What is capital formation? How does cooperatives help capital formation?
Answers
Answer:
Capital formation is a concept used in macroeconomics, national accounts and financial economics. Occasionally it is also used in corporate accounts.
1. The position of member-owners of co-operatives has been historically vague, because a co-operative has had according to law a monopoly in its area and no competing services have been allowed. Government has built, developed and controlled the co-operatives to the extent that co-operatives have been considered to be public property. Management has had almost a free hand in making deductions from member produce payments and in using the money in the way they have considered best. Members have remained a mass of largely passive suppliers, whose ownership and autonomy has not been respected adequately.
2. Members have not invested in the share capital of the co-operatives, also partly because the investment does not accumulate exchange value and partly because with only a minimum number of shares the member can gain access to the bulk of member services offered by the co-operative.
3. A person can become a member with full powers to use all the facilities by buying one share of nominal value irrespective of the net worth of the cooperative per member. Because the cost of new member entry does not change over time in spite of increases in co-operative net worth, new members can join the co-operative at a highly subsidised price, and in a sense become “free riders”.
4. The co-operatives collect money from the user-owners by deducting the repayments of investment loans from the producer payments. Because the net worth per member is much higher than the share capital per member without significant financing from internally generated surplus, it is seems that the additional capital contributed by the members is entered in the books of the cooperatives into the indivisible capital. An average member may have contributed 2,000-3,000 shillings or more from the producer payments. This capital contributed by the member is then often recorded in the collective and indivisible capital of the co-operative rather than converting these payments into additional member shares. Members seldom receive recognition for their increased financial stake. In the end, a retiring member may have only one share of 20 shillings and the value of the redeemed share will not buy him/her much after withdrawing from the co-operative after 20-30 years. A member loses the investment to the co-operative, which does not encourage the member to appreciate the financial participation as an owner.
5. User-ownership principle assumes that only the active farmers are the decision-makers in the co-operative. In reality, members do not bother to redeem their shares and withdraw from membership because of the negligible value of their shares. The membership registers of co-operatives include frequently a high number of passive members (20-50%) which is contrary to the user-ownership principle and does not promote mutuality between active members. For the purpose of redeeming the capital invested by the owners, co-operatives should rather view share capital as a long-term loan. Capital redemption plans are not yet prepared by the Kenyan co-operatives and require internal profitability. Kenyan co-operatives have not educated their members on the benefits, which may accrue to them after the active membership period and the need to generate funds consistently from operations in order to pay these benefits.
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