Understanding dividend returns in SACCOs

By Clinton Magoti

One of the core principles for savings and credit cooperative societies (SACCO) is member value creation. One of the strategies different societies use to achieve these by maximising members’ savings for returns.
When you join a credit cooperative society as a member, you are required to save some amount of money every month. The funds are invested in form of withdrawable deposits, mainly referred to as member’s deposits and non-withdrawable deposits known as share capital.
Now, let’s dwell much into non-withdrawable deposits or share capital. Perhaps you could be wondering what is share capital?
Share capital is the equity or core capital of the Sacco. It represents each member’s ownership of the Society in terms of shares.
Share capital is the sum of money the Shareholders/Owners pay into a business entity. The return on share capital is referred to as dividends.
What is dividend?
Every financial year, Sacco members are paid a percentage of their non-withdrawable deposits or share capital. The money can be referred to as the profit from their savings or dividend. It is usually approved during the Annual General Meetings held at the end of each fiscal year.
From the financial definition, a dividend refers to the amount of money you receive out of the profits and reserves made from your savings in a Sacco or Company for a certain period. Sacco members are entitled to dividends earned from their shares.
The money can be paid either monthly, quarterly, semi-annually, or annually depending on the Sacco by-laws. SACCOs pay dividends to all members with balances in deposits and share capital, to be precise, active members.
If you join a Sacco, save for a given time then stop your monthly deposits, and you become a dormant member. This member only earns dividends if they have shares or non-withdrawable deposits.
Just a quick recap of withdrawable deposits.
These are savings a member makes every month to a Sacco and are refundable. Withdrawable deposits earn interest at the end of every financial year. The difference between this and non-withdrawable or share capital is, that shares are paid once upon joining the Sacco and can only be transferred or sold but not refunded.
Dividend calculation
Dividends are paid as a percentage of shares a Sacco holds. In the financial year 2021, different societies recorded growth in Sacco dividend pay-out, with a majority of them going up to 20 per cent.
To effectively calculate dividends, most societies have software and databases that ensure an up-to-date statement for members’ savings.
Flat rate
Interests on deposits are computed on a pro-rata or flat rate basis. This is a straightforward method of calculating dividends to be received by each member. The method uses a formula, which is
Dividends = shares held by an individual member/total shares held by all members multiplied by the amount issued as dividends.
Pro-rata method
This method involves the equal distribution of dividends to all members. It is the most preferred as it allows the Sacco to offer interest rates to members every month. The annual rate of dividends is first calculated at a monthly rate.
If a given Sacco offers interest at a rate of 8%, the monthly dividend rate will be as follows: Monthly rate = 8/12, which will be equal to 0.67% per month. This means that each member will be entitled to an interest rate of 0.67% per month. This is a fair method of calculating dividends as it also considers the withdrawals made by a certain member during the entire period.
Dividend approval
The SACCO board recommends the payment of dividends at a certain percentage based on the financial performance during the preparation of the financial statements. The recommendation is then submitted to the regulator, in this case, the Sacco Society Regulatory Authority (SASRA) to approve or register the financial statements.
After obtaining approval, the Board Members of the SACCO seek the approval of members through the Annual General Meeting or Annual Delegate Meeting to pay dividends. If the members approve, then the SACCO is authorized to pay dividends, and this is usually done within 24 hours.
Withholding tax
Upon paying out dividends, SACCOs ought to adhere to the income tax regulations of the Kenya Revenue Authority (KRA). The law vests the responsibility of withholding tax on dividend payments at the end of every financial year to the Sacco.
The SACCO is required to withhold tax on dividends at an applicable rate of 5% for residents and 15% for non-residents. Failure to do so, SACCO will be liable to penalties and interest at 1% compounded monthly from the due date. The SACCO is there required to ensure withholding tax is deducted and paid to the authority, on or before the 20th day of the following month of payment.
Conclusion
Dividends are the best investment returns you could take in your journey to financial growth. Investing in a Sacco earns dividends and interests which could supplement your income. This is a passive source of income that guarantees your journey to financial freedom.