Factors to be considered when borrowing a loan

1.       Business concept
It is the duty of member to put together details of the investment to be undertaken- the purpose of the loan i.e. the loan for increasing stock, purchase of machine, purchase of building materials, purchase of land, etc.

2.       Character of borrower

Assess your character- how do you behave when you have money and when you don’t?

-put in safety measures to ensure you use the loan for the purpose intended/wisely.

-why are you borrowing? Is it because you need the loan or is it because the money is available?

-are you a trustworthy applicant? Hardworking?

3.       Capacity to pay

This is the ability to repay credit if extended. Assess your own ability to repay the loan in line with society’s loan policy and your personal financial position.

Consider your capital standing or financial strength i.e. monthly financial obligations not on the palsy that may hinder you from repaying the loan or make you suffer pecuniary embarrassment.

4.       Own contribution

This is the amount of funds borrower is willing to invest in the business. Do not expect your society to finance your project 100%

5.       Collateral for loan

These are details on security put forward by the borrower in good faith as a guarantee that money borrowed will be repaid.

In co-operatives this is basically a guarantor. However, members should use other forms of security e.g. share certificates and insurance policy, in case the society loan policy allows.

6.       Interest rate

Consider the interest rate of the loan to be borrowed and its effect on your income for the whole period of the loan repayment.

Members should concentrate on development loans for their own development and take school fees loan where necessary.

They should avoid unnecessary emergency loans at all cost because mostly one cannot do much and they reduce member’s ability to take a development loan.

RULES GOVERNING LOAN APPLICATION

An applicant shall be considered or accepted for the processing upon a members meeting the following conditions:

1.       Must have been an active member of the society for a period f not less than six months

2.       Must be consistent saver with the society for a period of not less than six months

3.       Must be willing to conform to all rules, by laws and co-operative societies act

4.       Must be a Kenyan citizen with a valid identity card and be a person of sound mind who has not been declared bankrupt or barred to contract for any reasons

5.       Must be earning regular income either from business or employment

6.       The loan application must be for prudent purposes and application must justify its legality by stating its purpose

7.       Must be willing to make all necessary disclosures of information necessary to facilitate loan processing and guarantorship

How can mobilization of member funds be improved?

Cooperatives need to find ways to increase member funding, since this provides the lowest cost, lowest risk form of capital for operations and investment. As government and donor support continues to decline, increasingly this also becomes the only practical source of funding for cooperatives. Even where outside support is still available, the advantage of increased reliance on member funding is that it gives greater autonomy to the cooperative and lowers the risk of eventual withdrawal of outside funding.

The strategy for increasing member funding depends on the particular circumstances of the cooperative, the type of activity it is engaged in and its scale of operation. Among the strategies to consider are:

Improving operating efficiency

Improving efficiency can be important for the mobilization of funds. It enables a cooperative to offer more competitive prices, securing and keeping member loyalty.

Funding and efficiency are related. Cooperatives with sufficient funds are able to invest in training and technology to reduce costs, and to increase or improve production. Well managed, technologically efficient cooperatives are generally more likely to accumulate capital.

Promoting patronage

The more members use the cooperative’s services - that is by taking loans and saving with the the cooperative - the more funds the cooperative will receive. It is therefore important for the cooperative to promote patronage. This is most easily achieved when cooperatives provide services valued by members, offer competitive interest rates and prompt payments.

Giving priority to mobilizing member funds

Most cooperatives will have to rely on member generated funds to finance their operations. Members’ financial stakes in the cooperative enforce greater accountability of the cooperative to members, build member participation in decision making and strengthen cooperative financial self-reliance and operational autonomy.

There are a number of ways in which member funds are obtained. In many cases, increased levels of funding can be achieved through adjusting these methods:

· Non-refundable membership fees upon joining/entrance/registartion fees

These fees are often small, but they need not necessarily be so if new members are buying into a successful business that provides valuable services.

