Saccos

Challenges in dividend payments

How SACCOs calculate dividends Challenges in dividend payments Understanding dividends declaration in SACCOs

Dividend payments are one of the most anticipated benefits for shareholders, especially in cooperative societies and corporations. However, the process of ensuring timely and fair distribution of dividends is fraught with challenges. These obstacles can affect the financial well-being of stakeholders and strain the relationship between organizations and their members. Below we explore the challenges in dividend payments and their potential impact on organizations and shareholders.

  1. Inconsistent Financial Performance

One of the most significant factors influencing dividend payments is an organization’s financial performance. When profits fluctuate due to economic downturns, poor investment decisions, or reduced revenue, it becomes challenging to allocate funds for dividend payouts.

Shareholders may lose confidence, leading to decreased investment and loyalty.

During the COVID-19 pandemic, many companies experienced reduced profits, resulting in lower or skipped dividends.

  1. Regulatory and Compliance Issues

Dividend payments are subject to strict regulations, which vary by country. Organizations must comply with tax laws, shareholder agreements, and financial disclosure requirements.

Non-compliance with these regulations can lead to penalties, legal challenges, or delays in dividend distribution.

In Kenya, dividends are subject to withholding tax, which must be remitted to the Kenya Revenue Authority (KRA) before payments are made to shareholders. Mismanagement of this process can lead to legal repercussions.

  1. Poor Cash Flow Management

Even if an organization records profits, a lack of liquidity can hinder its ability to distribute dividends. This issue often arises when funds are tied up in long-term investments or when expenses exceed operational budgets.

Shareholders may interpret delayed payments as a sign of financial distress, potentially causing a loss of trust.

Proper financial planning and maintaining sufficient reserves can mitigate this challenge.

  1. Ineffective Communication

Transparent communication about dividend policies, timelines, and amounts is crucial for maintaining shareholder confidence. Miscommunication or lack of updates can lead to confusion and dissatisfaction.

Shareholders may feel neglected or undervalued, straining the relationship between them and the organization.

Delayed announcements about dividend changes can lead to frustration among members, especially in cooperative societies like SACCOs.

  1. Economic and Political Instability

External factors such as inflation, exchange rate fluctuations, and political instability can negatively affect an organization’s profitability.

These factors can force organizations to reduce or eliminate dividend payments to sustain operations.

In developing economies, unpredictable economic policies often make dividend planning difficult.

  1. Defaulting Members in SACCOs

For Savings and Credit Cooperative Organizations (SACCOs), dividend payments largely depend on members’ active participation, such as loan repayments and savings contributions. Defaults in loan repayments can reduce the overall surplus, affecting dividends.

Reduced payouts can lead to dissatisfaction among members and reduced confidence in the SACCO’s operations.

Enforcing stricter loan repayment policies and providing financial education to members can help alleviate this challenge.

  1. Technological Challenges

The process of distributing dividends often relies on digital platforms for efficiency. However, inadequate systems or technical failures can disrupt payment schedules.

Shareholders may experience delays or errors in receiving their payments, leading to frustration.

A glitch in a SACCO’s digital payment system could delay the crediting of dividends to members’ accounts.

  1. High Operational Costs

In some organizations, the cost of managing and distributing dividends can be disproportionately high, particularly for small-scale SACCOs or companies with limited resources.

High costs may eat into profits, leaving less for dividend payouts.

Streamlining administrative processes and adopting efficient technologies can help reduce costs.

  1. Board-Level Disagreements

Disagreements among board members or directors about dividend policies can delay or disrupt payments. This is particularly common in cooperative societies where diverse interests must be balanced.

Such disputes can lead to delays, reduced payouts, or even litigation.

Conflicts over whether to reinvest profits or distribute dividends can create divisions within an organization.

  1. Global Economic Factors

In a globalized economy, factors such as supply chain disruptions, geopolitical tensions, and fluctuating commodity prices can affect profitability.

Reduced profitability directly translates to lower dividend payouts, impacting shareholder satisfaction.

The Russia-Ukraine war significantly impacted global energy prices, affecting companies reliant on imported resources.

Strategies to Overcome Dividend Payment Challenges

  1. Adopt Transparent Policies: Clear and consistent dividend policies can help manage shareholder expectations.
  2. Improve Financial Management: Proper cash flow management ensures funds are available for dividends.
  3. Leverage Technology: Invest in reliable digital platforms to streamline the dividend distribution process.
  4. Enhance Communication: Regularly update shareholders about financial performance and dividend policies.
  5. Plan for Contingencies: Maintain reserves to handle economic uncertainties and ensure consistent payouts.

 

Andrew Walyaula
Author: Andrew Walyaula

Andrew Walyaula is a seasoned multimedia journalist. waliaulaandrew0@gmail.com

Andrew Walyaula

About Author

Andrew Walyaula is a seasoned multimedia journalist. waliaulaandrew0@gmail.com

Leave a Reply

You may also like

Why dividends differ in SACCOs SACCO loan calculator: Simplifying loan planning for members: Reducing Balance Method
Saccos

SACCO loan calculator: Simplifying loan planning for members

When planning to take a loan from a Savings and Credit Cooperative (SACCO), understanding the financial implications is crucial. A
Benefits of using a SACCO loan calculator: Factors affecting dividend payment
Saccos

Benefits of using a SACCO loan calculator

When you decide to borrow money from a Savings and Credit Cooperative (SACCO), understanding your financial commitment is crucial. A
error: Content is protected !!
×