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This paper summarizes the main findings of a case study of capital formation and investment in a small sample of large coffee and dairy cooperatives in Kenya and provides some practical recommendations for improving capital formation in these two co-operative sectors.

The research on agricultural cooperative capital formation was motivated by the financial crisis now facing farmer co-operatives in many developing countries. As traditional sources of capital to fund investments and growth dry up, member participation and loyalty have begun to decline and economic performance is falling. At least in Africa and Asia, governments have been the major promoters, controllers and financiers of agricultural co-operative development, and therefore, the sense of member ownership and level of member participation in financing these cooperatives have been low. Many see the main cause of this capital crisis as being triggered by structural adjustment programmes and market liberalisation, which occurred during the late 1980’s and early 1990’s.

In 1993, when the first signs of financial weakening within the agricultural cooperative movements in developing countries became apparent, FAO launched a research programme in collaboration with national research institutions, to address this particular co-operative crisis. FAO regarded the issue as problematic, not only because of the “not-for-profit” nature of co-operatives which tended to discourage the accumulation of co-operative surpluses for investment purposes, but also because of their adherence to the principles of democratic control based on the “one member one vote” rule and to “limited return on capital” which created other problems for internal member capital formation.

Research studies on this topic were conducted in Guatemala, India and Kenya during the period of 1994-95, where various hypotheses regarding co-operative capital formation, member participation and growth were tested mainly by using quantitative research methods. The limitations of this approach became apparent especially in the interpretation of behavioural aspects of capital formation.

To resolve this problem, FAO entered into an academic and research institution partnership agreement with the Turku School of Economics and Business Administration (TSEBA), Business Research and Development Centre in 1996 to look more closely at the behavioural factors affecting co-operative capital formation of coffee and dairy sectors in Kenya. The research was conducted in 1997 in a small but representative sample of coffee and dairy co-operatives as well as privately owned coffee estates and dairy plants in the Central Highlands of Kenya.

A major conclusion of the study is that achieving success in mobilising capital in agricultural co-operatives in Kenya’s rapidly changing environment will require drastic changes in co-operative governance, including the introduction of new considerations regarding transparency, accountability, customer-orientation, automation of information systems, competitive recruitment and business training of management and members as well as re-consideration of operations in accordance with the co-operative principles. The researchers argue that implementation of such reforms, should lead to improvements in member commitment and loyalty, which in turn will promote capital formation in farmer co-operatives in Kenya. Those wishing to review the complete study report are suggested to contact TSEBA directly.3

3 Contact Address: Dr. Pasi Malinen, Business Research and Development Centre, Turku School of Economics and Business Administration, P.O. Box 110, FIN-20521 Turku, Finland, Fax: +358-2-3383268, Email:

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