·          Member shares

All members are required to purchase shares, which are usually the primary source of member capital. Shares purchased should earn dividends and are transferable to other members upon withdrawal from membership or given to his/her heirs in the event of the member’s death.

·         Member deposits

Co-operatives can also consider increasing minimum monthly contributions.

Products

     Other than loan products, co-operatives can introduce saving products e.g. holiday savings, withdrawable savings scheme, etc. Major source of affordable loans/credit. Why?

1)      Core objective and best form of saving

2)      Prerequisite for investment

3)      Saving for retirement

4)      Members earn GOOD returns at the end of the year

·          Retention of surplus.

Surplus can either be retained by the cooperative as institutional capital, or paid out in patronage refunds to members following the close of each year. In practice, cooperatives often offer interest rates more favourable than those prevailing in the market, creating little surplus and making it impossible to offer patronage refunds. Whenever possible, these practices should be altered either to build up surpluses or increase patronage refunds and attract new members.

 

·          Deferred payments

A surplus creates two opportunities for increasing capital available to a cooperative. One is the surplus retained, and the other is the patronage refund that is allocated but not immediately paid out in cash. During the period between the realisation of the surplus and the cash pay-out of patronage refunds, the cooperative has the use of the cash. Pay-out may take the form of a share or of an obligation to pay the member in the future.

Consider use of outside funding

In simple terms, the higher the institutional capital and member deposits, the more outside lenders such as banks and suppliers will be willing to loan funds to the cooperative. Care should be taken in borrowing, however since the higher the outside funding as a proportion of funds used, the higher the risk if something goes wrong.

Too much institutional capital?

For the majority of cooperatives in developing countries, the possibility of accumulating too much institutional capital any time soon is small. However, members should be aware that it is actually possible for the original purpose of the cooperative to be lost if the amount of institutional capital becomes too large.

This may result in the exclusion of new members, because present members do not want others to benefit from the services provided and surpluses produced by the capital accumulated.

Member financing builds the sense of member ownership

Cooperatives have always been referred to as “member-owned” organizations, yet in countries where cooperatives have depended too heavily on outsiders for financial support, that sense of ownership and personal financial stake has been lost. It is not uncommon to hear members and shareholders refer to their cooperative as the “government’s cooperative” instead of their own cooperative. This is largely because the financial stake or contribution of the membership of the cooperative is small relative to the non-member stake. In spite of the one-member-one-vote principle, the major suppliers of capital, in this case non-members, have the largest say and tend to determine the main priorities of the cooperative business. Cooperative member participation drops and the cooperative promise is weakened.

Conclusion

It is important to build the membership’s financial stake in the cooperative. This increases the sense of collective ownership, makes the cooperative’s management more accountable to serving members, strengthens member commitment and loyalty and thus provides a true and sustainable basis “or cooperation.

Adapted from http://www.fao.org/docrep/003/w5069e/w5069e07.htm

STEPS TO FOLLOW WHEN FILING A SUIT AT THE CO-OPERATIVE TRIBUNAL

The customer or the claimant reports the problem at the Tribunal Registry. If the problem is a dispute, the customer is advised and shown how to prepare a statement of claim or plaint as it is called in other courts.

NB:   The customer is advised to produce 7 (seven) copies of the plaint and 3 copies of the summons.

After the customer has prepared the plaint or statement of claim, the claim is accessed depending on the following.

1. Amount of the money claimed
2. Number of prayers in the claim

NB: the formula used to calculate the filing fees is shown below;
P- Principle amount claimed.
(P-6,000) x 2/100 + 780 + 100 = F/Fs

Amount charged per prayer is ksh. 1,000/= ( one thousand only.)

