COOPERATIVE LAW

Cooperative law governs the formation, operation, and dissolution of cooperative societies.
These are unique organizations driven by member-centric principles, distinct from traditional
companies driven by profit maximization for shareholders. In Kenya, cooperative law plays a
crucial role in regulating a vibrant cooperative sector, particularly in agriculture, housing, and
financial services (SACCOs).

Definition and Types of Cooperatives

Definition: A cooperative is an autonomous association of persons united voluntarily to meet

their common economic, social, and cultural needs and aspirations through a jointly-owned and
democratically-controlled enterprise. They are based on the values of self-help, self-
responsibility, democracy, equality, equity, and solidarity.

Key Characteristics:

 Voluntary and Open Membership: Open to all persons able to use their services and
willing to accept the responsibilities of membership, without gender, social, racial,
political, or religious discrimination.
 Democratic Member Control: Members control the cooperative democratically.
Members actively participate in setting policies and making decisions. In primary
cooperatives, members have equal voting rights (one member, one vote).
 Member Economic Participation: Members contribute equitably to, and democratically
control, the capital of their cooperative.
 Autonomy and Independence: Cooperatives are autonomous, self-help organizations
controlled by their members.
 Education, Training, and Information: Cooperatives provide education and training
for their members, elected representatives, managers, and employees so they can
contribute effectively to the development of their cooperatives.
 Cooperation among Cooperatives: Cooperatives serve their members most effectively
and strengthen the cooperative movement by working together through local, national,
regional, and international structures.
 Concern for Community: Cooperatives work for the sustainable development of their
communities through policies approved by their members.

Types of Cooperatives (Common in Kenya):

 Financial Cooperatives (SACCOs - Savings and Credit Cooperative Societies):

These are the most common type in Kenya. They allow members to save money regularly
and access affordable loans.
o Examples: Harambee Sacco, Stima Sacco, Mwalimu Sacco.
 Agricultural Cooperatives: Formed by farmers to collectively market their produce,
purchase inputs, process goods, or access credit.
o Examples: Coffee cooperatives, dairy cooperatives (e.g., New KCC, though now
a parastatal, it originated as a cooperative).
  Housing Cooperatives: Members pool resources to acquire land and construct houses,
making homeownership more affordable.
 Consumer Cooperatives: Members collectively purchase goods or services at
competitive prices.
 Producer Cooperatives: Members (e.g., artisans, small manufacturers) come together to
produce and market their goods collectively.
 Service Cooperatives: Provide specific services to their members, such as transport,
health, or education.
 Multi-purpose Cooperatives: Engage in a combination of activities, e.g., saving,
lending, and marketing of produce.

Sources of Cooperative Law (Kenya Specific)

The legal framework for cooperatives in Kenya primarily draws from:

1. The Constitution of Kenya: Provides the overarching legal principles and framework,
including provisions on fundamental rights and freedoms, which underpin all other laws.
2. The Co-operative Societies Act (Cap 490, Laws of Kenya): This is the principal
legislation governing the constitution, registration, and regulation of cooperative societies
in Kenya. It outlines procedures for formation, governance, management, financial
oversight, dispute resolution, and dissolution.
3. The Co-operative Societies Rules: These are subsidiary legislations made under the Co-
operative Societies Act by the Cabinet Secretary responsible for cooperatives. They
provide more detailed procedures and regulations for the implementation of the Act,
covering areas like registration forms, by-law amendments, member admission, meeting
procedures, and liquidation processes.
4. The SACCO Societies Act, 2008: This specific Act makes provision for the licensing,
regulation, supervision, and promotion of Deposit-Taking SACCO societies, and
establishes the SACCO Societies Regulatory Authority (SASRA). This indicates a higher
level of regulation for SACCOs due to their financial nature.
5. The SACCO Societies Regulations: Subsidiary legislation under the SACCO Societies
Act, providing detailed rules for the operation and oversight of SACCOs.
6. By-laws of Individual Cooperative Societies: Each registered cooperative society must
have its own by-laws, which are internal regulations consistent with the Co-operative
Societies Act and Rules. These by-laws govern the society's specific operations,
membership qualifications, internal management, and financial arrangements. They are
legally binding on members.
7. Case Law/Judicial Precedent: Decisions made by courts in cooperative disputes
contribute to the body of cooperative law by interpreting the statutes and clarifying their
application.
8. International Cooperative Principles: While not directly legally binding, the
universally accepted International Cooperative Alliance (ICA) Principles often inform the
legislative framework and the spirit of cooperative operations.
Registration and Membership of Cooperatives (Kenya)

