How do Cooperatives work?
By James Allman-Gulino, KF11 Uganda
I have now started the phase in my Kiva Fellowship when I will be working with MCDT SACCO, a relatively small MFI located in Kampala, Uganda. MCDT lends to clients based on the Grameen Bank methodology – to take out loans, borrowers form groups that collectively guarantee each member’s loan. If one member misses a repayment or defaults, the other members of the group are responsible for that individual’s loan amount. MCDT’s clients come primarily from the peri-urban areas surrounding Kampala city, and are all women.
However, probably the most unique aspect of MCDT SACCO is that it is organized as a cooperative. The “SACCO” in its name refers to “Savings and Credit Cooperative,” which is a term used in many countries to refer to what Americans might know as a credit union. A cooperative/credit union provides most of the same services as other financial institutions: savings accounts, access to loan credit, and other basic financial services. However, the distinctive thing about cooperatives is that they are actually owned and controlled by their clients. Cooperatives’ clients (“members”) invest financial capital in the institution, receiving shares and thereby becoming partial owners of the cooperative. This ownership entitles the members to a say in aspects of the SACCO’s decision-making, and the ability to elect a Board of Directors; each member receives a vote, regardless of how many shares they hold. The votes on policy decisions and Board membership happen at the institution’s annual shareholders’ meeting (actual voting is done through elected member representatives; having several thousand borrowers all vote together would be logistically impossible). Cooperatives thus give members a means to actually influence how their own financial services are structured, in a way they couldn’t at a large financial institution. This is particularly important given the high interest rates and fees that microfinance clients can sometimes face; in a SACCO, these problems can be mollified by giving clients a bit more of active role in determining fee structures and other policies.
MCDT functions by offering both savings accounts and lines of credit to its members; to access these services, you must purchase at least one share of the cooperative. One share costs a member 10,000 Ugandan Shillings (a bit less than $5); in order to get larger loan amounts, a member must buy additional shares. The provision of these shares, in addition to the savings accounts that members hold, helps supply MCDT with a supply of capital from which they can issue microfinance loans. Depending on MCDT’s yearly financial performance, owning shares also entitles members to a share of the SACCO’s profits, if any.
It’s been particularly interesting to see how MCDT’s status as a cooperative affects its members, and empowers them to influence the institution’s decision-making. For instance, I was with a group of borrowers last week who were discussing MCDT’s various service fees. They were happy that MCDT had recently lowered the interest rate on their basic loan product, but one member was annoyed because she thought the fees for client passbooks (basically a small ledger to keep track of accounting) were too high. The other group members encouraged her to bring the issue up before the upcoming annual shareholders’ meeting, where member representatives could nominate to change or eliminate that particular fee. Other members chimed in with more suggestions, and one of them noted everyone’s sentiments to remember for later. The credit officer I was with also reminded them that such service fees were important for the SACCO to maintain good financial performance and produce profits, which could then be passed back to the members. It was refreshing to see such a vibrant conversation between borrowers about the actual policies that affected them; clearly MCDT’s structure had helped empower the members to want a more active role in the cooperative’s operations.
I hope that gives a quick but helpful summary of how cooperatives work, and the unique aspects of that particular model for a microfinance institution. Please feel free to leave any comments/questions about MCDT and their operations, or how their cooperative structure affects what they do. Also if you’re a Kiva lender and the idea of a cooperative particularly appeals to you, make sure to check out Kiva’s other Field Partners that are organized as cooperatives, including CCT, GDMPC, Cooperativa San Jose, and PMPC.