How to calculate dividends and interests on deposits in Saccos

Savings and Credit Cooperatives (Saccos), operate as financial institutions where members pool their resources to facilitate savings and credit services. The earnings generated by Saccos come from the interest on loans and profits from investments. Understanding how dividends and interests on deposits are calculated in Saccos is essential for Sacco members to maximize their returns.
How are dividends and interests on deposits calculated in Saccos?
Earnings Structure
Saccos operate by consolidating members’ savings in a collective pool. From this pool, members can borrow loans, and the interest paid on these loans becomes part of the Sacco’s earnings. Additionally, Saccos can invest in income-generating assets, and the profits from these investments contribute to the overall earnings.
Also Read: How to choose a Sacco in Kenya
Before distributing the accumulated earnings to members, the Sacco deducts operational costs and reinvests some funds for its growth. The remaining amount is then distributed as dividends among the Sacco members.
Dividends
Dividends represent a share of the profit that Sacco members receive based on their participation in the cooperative. Saccos that pay attractive dividends tend to attract more members, fostering growth.
Interest on Deposits
Members’ deposits with the Sacco also earn interest, which is predetermined at the Annual General Meeting (AGM). The interest rate is announced at the AGM for the upcoming year and is paid monthly, providing members with a consistent source of income.
How to calculate interests on deposits in Saccos using Pro-rata Method
Interest on deposits is calculated using the pro-rata (proportional) and compound basis. To calculate monthly earnings, the agreed-upon interest rate is divided by 12 (number of months in a year). The interest is then calculated based on the closing deposit balance each month.
For example, if a member has a Ksh5,000 monthly contribution, starting with a Ksh20,000 deposit, and the Sacco agrees on a 12% annual interest rate, the January earnings would be 1% of Ksh25,000, resulting in Ksh250.
Advantages of the Pro-rata Method
- Fairness: Rewards members who save early, ensuring higher yields for consistent savers.
- Ability to Factor in Withdrawals: Reflects any withdrawals in dividends, maintaining accuracy.
Dividends on Share Capital
Dividends on share capital are computed based on the closing balance at the end of the financial year. The rate is recommended by the management committee and approved by the AGM. The dividend rate depends on the Sacco’s performance.
Using the example, if the closing balance at the end of the year is Ksh80,000, and the dividend rate is 10%, the potential dividend earnings would be Ksh8,000.
Consider Deductions
While calculating earnings, members should consider deductions such as withholding tax and excise duty tax, both set at 5%. For instance, on a total earning of Ksh14,300, withholding tax and excise duty would amount to Ksh715 each. Additionally, processing fees may vary among Saccos.