SACCO dividends are one of the biggest reasons members choose to save and invest through cooperative societies. At the end of a financial year, members look forward to receiving a return on their shares and other investments.
But what happens when your SACCO declares a lower dividend than you received in previous years?
A reduction in dividends can be disappointing, especially when you have maintained your savings or increased your shareholding. However, a lower dividend does not automatically mean that your SACCO is performing poorly.
Several factors can affect the amount a SACCO distributes to members. These include profitability, loan performance, operating costs, liquidity, regulatory requirements and the amount of income generated during the financial year.
Understanding these factors can help members interpret dividend changes and make better financial decisions.
What are SACCO dividends?
SACCO dividends are returns distributed to members from the surplus generated by a cooperative society.
The amount a member receives generally depends on the number of qualifying shares they hold and the dividend rate approved for that financial year.
For example, if a SACCO declares a dividend rate of 10 per cent and a member has Sh100,000 in qualifying shares, the gross dividend would be Sh10,000 before any applicable deductions.
However, dividend rates are not guaranteed.
A SACCO may declare a higher or lower rate depending on its financial performance and the decisions approved through the appropriate governance process.
Your SACCO may have made less profit
One of the biggest reasons dividends fall is reduced profitability.
SACCOs generate income from several activities, with lending usually being a major source. When income falls while expenses remain high, the surplus available for distribution can decline.
For example, a SACCO may experience lower interest income if loan growth slows down.
If fewer members take loans, or if borrowers repay loans faster than expected, the SACCO may generate less income from its loan portfolio.
Lower income can eventually translate into a smaller surplus and, consequently, lower dividends.
Loan defaults can reduce dividends
The quality of a SACCO’s loan portfolio has a direct impact on its financial performance.
When members fail to repay loans on time, the SACCO may have to make provisions for doubtful or non-performing loans.
These provisions can reduce the surplus available for distribution.
This means that even if a SACCO has a large loan book, it may not necessarily generate a large surplus if a significant portion of its loans are not performing well.
Members should therefore pay attention to the SACCO’s loan repayment performance when assessing why dividends have changed.
Operating costs may have increased
SACCOs also face costs associated with running their businesses.
These include employee salaries, technology, banking charges, branch operations, security, marketing, insurance, audit fees and other administrative expenses.
A SACCO that invests heavily in technology or expands its branch network may experience higher costs in the short term.
If expenses increase faster than income, the surplus may decline.
For members, this could mean a lower dividend rate even when the SACCO continues to expand its operations.
The SACCO may be investing for future growth
A lower dividend does not always indicate a problem.
Sometimes, a SACCO may retain more of its surplus to strengthen the institution.
The money may be used to increase reserves, improve technology, open new branches, develop products, strengthen liquidity or support future lending.
Such investments can reduce the amount immediately available for distribution to members.
The important question is whether the retained funds are being used effectively.
A SACCO that sacrifices some short-term dividend income to build a stronger and more profitable institution could potentially benefit members in the long run.
Your SACCO’s income sources may have changed
SACCOs do not all rely on the same income streams.
Some generate most of their income from loans, while others have diversified into banking services, investments, insurance, housing finance, property and other businesses.
Changes in these income sources can affect dividends.
For instance, if investment income falls significantly during a particular financial year, the SACCO’s overall surplus could decline.
Similarly, changes in interest rates, market conditions or the performance of investments can affect the income available for distribution.
Increased cost of borrowing can affect performance
Economic conditions can also influence SACCO performance.
When the cost of funds increases, a SACCO may spend more to access or maintain the liquidity it needs to support its operations.
Higher costs can put pressure on margins.
At the same time, members facing economic difficulties may borrow less or struggle to repay existing loans.
This combination can affect both income and loan quality, ultimately putting pressure on dividends.
The SACCO may be strengthening its reserves
Another reason dividends may decline is the need to strengthen the SACCO’s financial position.
A financially stable SACCO needs adequate reserves and capital to absorb unexpected losses and support future growth.
Instead of distributing every available shilling as dividends, the SACCO may retain part of its earnings.
This can strengthen the cooperative and improve its ability to withstand financial shocks.
Members should therefore look beyond the dividend rate and examine whether the SACCO’s reserves and capital position are improving.
