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«Rajesh Agrawal Indian Institute of Management Ahmedabad K V Raju Institute of Rural Management Anand K Prathap Reddy Institute of Rural Management ...»

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Member-funds and cooperative performance

Rajesh Agrawal

Indian Institute of Management Ahmedabad

K V Raju

Institute of Rural Management Anand

K Prathap Reddy

Institute of Rural Management Anand

R Srinivasan

Indian Institute of Management Bangalore

M S Sriram

Indian Institute of Management Ahmedabad

September 2002

Corresponding Author.

Member-funds and cooperative performance

Rajesh Agrawal, K V Raju, K Prathap Reddy, R Srinivasan and M S Sriram

Abstract

This research examines the role of member-funds in multi-purpose cooperatives in the state of Andhra Pradesh, India. The central thesis is that member-funds, both in terms of quantity and quality, can enhance the control members exert on the cooperative. The involvement of members through their capital stake could be at various levels – by the provision of permanent capital, long-term capital and short-term capital. We expect that each of these will have differing effects on control and on the culture and systems of the cooperative. Such an effect on control is expected to directly drive cooperative performance, and indirectly enhance cooperative performance through greater usage of the cooperative by the members. Enhanced cooperative performance in turn would satisfy members, and the loop will hopefully be completed; satisfied members would place more funds with the cooperative.

The research used data collected from 923 individuals and 30 multi-purpose cooperatives, as well as case-studies of four successful multi-purpose cooperatives.

The 'bottom-line' of this research is that member-funds have a central role in enhancing cooperative performance. Funds provided voluntarily, either as an outcome of collective cooperative level decision making or of individual level decisions are of high quality. Externally compelled memberfunds are of low quality, as are short-term member funds.

Rajesh Agrawal is a faculty member in the Finance and Accounting Area of the Indian Institute of Management, Ahmedabad (IIMA) and is currently on leave – working as Director (Finance) International Crop Research Institute for Semi Arid Tropics, Hyderabad. KV Raju is a faculty member and K Prathap Reddy is the Director of Institute of Rural Management Anand (IRMA). R Srinivasan is Dean (Academics) and Professor of the Finance and Control at Indian Institute of Management Bangalore (IIMB). M S Sriram is a faculty member at the Centre for Management in Agriculture at IIMA.

Member-funds and cooperative performance A cooperative can be viewed ideologically in two opposing fashions. First as an integral part of a capitalist society. Second, as an organization that is in some manner the antithesis of a capitalist firm. Cooperative legislation, in India, effectively (and possibly unintendedly) assumes the latter view by making it difficult for a cooperative to raise funds on market-determined terms. The government often steps in to make available funds to cooperatives on concessional terms.

However, there has always been a view that it is good for a cooperative to raise funds from its members. Understanding the roles that member-funds can play in a cooperative is of importance to managers and policy-makers alike.

This research3 examines the role of member-funds in multi-purpose cooperatives in the state of Andhra Pradesh, India. The central thesis is that member-funds, both in terms of quantity and quality, can enhance the control members exert on the cooperative. The involvement of members through their capital stake could be at various levels – by the provision of permanent capital, long-term capital and short-term capital. We expect that each of these will have differing effects on control and on the culture and systems of the cooperative. Such an effect on control is expected to directly drive cooperative performance, and indirectly enhance cooperative performance through greater usage of the cooperative by the members. Enhanced cooperative performance in turn would satisfy members, and the loop will hopefully be completed; satisfied members would place more funds with the cooperative (see Figure 1).

Figure 1 about here The above thesis essentially focuses on why member-funds are required. The research also examines strategies for mobilizing member-funds, addressing the issue of how member-funds are raised.

The paper is organized as follows. Research methodology covers the literature, the three research components used, the statistical data analysis tools, and a description of the types of member-funds used by the coooperatives studied. Research findings are then summarized.

Finally implications for managers and policy-makers are presented.

We are grateful to the Food Agricultural Organization and the Committee for the Promotion and Advancement of Cooperatives for financial support, and indeed for motivating this research in the first instance.

Research methodology Literature Three strands of literature contributed immediately to the research design, and are mentioned below.

A large body of literature, beyond what is cited exists, but has been omitted from considerations of space alone.

The central thesis of the FAO/COPAC Draft Proposal (1992) was that member-funds, in cooperatives, lead to greater member-participation and enhanced cooperative performance.

Reddy and Sekhar (1992) measured, among other variables, member-control in both cooperatives and other village-level organizations. Their instrument was designed to capture the members' perceived influence on liberal democratic decisions (elections), as well as on routine and non-routine managerial decisions. While the FAO/COPAC Draft Proposal emphasized the use of secondary measures of member participation (for instance, voting percentages), the Reddy-Sekhar research contributed to the design of a robust instrument for capturing member-control and membersatisfaction from individuals.





Furubotn and Pejovich (1973) and Jensen and Meckling (1979) analyse the role that capital can play in a cooperative using the property rights framework. Important in this framework is a recognition that, unlike in the capitalist firm where suppliers of capital are the residual claimants4; suppliers of a commodity, or buyers of a cooperative's output and sometimes even suppliers of capital are the residual claimants in a cooperative. Phansalkar and Srinivasan (1992a, 1992b) provide an analysis of a range of possible property rights that can be vested with cooperative members, and the appropriate property rights set for various market and technological contexts. Agrawal (1992) looks at the role of income tax in discouraging member-capital.

