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05 Cooperative Societies
Introduction So far you have learnt about sole proprietorship, partnership and joint stock company as different forms of business organisation. You must have noticed that besides many differences among them in respect of their formation, operation, capital contribution as well as liabilities, one common similarity is that they all engage in business activities to earn profit. Without profit it is impossible for them to survive and grow. But there are certain organizations which undertake business activities with the prime objective of providing service to the members. Although some amount of profit is essential to survive in the market, their main intention is not to generate profit and grow. They pool available resources from the members, utilise the same in the best possible manner and the benefits are shared by the members. Let us take one example. Suppose a poor villager has two cows and gets ten litres of milk. After consumption by his family everyday he finds a surplus of five litres of milk. What can he do with the surplus? He may want to sell the milk but may not find a customer in the village. Somebody may tell him to sell the milk in the nearby town or city. Again he finds it difficult, as he does not have money to go to the town to sell milk. What should he do? He is faced with a problem. Do you have any solution for him? One day that poor villager met a graduate of a local university who had earlier done this course. The learner told him, you see, you are not the only person facing this problem. There are many others in your village and also in the nearby village who face a similar problem. Why don’t you all sit together and find a solution to your common problem? In the morning you can collect the surplus milk at a common place and send somebody to the nearby town to sell it. Again in the evening, you can sit together and distribute the money according to your contribution of milk. Of course first you have to deduct all the expenses from the sale proceeds. That villager agreed to what the graduate said. He told everybody about this new idea and formed a group of milk producers in his village. By selling the milk in the nearby town they were all able to earn money. After that they did not face any problem of finding a market for the surplus milk. This process continued for a long time. One day somebody suggested that instead of selling only milk why not produce other milk products like ghee, butter, cheese, milk powder etc. and sell them in the market at a better price? All of them agreed and did the same. They produced quality milk products and found a very good market for their products not only in the nearby town but in the entire country. Just think it over. A poor villager, who was not able to sell five litres of milk in his village, is now selling milk and milk products throughout the nation. He is now enjoying a good life. How did it happen? Who made it possible? This is the reward of a joint effort or co-operation. The term co-operation is derived from the Latin word co-operari, where the word co means ‘with’ and operari means ‘to work’. Thus, co-operation means working together. So those who want to work together with some common economic objective can form a society which is termed as “co- operative society”. It is a voluntary association of persons who work together to promote their economic interest. It works on the principle of self-help as well as mutual help. The main objective is to provide support to the members. Nobody joins a cooperative society to earn profit. People come forward as a group, pool their individual resources, utilise them in the best possible manner, and derive some common benefit out of it.
In the above example, all producers of milk in a village joined hands, collected the surplus milk at a common place and sold milk and milk products in the market. This was possible because of their joint effort. Individually it would not have been possible either to sell or produce any milk product in that village. They had formed a co-operative society for this purpose. In a similar way, the consumers of a particular locality can join hands to provide goods for their daily need and thus, form a co-operative society. Now they can buy goods directly from the producers and sell those to members at a cheaper price. Why is the price cheaper? Because they buy goods directly from the producer and thereby the middlemen’s profit is eliminated. Do you think it would have been possible on the part of a single consumer to buy goods directly from the producers? Of course, not. In the same way people can form other types of co-operative societies as well. Let us know about them. Definition A co-operative is an autonomous association of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through a jointly-owned and democratically- controlled enterprise.