital and liquidity. This will significantly strengthen the resilience of the financial system.
“Of course, this has unpleasant implications for shareholders, including retail and small institutional investors, for whom bank dividends may be an important source of regular income. Nonetheless, in the face of the abrupt economic contraction, there is a strong case for further strengthening banks’ capital base,” said the IMF Managing Director.
She said all stakeholders will ultimately benefit if banks preserve capital instead of paying out to shareholders during the pandemic. Protecting the banking sector’s strength now means that, once the recovery picks up, shareholders can expect large payouts.
In March, the Bank of England asked banks to suspend plans to pay dividends and cash bonuses to executives, indicating it was ready to use its supervisory powers if any bank refused. Eventually, the banks complied.
In Brazil, supervisors have had to use their authority to suspend payouts in a collective manner.
IMF managing director advises that collective decisions are vital and that Banks that take action on their own could be penalized by investors who fail to understand the need to restrict payouts.
Today, supervisors in many countries use stress tests to determine whether — and by how much — payouts should be restricted.
Pioneered by the IMF more than 20 years ago, these tests quantify the additional capital needed to keep banks resilient in the face of crisis and are a vital guidepost helping banks to traverse unfamiliar territory.