Research Components

The research had three components. The first was a survey of individual members. A questionnaire covering member-funds, member-control, member-usage, and member-satisfaction was administered on 923 members belonging to 32 multi-purpose cooperatives in Andhra Pradesh. The questionnaire measured 14 individual items relating to member-control. Items covered included, participation in cooperative elections, control that members perceived as Residual claimants are those entitled to the difference between inflows from customers and fixed payments to other parties. The residual claimants in a sugar-processing company are the shareholders, while the residual claimants in a sugar-processing cooperative are the sugarcane farmers.

having on budget decisions, decisions on price fixation, appointment of the chief executive, as well as an overall measure of being in control. The questionnaire also covered three items of member-usage, four items of member-satisfaction, and documented the total funds each member had with the cooperative.

The second component covered 10-year financial data of 30 of these cooperatives, as well as 10year non-financial data of these cooperatives (covering elections and voting percentages, attendance in annual and extra-ordinary meetings, the rating provided by the auditor, and the audit lag that measured the interval between the end of a financial year and certification of accounts). Of these, 18 were high-performing (good) cooperatives and the remaining 12 lowperforming (bad) cooperatives. This classification was based on the consensus opinions of several experts. At the cooperative level, member-funds, member-control and cooperative performance were measured. All the cooperatives studied extended credit to members, and provided fertilizer and other agricultural inputs. Most also sold consumer goods. Also ten cooperatives had paddy-processing facilities.

Case studies of four high-performing cooperatives, out of the above 30, constituted the third component. These cooperatives were Achanta, Gattududdanapally, Mulukanoor and Yendagandi.

Data Analysis Data collected in the first two components were subjected to a battery of statistical tests. These included factor analysis, correlations, multiple regression, discriminant analysis, and causal path modelling (LISREL)5. These are briefly summarized below. This summary below is not intended to present results, but to indicate the nature of tests conducted.

Factor analysis extracts the underlying sense of measured data. For instance, following factor analysis, the numerous measures of member-control, in the questionnaire, collapsed into three items. The first was control through elections, the second through interactions with the cooperative staff, and the third an overall sense of being in control. The various measures of member-satisfaction collapsed into a single measure, as did the various measures of memberusage.

Again a factor analysis was conducted on possible measures of cooperative growth. One factor emerged that appeared to encapsulate cooperative performance. This factor combined growth in capital employed, net working capital, long-term capital, net worth, and interest income. This factor Fortunately for us there is as yet no Society for the Prevention of Cruelty to Data.

was used as a measure of cooperative performance. This measure was consistent with the a priori classification of cooperatives into good and bad.

Correlations between pairs of variables show the strength and direction of relationship. Thus the three measures of member-control—participation in elections, control that members perceived as having over day to day operations, as well as an overall measure of being in control—were significantly and positively correlated with member-usage and member-satisfaction.

Multiple regression enables an item to be expressed as a function of other items. For instance member-satisfaction was significantly and positively related to member-usage, control through elections, and the overall sense of being in control; and negatively related to control through interactions with the cooperative staff. In other words, while being allowed to participate in elections adds to member-satisfaction, dissatisfied members interacted more frequently with the cooperative than did satisfied ones.

The purpose of LISREL is more ambitious, to confirm a causal path such as suggested at the outset of this article.

Member-funds Multi-purpose cooperatives can raise funds from members through several instruments. The first is by raising share capital (Member-Share Capital). Cooperative legislation in India imposes a ceiling on the dividend that can be paid on such share capital, the ceiling is lower than the market rate of return for financial instruments with comparable risk. The principle of open membership does not permit transfer of shares. A member can withdraw the amount subscribed, on termination of her membership. Given the difficulty of attracting share capital from members on these terms, legislation usually compels members to bring in some capital. In credit cooperatives a member, intending to borrow, had to have capital equal to ten percent of the loan amount.

A cooperative, that generates a profit, can retain surpluses in the form of indivisible (NonWithdrawable) reserves. A member has no right to such indivisible reserves, in case the cooperative is liquidated such reserves can be transferred to a successor cooperative. Such indivisible reserves led to the creation of a reserve fund invested outside the cooperative or to the creation of buildings, and other visible assets within the cooperative. A cooperative might also chose to create reserves that can be distributed to members in a contingency, such as a price-fluctuation reserve (Withdrawable Reserves).

Cooperatives also accept deposits from members for periods ranging from 90 days to ten years paying market rates of interest (Withdrawable Deposits). Some cooperatives also encourage members to subscribe to deposits that are equity-like in nature (Non-Withdrawable Deposits). Such deposits carry a market rate of return, but cannot be withdrawn unless a member terminates her membership. These deposits are usually raised by check-off from payments made by the cooperative to the member. Thus these amounts are in proportion to the volume of activity a member conducts with the cooperative. To discourage the frequent withdrawal of such deposits, a cooperative requires that a member leaving the cooperative and rejoining, restore her previously held deposits. As a further discouragement a cooperative may impose an interval between termination and rejoining.

Member-funds constituted about a quarter of the overall funds raised by the average cooperative studied. Of these, Withdrawable and Non-Withdrawable Reserves that could not be identified with members constituted a quarter. Member-Share Capital and Non-Withdrawable Deposits (amounts available on termination of membership) constituted 30% while Withdrawable Deposits was around 35% The remainder consisted of short-term dues to members arising from their supply to the cooperative.

Research findings The hard data was subjected to statistical analysis; case-analysis was used both to provide insights on processes, and to add meaning to the output of statistical analysis.

Individual level analysis All cooperatives When the entire sample was considered, member-funds were found to be significantly associated with member-control and member-usage. Member-funds, in this individual level analysis, included funds paid-in by members (share-capital and deposits) but excluded reserves.

Member-satisfaction was strongly dependent on member-usage, and to a lesser extent on membercontrol. Control through operations was used when members were less satisfied.



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