The government recently warned Saccos against the culture of declaring ‘impractical dividends’ to members at the expense of financial stability of the institutions.
The government’s argument was that if not checked, the trend would lead to the collapse of many Saccos.
Since their inception, Saccos have become very popular among Kenyans and provided financial services to their members. To attract and retain members, the Saccos develop tailor-made products and pay dividends as high as 20 per cent.
While paying high dividends is a desirable outcome for members, it may not always be the best option for the Sacco.
How is payment of high dividends impacting on Saccos?
Pros
- Attracts and retains members
Paying high dividends is an excellent way to attract and retain members. When Saccos pay high dividends, they create a sense of loyalty among members who may be willing to invest more in the Sacco.
- Increases members’ income
High dividends increase members’ income, ending up having more disposable income that they can use to meet their needs or invest in other ventures.
- Encourages saving
High dividends encourage members to save more. When Saccos pay high dividends, members are encouraged to save more, which consequently leads to increased capital for the Sacco.
Cons
- Reduces capital
Paying high dividends reduces the Sacco’s capital. When a Sacco pays high dividends, it reduces its retained earnings used to finance its operations and investments. If this happens, Saccos will be forced to borrow from other sources, which can increase its debt burden.
- Limits expansion
Paying high dividends can limit a Sacco’s expansion since the Sacco might not have enough capital to invest in new projects or expand its operations. This can limit the Sacco’s ability to compete with other financial institutions and provide more services to its members.
- Unpredictability
Paying high dividends can lead to unpredictability, especially for Saccos that might not sustain such payments for long hence lead to disappointments among members.
- Risk of insolvency
When a Sacco pays high dividends, it may not be able to maintain adequate reserves, which are necessary to cover unexpected losses.
It is therefore important for a Sacco to strike a balance between paying dividends and retaining earnings for future operations and investments.
By David Kipkorir
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