The following are the common charges at our registry:-

1. Defence                                -50/=
2. Memo of appearance         -50/=
3. All affidavits                        -50/=
4. Chamber summons            -300/=
5. Decrees                                -300/=
6. Warrant of execution         -875/=
7. Notice to show cause          -275/=
8. Adjournment fee                 -300/=
9. Appointment of advocate   -50/=
10. Filing of a document           -100/=

After the document is assessed, the customer is shown the cash office for
payment. In cash office the customer is served quickly in less than 5 minutes and given a receipt to confirm payment.

After payment, the claim/plaint is returned to the registry for stamping and filing where the summons is taken to the authorized officer to sign. i.e. Chairman, Deputy Chairman or the Secretary to the Co-operative tribunal. This does not take long. The customer is advised to serve the Respondent or a Court process server on an agreed fees to serve the summons on behalf of the Claimant. In return the court process server will return an affidavit of service to the court. The Claimant is advised to wait for 15 working days to see whether there will be any response from the Respondent.

After the expiry of 15 days, the customer returns to the registry for further advice.

1. If the Respondent has filed a defence, the customer is advised to call the
   Respondent with a letter to come to court together to get a suitable date for them to settle the claim.
2. If the Respondent has filed a memo of appearance the Claimant is advised to wait for another 15 days.
3. If the Respondent has not responded, the Claimant can request for judgement with a fee of kshs.150.00

When all of this has been done the cases are heard and judgement entered a
decree is drawn for a fee of kshs.300.00. After the decree has been signed, the Claimant further pays kshs. 875.00 for warrants of execution.

NB: When the Respondent does not have assets to be attached, the Claimant can be advised to request for notice to show cause why the Respondent cannot be put in a Civil Jail. Currently warrants of arrest and warrants to the officer in charge of prison are signed and the Claimant commits him/herself to pay kshs. 1,800.00 per month for the upkeep of the Respondent at the
prison.

If the Claimant or the customer or Respondent is not satisfied with the ruling or judgement, he/she can appeal in High Court.

THE ROLE AND RESPONSIBILITIES OF SUPERVISORY COMMITTEE

MANAGEMENT COMMITTEE

o   They make decisions regarding the day- to-day management for operations of the society.

o   They arc directly responsible to the share- holders for giving accurate and dependable accounting information in investment decisions without a doubt of its reliability or validity,

o   Management committees are responsible to the general public, government etc on behalf of the shareholders.

o    In other words, they are the responsibilities of the society to the outside world.

SUPERVISORY COMMITTEE/INTERNAL AUDIT 

·         The supervisory committees are the watchdog of the members on the work performance of the management committee.

·                  The committee is answerable to the members.

·                  Their main duty is to ensure that the society is run according to the directions given at the AGM/SGM and in accordance with the co-operative laws and regulations in force. The supervisory committee is not an alternative management body but complimentary to the functions of the management committee.

·                  It serves the same purpose as an internal Audit department in an organization.

WORK PROGRAMME

The supervisory committees meet at least once every quarter to review the activities of the preceding quarter and then report its findings to the management committee. The report covers administrative and financial performance.

   The quarters are:

Jan   -    March        -      1st   Quarter.

April -   June           -      2nd Quarter.

July   - September  -     3rd  Quarter

Oct   -    Dec                -  4th  Quarter

DUTIES

Their duties include checking if the acquisition of assets, recruitment of the staff, record keeping and the general management of the society is done in a manner that would best serve the interest of the members and no loss accrues that could be avoided.

SPECIFIC DUTIES;

o   Periodically evaluate the programme of the society as to their cost effectiveness, Impact on the members’  income, compliance with the AGM/SGM directions and Cooperative Societies Act,  Rules and the By-Laws of  the society.

o   Check the effectiveness of the management committee, e.g. recording and filling of the minutes of AGM/SGM and committee's.

o    Compliance with the cooperative principles.

o    Regularity of committee and general meetings.

o   Check whether cash is regularly verified and bank reconciliations done.

o   Regularly check the performance ratios of the society, e.g. cash ratios, solvency ratios.

o   Check whether members' personal Accounts (shares) arc regularly and accurately updated.