^1 A cooperative society is a form of organization where people associate voluntarily and on the basis of equality for the furtherance of their common economic interest. Consumers’ cooperative societies, cooperative credit societies, cooperative farming societies and cooperative housing societies are some examples of this type of organizations. The primary motive of a cooperative society is to provide maximum service to its members and not to make profits. This does not, however, mean that a co-operative does not work for profit at all. There are several societies engaged in business activities, which earn reasonably good profits while providing service to their members as well as to non-members. Whatever is the profit, it will be partly distributed as bonus to its members. A cooperative society raises its capital from its members in the form of share capital and proceeds arising from operation are shared among members in an equitable manner based upon a set of established cooperative principles. The management of a cooperative is run by a managing committee elected by members on the basis of one member one vote irrespective of the number of shares held by members. The general body of members decides the broad policy framework and guidelines, which the managing committee is required to follow. History^2 Early Co-op Origins In early human societies, people learned to cooperate and work together to increase their success in hunting, fishing, gathering foods, building shelter, and meeting other individual and group needs. Historians have found evidence of cooperation among peoples in early Greece, Egypt, Rome and Babylon, among Native American and African tribes, and between many other groups. Ancient records show that Babylonians practiced cooperative farming and that the Chinese developed savings and loan associations similar to those in use today. In North America, clearing land in preparation for the planting of crops, threshing bees, and barn raisings all required cooperative efforts. Early agriculture would have been impossible without mutual aid among farmers. They relied on one another to defend land, harvest crops, build barns and storage buildings, and to share (^1) Source: ICA Statement on the Cooperative Identity (^2) Principal source (adapted): http://www.cooplife.com/coophist.htm (24/10/2005)
The cooperative movement is an important instrument supported and encouraged by the government, aimed at achieving mass participation in the national development and to provide a means of raising the standards of living of Kenyans, both in rural and urban areas. FORMATION AND OPERATION In Kenya, cooperatives are registered by the Commissioner of Cooperative Development (CCD) under the Cooperative Societies Act, 2004. Cooperative organizations are normally registered with limited liability. Cooperatives have a perpetual succession, which is not affected by entry or exit of members. All cooperatives are required to operate in accordance with the Act and the Cooperative Societies Rules, 2004, prepared by the Minister (CS) in charge of Cooperative Development. A cooperative should have a minimum of ten members but no maximum is set. The ten members must sign the application form for registration. All major decisions of cooperatives must be made at the general meeting by a majority vote. Each member has one vote irrespective of the share capital the member has in the cooperative and also irrespective of the activities carried out between the member and the cooperative. This is because a cooperative is an association of people, but not capital, as is the case in joint stock limited companies. THE COOPERATIVE PRINCIPLES^4 Co-ops worldwide share a common creed – known as the “co-op principles”. All co-ops operate under these seven principles. The co-op principles serve as an important framework to define the unique ways co-op businesses are structured. They help all co-ops maintain both the spirit and structure of cooperation. The co-op principles were originally developed in the mid-1800s by groups struggling to provide unadulterated, quality food when the market offered them very few options. They were eventually endorsed by the International Cooperative Alliance, most recently in 1995, as the standards by which all co-ops should operate and by which members maintain democratic control. Co-ops are among very few types of business organizations that adhere to a set of principles. These principles are significant not just from a historical perspective but also because they outline a democratic structure that can be adapted to businesses providing any of a large variety of services and products. The International Cooperative Alliance Statement of Cooperative Diversity Adopted September 1995 VALUES Cooperatives are based on the values of self-help, self-responsibility, democracy, equality, equity, and solidarity. In the tradition of their founders, cooperative members believe in the ethical values of honesty, openness, social responsibility, and caring for others. PRINCIPLES The cooperative principles are guidelines by which cooperatives put their values into practice. First Principle: VOLUNTARY AND OPEN MEMBERSHIP Cooperatives are voluntary organizations, open to all persons able to use their services and willing (^4) Source: http://www.ica.coop/coop/principles.html ( 10 / 10 / 2007 )
to accept the responsibility of membership, without gender, social, racial, political, or religious discrimination. Second Principle: DEMOCRATIC MEMBER CONTROL Cooperatives are democratic organizations controlled by their members, who actively participate in setting their policies and making decisions. Men and women serving as elected representatives are accountable to the membership. In primary cooperatives, members have equal voting rights (one member, one vote) and cooperatives at other levels are organized in a democratic manner. Third Principle: MEMBER ECONOMIC PARTICIPATION Members contribute equitably to, and democratically control, the capital of the cooperative. At least part of that capital is usually the common property of the cooperative. They usually receive limited compensation, if any, on capital subscribed as a condition of membership. Members allocate surpluses for any or all of the following purposes: developing the cooperative, possibly by setting up reserves, part of which at least would be indivisible, benefiting members in proportion to their transactions with the cooperative, and supporting other activities approved by the membership. Fourth Principle: AUTONOMY AND INDEPENDENCE Cooperatives are autonomous, self-help