Membership growth does not always mean higher dividends
A growing membership base is generally positive for a SACCO.
However, more members do not automatically translate into higher dividends.
A SACCO may recruit thousands of new members, but if those members contribute little in share capital or savings and do not use its income-generating products, the immediate effect on profitability may be limited.
Rapid expansion can also increase operational expenses.
The SACCO may need to hire more employees, upgrade technology, open additional service points and invest in marketing.
These expenses can affect short-term profitability.
Dividend rates can change because of share capital
Members should understand the difference between savings and shares.
SACCO savings are generally deposits that members can use or withdraw according to the SACCO’s rules.
Shares, on the other hand, represent ownership in the cooperative and are usually the basis upon which dividends are calculated.
Therefore, increasing your savings does not necessarily mean you will receive a larger dividend.
If you want to understand your dividend earnings, find out how your SACCO calculates dividends and what portion of your membership investment qualifies for the declared return.
A lower dividend rate is not the only measure of performance
Members should avoid judging a SACCO solely by its dividend rate.
A SACCO offering an exceptionally high dividend may not necessarily be stronger than one offering a slightly lower rate.
Instead, members should examine several financial indicators.
These include:
- Profit or surplus growth
- Loan portfolio performance
- Non-performing loans
- Asset growth
- Liquidity
- Capital adequacy
- Reserves
- Operating expenses
- Membership growth
- Loan recovery performance
Looking at these indicators provides a clearer picture of the SACCO’s financial health.
Check your SACCO’s annual report
If your dividends have fallen, the first place to look is your SACCO’s annual financial report.
The report can help explain what happened during the financial year.
Look at the income statement to determine whether the SACCO’s income and surplus increased or declined.
You should also examine the balance sheet, loan portfolio, liabilities, assets and reserves.
Comparing the latest report with previous years can reveal important trends.
For example, if the surplus has declined for three consecutive years, the lower dividend may reflect a broader profitability problem.
If the surplus has increased but the dividend rate has fallen, the SACCO may be retaining more money to strengthen its capital or reserves.
Ask questions at the Annual General Meeting
Members have an important role to play in SACCO governance.
If you are concerned about declining dividends, do not simply wait for the next payout.
Attend the SACCO’s Annual General Meeting and ask management and the board to explain the change.
You can ask questions such as:
Why did the dividend rate fall?
Did the SACCO’s surplus decline?
How much was spent on loan-loss provisions?
Have operating costs increased?
How much surplus was retained?
What investments are being made with retained earnings?
Has the level of loan defaults increased?
What is the SACCO doing to improve profitability?
These questions can help members understand whether the lower dividend is temporary or part of a longer-term trend.
Do not withdraw your savings simply because dividends fell
A lower dividend may tempt some members to withdraw their money or leave the SACCO.
However, members should first understand the reason behind the decline.
If the SACCO remains financially sound, continues to grow its loan portfolio responsibly, maintains strong reserves and invests in sustainable projects, a temporary reduction in dividends may not be a reason to panic.
On the other hand, repeated dividend declines accompanied by falling profitability, rising loan defaults, weak liquidity and poor governance deserve closer attention.
Compare your SACCO with similar institutions
Another useful step is to compare your SACCO’s performance with other SACCOs operating in a similar segment.
Do not compare dividend rates alone.
Look at profitability, asset growth, loan performance, capital strength and member growth.
A lower dividend across several SACCOs could indicate wider economic pressures.
If competitors are consistently performing better while your SACCO’s financial indicators are deteriorating, members may need to demand stronger explanations from management.
What members should do after a dividend reduction
A lower dividend should trigger questions, not panic.
Start by reviewing the SACCO’s latest annual report. Check whether profitability has increased or declined.
Next, examine the quality of the loan portfolio and the level of non-performing loans.
You should also determine whether the SACCO has increased its operating expenses or invested heavily in new projects.
Finally, find out how much surplus has been retained and why.
The goal should be to understand whether the SACCO is experiencing temporary pressure or whether there is a deeper financial or governance problem.
Author: Andrew Walyaula
Andrew Walyaula is a seasoned multimedia journalist. Email: [email protected]