o   Verify whether investments are properly accounted for e.g. Share Certificates are securely kept.

o   Ensure that adequate accounting policies are in place and are working.

o   Check on the presence and the effectiveness of the internal controls in the society.

o   Take note and inform the Management Committee of complaints from the

        members which might be channeled through the committee.

o   Ensure and verify that theeconomic report is prepared and discussed.

o   Check whether the Management Committee is taking any remedial action on any shortcomings revealed.

o   Liaise with the external auditor in areas that the committee would need assistance in carrying out their duties.

o   Ensure that the Management Committee adequately acts on any observations and notes raised by the external auditor.

RELATIONSHIP WITH THE MANAGEMENT COMMITTEE

The supervisory committee and the management committee play a complimentary role in the management of the society and  to ensure that harmony is maintained in between the two committees, the following is to be adhered to: -

o   Work schedules are prepared and presented to the management committee early.

o    Request documents required and working space in time and in writing.

o   Carry out the work expeditiously bearing in mind that the documents are still

o   in use.

o   Prepare written reports detailing the shortfalls noted, the progress made since the last report, and the steps that can be taken to rectify the shortfalls.

o    Always avoid confrontations

o   Never report on unverified information.

o   Report to the management Committee first.

o   Report only those areas not implemented in an AGM/SGM.

o   Do not interfere with the day to day running of the society as this is the

responsibility of the management committee of the society.

FINANCIAL CHALLENGES FACING SACCOS

COMMON CHALLENGES

• Liquidity/cash flow problems
• Loan backlog
• Delayed refunds of members deposits
• Competition between Saccos
• Competition from banks and micro finance institutions
• Short visa-vis long term lending
• Poor member loyalty

USE OF CREDIT POLICY AS A TOOL OF FINANCIAL MANAGEMENT

1. Introduction.

• Developed to serve as a guide to the action or decision making process in the credit section of the Sacco.
• Provides procedures and guidelines on handling or management of all Sacco loans
• Addresses loan processing, approval, disbursement, administration, monitoring and delinquency
• Formulated as a separate document or form part of the By-laws
• Formulated by the management committee for approval and adoption by the general meeting

2. Purpose of the credit policy

• Ensure that the society does not get into financial difficulties by approving loans to members in access of fluids available
• Facilitates efficient and effective loans processing, approval and recoveries
• Ensure fairness in loan granting
• Minimize loan defaulting
• Improve society liquid position

3. Control Objectives 

The control objectives of the credit policy is to ensure that:-

• Loans are granted to bonafide members only
• Loans are properly appraised and approved
• Loans are properly guaranteed and approved
• Loans disbursement are done as per the approved terms and conditions
• Proper records of loans are maintained
• There is effective monitoring and control
• Delinquent loans are detected for action

4. Administration of Credit Policy

The credit policy is normally administered by the credit committee on behalf of the management committee.

The credit committee may delegate defined authority and functions in writing to an employee or elected official of the society to facilitate the efficient processing of loans.

5. Features of the Credit Policy

The main features of the credit policy include:-

• Lending requirements-period of active membership, minimum deposits, waiting period after clearance of loans before maturity, waiting period after boosting of deposits
• Types of loans and products-development, education/school fees, emergency, instant, express, okoa jahazi
• Loan entitlement
• Loan limits
• Repayment periods for loans
• Cash reserves (15%)

Lasting Liquidity Improvement Options

• Increase minimum contribution across the board
• Introduce special saving schemes e.g. Save As You Earn (SAYE), cluster method, Save As You Borrow (SAYB), saving scheme, holiday saving scheme, withdrawable saving account
• Non withdrawal deposits
• Withdrawal and rejoining conditions

Hard Liquidity Improvement Options

• Increase membership incubation period
• Reduce multiplier
• Reduce repayment period
• Fix limits for loans
• Adhere to rules for boosting of deposits
• Adhere to rules for pre-mature loan clearance