organizations controlled by their members. If they enter into agreements with other organizations, including governments, or raise capital from external sources, they do so on terms that ensure democratic control by their members and maintain their cooperative autonomy. Fifth Principle: EDUCATION, TRAINING, AND INFORMATION Cooperatives provide education and training for their members, elected representatives, managers, and employees so they can contribute effectively to the development of their cooperatives. They inform the general public – particularly young people and opinion leaders – about the nature and benefits of cooperation. Sixth Principle: COOPERATION AMONG COOPERATIVES Cooperatives serve their members most effectively and strengthen the cooperative movement by working together through local, national, regional, and international structures. Seventh Principle: CONCERN FOR THE COMMUNITY While focusing on member needs, cooperatives work for the sustainable development of their communities through policies accepted by their members. THE STRUCTURE OF COOPERATIVES IN KENYA The co-operative movement in Kenya is organized into four-tier system consisting of: Apex, Tertiary (NACOs), Secondary (County/District Unions) and Primary. Apex Co-operative Organization The apex co-operative organization today in (^) Kenya is the Co-operative Alliance of Kenya (CAK). The Co-operative Alliance of Kenya Limited (CAK) was registered on the 22nd December, 2009 as the National Apex Organization for the Co-operative Movement of Kenya under the Co-operative Societies Act, CAP 490 Laws of Kenya. The newly registered Co-operative Alliance of Kenya Limited is to be the driving force of the Co-operative Movement in Kenya. CAK is a successor to Kenya National Federation of Cooperatives (KNFC). KNFC was formed in 1964 by co-operative societies unions and NACOs to be the spokesman of the co-operative movement and to promote co-
Co-operative Development and Information Centre (CODIC) Ltd This was developed as a one stop shop for co-operative societies on issues of information technology and co-operative development. The primary function is computerization of cooperative society operations in order to improve efficiency. Among its major achievements is development of software which is used to install ATMs in a number of societies. Co-operative Insurance Company of Kenya (CIC) Ltd The Co-operative Insurance Company of Kenya Limited (CIC) was established in 1978 and was formerly known as Co-operative Insurance Services Limited (CIS). In 1999, the company name was changed to the Co-operative Insurance Company of Kenya Limited (CIC). The name change was part of the company’s market repositioning strategy of completely changing the then small company to a respected insurer in the country. It is currently among the largest insurance companies in terms of capitalization and insurance premium Kenya Planters Co-operative Union (KPCU) Kenya Planters Co-operative Union (KPCU) was registered 1937 as a national co-operative union for primary coffee co-operatives societies. The union, however, currently faces some serious challenges necessitated by poor governance structure and dual certificate of registration. Kenya Union of Savings and Credit Co-operative (KUSCCO) Ltd KUSCCO is the union for SACCOs in Kenya. It is charged with responsibility of championing issues affecting SACCOs in Kenya through advocacy and representation. The main objectives of KUSCCO are to:
- Promote the organisation and development of viable co-operative savings and credit societies
- Disseminate information concerning savings and credit^ societies and co-ordinate their operating methods and practice to maintain basic uniformity
- Foster education, training of members, officials and^ employees of savings and credit societies
- Act as the sole local and international representative and^ mouthpiece of savings and credit societies
- Help improve the internal management of savings and credit^ societies by providing a standardized management system. KUSCCO operations are managed by a board of 15 directors selected by member SACCOs on regional basis. The organisation has its Headquarters in Nairobi and five branch offices in Kisumu, Nakuru, Nairobi, Embu and Mombasa. Each upcountry office serves KUSCCO members within its region. There are sub branches in wider regions to cover all the 47 counties Kenya Rural SACCO Societies Union (KERUSSU) Ltd The Kenya Rural Savings & Credit Cooperatives Societies Union (KERUSSU) was registered in 1998 and is the umbrella national cooperative organization for rural SACCOs. KERUSSU brings together rural SACCO societies and other forms of savings & credit associations in Kenya. The membership of KERUSSU is made up of cooperative societies whose operations are largely based in rural areas of Kenya where:
- The members’ major source of income is from rural based^ activities such as farming
- The greater percentage of the members live in rural areas
