Effects of liberalization on the investment practices of reserve funds and payment of dividends in savings and credit co-operatives in Nairobi comparative survey

Abstract

Savings and credit co-operative societies popularly known as SACCOs were set up with the objective of promoting thrift and to provide sources of credit to members at fair rate of interest. According to Co-operative societies Act Cap 490 section 45 of the laws of Kenya, each Sacco is to transfer 25% of the net surplus of each financial year before distribution to reserve fund. The Act restricts where these reserve funds should be invested. It also states that no more than 10% of members' deposits should be paid as dividends to members. In 1997, through seasonal paper number 6, the co-operative sector was liberalized which entailed the transfer of services and functions initially done by the ministry of cooperatives to the Saccos. This project tries to find out whether liberalization caused any effects on investment practices of reserve funds and distribution of dividends. In the study a sample of 30 Saccos were randomly selected from Nairobi Province, and the period of study was 1992 to 2001. From the findings mean reserve funds mean growth rate increased from12.66% to 19.85% in pre and post liberalization respectively. Dividend payment rate increased from a mean of 4.12% to 5.12% in pre liberalization and post liberalization respectively. It is very clear that liberalization of the cooperative sector had a positive effect on the distributions and reserve funds. In terms of investment practices, 60% of the Saccos shifted to new areas of investment after liberalization allowed by the Act. Liberalization then had an effect on dividend payment and investment practices on Saccos. However more research needs to be done in this area.