Improving member services and patronage
Consider use of outside funding
Improving operating efficiency
Promoting patronage
Giving priority to mobilizing member funds
Too much institutional capital?
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:
Most strategies for cooperative development require increased funds. The strategy for developing the cooperative so that it maintains or expands its market position should focus on operational efficiency and on patronage, on how the cooperative can maintain existing business and attract more business and new members. Increased patronage provides an important source of member capital. However, it also usually requires more working capital for the operation of the business of the cooperative and may require more investment in fixed assets such as buildings and equipment.
In simple terms, the higher the institutional and member capital, 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. (This risk is measured by the gearing ratio - an increased gearing ratio meaning a higher risk). If more funds are required, a low gearing ratio can be maintained if member contributions are also increased. For example, if the cooperative owns $1000 and needs an additional $1000, it will be highly geared (50% gearing ratio4) if all funds come from a loan. Alternatively, if the cooperative raises an additional $500 from member funding, the sum to be borrowed would be lower The gearing ratio would then be 25%5 representing a considerably lower risk. It is also easier to find a bank or other lender willing to provide the less risky loan. The interest rate will also often be lower
4 i.e. gearing ratio = 1000 ÷ (1000 + 1000) × 100 = 50%
5 i.e. gearing ratio = 500 ÷ (1500+ 500) × 100 = 25%
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.
The more members use the cooperative’s services - that is by selling through or buying from 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 prices and prompt payment.
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 joiningMany changes in cooperative financing are underway in Europe. These have included the issue of new classes of shares in addition to member shares, that are weighted on the basis of one share, one vote, providing control and governance incentives that result from cooperative solidarity but not necessarily by the traditional ownership structure. This technique can attract additional members and capital from those who would otherwise not be willing to contribute their capital due to their relative lack of control when capita entitles each member to only one vote regardless of the members’ investment in the cooperative. Other changes involve the use of limited company forms of organization for certain activities undertaken for the benefit of cooperatives and their members. These activities may include wholesale or other large scale marketing activities.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 interest and are refundable to the member upon withdrawal from membership or to his/her heirs in the event of the member’s death.
Shares in some cooperatives can be paid for over time through check-offs from a member’s transactions with the cooperative. The members share account is credited with the amount of the deduction.
· Retention of surplus.A surplus arises when the cooperative is able to retain some of the proceeds from sales of members’ produce or from members’ purchases from the cooperative. This surplus can either be retained by the cooperative as institutional capita, or paid out in patronage refunds to members following the close of each year In practice, cooperatives often offer prices more favourable than those prevailing in the market, creating little surplus and making it impossible to offer patronage refunds. In other cases, cooperatives are protected by governments and do not operate in competitive markets, making any surplus unrelated to competitive performance.
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.
Cooperatives in North America have been particularly creative in finding ways of retaining cash while allocating surpluses. The usual procedure is to issue notes payable over several years, such as five or seven. The member receives a portion of the allocation each year, while the cooperative is able to rotate its capital over the same period.
· Making member delivery rights transferable
In certain new processing and marketing cooperatives in North America the founder-members can purchase delivery rights which guarantee that the cooperative will purchase a given amount of produce each year. They also oblige the member to provide a certain amount of produce. These rights are freely transferable, which gives them a market value. This feature gives members an incentive to behave in a manner that maintains and increases the market value of their rights.
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. It may lead to strategies for intentional losses so that the capital accumulated returns to the members in the form of unrealistic prices for services. It may also lead to the conversion of the cooperative to another legal form, such as a limited company While this may benefit existing members by providing them with higher incomes, the members should be aware that many of the ideals of a cooperative may be lost in the process.