- And where members are largely derived from institutions^ and establishments^ such as factories based in rural areas and/or process inputs that are mostly from the rural areas. The overall goal of KERUSSU is to contribute to improved standard of living in the rural areas of Kenya through appropriate, efficient and effective rural cooperative movement with the capacity to offer accessible and affordable financial services. The aim of KERUSSU is to work towards empowered and dynamic rural SACCOs offering effective and efficient services to their members. National Co-operative Housing Union (NACHU) Ltd NACHU was established in 1979 under the Co-operative Societies Act (Cap 490) to coordinate shelter issues through the co-operative model by providing financial and technical service. Its formation was in response to the great demand for decent and affordable housing among the low- income group. NACHU therefore is an organization whose membership is made of registered primary housing cooperatives. The co-operative movement has an obligation under Kenya Vision 2030 to provide 25% of annual housing demand in Kenya. NACHU’s strength is its holistic approach to shelter development: housing microfinance combined with advocacy and technical services that allow cooperatives to gain access to land and infrastructure, and ensure quality construction. NACHU also supports member cooperatives with training in financial management, governance, and other important topics including HIV/AIDS prevention. Cooperative Communication Holdings Ltd (CCHL) Co-operative Communication Holdings Limited (CCHL) is a National Co-operative Organization (NACO) which was registered on 8th March 2010 to enter into partnership with the private sector in the provision of Information Communication Technology (ICT) services to the co-operative movement as a vehicle for investment in this fast-growing sector. The core activity of the CCHL is to partner with the private sector on areas of ICT in order to maximize returns to the members and ensure access to information through the provision of affordable products and services thereby promoting their social economic welfare. ICT is critical to the country’s development and CCHL is strategically placed to provide the best ICT products. Secondary Co-operatives (County/District Cooperative Unions) These co-operatives restrict their membership to primary co-operative societies. They include the County/District Co-operative Unions which serve the primary co-operatives as service agencies. They are managed by an executive committee whose members are elected from the primary co- operatives. They are formed with the aim of enhancing economies of scale through shared goods and services such as bulk procurement of farm inputs and education and training of its affiliates. Primary Co-operatives These co-operatives restrict their membership to individual persons and are mainly formed by individuals within a given locality or common bond. Most of them are single-purpose or single product enterprises. They group individual members for their economic thrift and cut across all sectors of the Kenyan economy such as: Marketing Co-ops, Savings and Credit, Housing, Horticulture, Livestock, coffee, pyrethrum, sugar cane, cotton, Fisheries and Dairy. They include:
ii. Open Membership: Persons having common interest can form a co-operative society. Any competent person can become a member at any time he/she likes and can leave the society at will. iii. Democratic Control: A co-operative society is controlled in a democratic manner. The members cast their vote to elect their representatives to form a committee that looks after the day-to-day administration. This committee is accountable to all the members of the society. iv. Limited Liability: The liability of members of a co-operative society is limited to the extent of capital contributed by them. Unlike sole proprietors and partners, the personal properties of members of the co-operative societies are free from any kind of risk because of business liabilities. v. Elimination of Middlemen’s Profit: Through co-operatives the members or consumers control their own supplies and thus, middlemen’s profit is eliminated. vi. Government Assistance: Both Central and Local governments provide all kinds of help to the societies. Such help may be provided in the form of capital contribution, loans at low rates of interest, exemption in tax, subsidies in repayment of loans, etc. vii. Stable Life: A co-operative society has a fairly stable life and it continues to exist for a long period of time. Its existence is not affected by the death, insolvency, lunacy or resignation of any of its members. viii. Tax Advantage: Cooperatives, unlike companies, are not taxed as separate entities. Members however are taxed on dividends received.
Limitations of Co–operative Society
Besides the above advantages, the co-operative form of business organisation also suffers from various limitations. i. Limited Capital: The amount of capital that a cooperative society can raise from its members is very limited because the membership is generally confined to a particular section of the society. Again due to low rate of return, the members do not invest more capital. Government’s assistance is often inadequate for most of the co-operative societies. ii. Problems in Management: Generally it is seen that co-operative societies do not function efficiently due to lack of managerial talent. The members or their elected representatives are not experienced enough to manage the society. Again, because of limited capital they are not able to get the benefits of professional management. iii. Lack of Motivation: Every co-operative society is formed to render service to its members rather than to earn profit. This does not provide enough motivation to the members to put in their best effort and manage the society efficiently. iv. Lack of Co-operation: The co-operative societies are formed with the idea of mutual co- operation. But it is often seen that there is a lot of friction between the members because of personality differences, ego clash, etc. The selfish attitude of members may sometimes bring an end to the society. v. Dependence on Government: The inadequacy of capital and various other limitations make cooperative societies dependant on the government for support and patronage in terms of grants, loans subsidies, etc. Due to this, the government sometimes directly interferes in the management of the society and also audit their annual accounts.