Registration: The process of registering a cooperative society in Kenya is overseen by the

Commissioner for Co-operative Development.

 Application: A group of at least ten qualified persons (for a primary society) must
apply for registration in the prescribed form.
 Proposed By-laws: The application must be accompanied by several copies of the
proposed by-laws, which must conform to model by-laws and cover essential matters like
the society's name, objects, area of operation, membership qualifications, and how funds
will be applied.
 Provisional Registration: The Commissioner may grant provisional registration for a
specific period (e.g., 18 months), allowing the nascent society to operate and demonstrate
its viability.
 Full Registration: If the society meets all requirements and demonstrates its capacity to
operate effectively during the provisional period, the Commissioner grants full
registration and issues a certificate of registration, making the cooperative a body
corporate.
 Appeal: If registration is refused, there is a right to appeal to the Cabinet Secretary
responsible for cooperatives.

Membership:

 Qualifications: The by-laws of each cooperative define specific qualifications for

membership (e.g., age, common bond, residency, occupation). Generally, a person must
be at least 18 years old and of sound mind.
 Admission: Membership is typically subject to approval by the society's committee of
management and formal admission at an annual general meeting.
 Rights of Members (See "Rights, Privileges and Duties" below).
 Limitation: Generally, a member can only be a member of one primary cooperative
society having the same objects.
 Cessation of Membership: Membership can cease through withdrawal, expulsion (for
violating by-laws), death, or ceasing to qualify.

Management Challenges

Cooperative societies in Kenya, despite their vital role, face a range of management challenges:

1. Governance and Leadership Issues:

o Poor Leadership: Inadequate leadership skills, lack of vision, and sometimes
corrupt practices among elected officials.
o Mismanagement and Fraud: Embezzlement of funds, lack of transparency, and
poor record-keeping.
o Lack of Accountability: Weak internal controls and oversight mechanisms make
it difficult to hold management accountable.
 o Political Interference: External political influence can undermine democratic
processes and lead to decisions not in the best interest of members.
2. Financial Management Challenges:
o Loan Default: High rates of loan defaulting by members, especially in SACCOs
and agricultural cooperatives.
o Inadequate Capitalization: Insufficient member contributions or limited access
to external financing.
o Lack of Financial Discipline: Poor budgeting, unauthorized expenditures, and
weak internal audit systems.
o Competition: Increasing competition from commercial banks and other financial
institutions.
3. Member Participation and Engagement:
o Apathy: Low member participation in meetings and decision-making processes.
o Lack of Education: Many members may not fully understand cooperative
principles, their rights, or the business model.
o Side-selling (in agricultural cooperatives): Members selling their produce
outside the cooperative, weakening its bargaining power and financial viability.
4. Operational and Administrative Issues:
o Inadequate Human Resource Capacity: Shortage of skilled managers,
accountants, and technical staff.
o Technological Adoption: Slow adoption of modern technology for efficient
operations, record-keeping, and communication.
o Inefficient Systems: Outdated or cumbersome administrative procedures.
o Dispute Resolution: Internal disputes among members or with management can
hinder progress.
5. External Environment:
o Policy and Regulatory Changes: Adapting to evolving legal and regulatory
frameworks.
o Market Fluctuations: Vulnerability to volatile market prices for agricultural
produce or economic downturns.
o Climate Change: For agricultural cooperatives, climate-related challenges
directly impact productivity.

Rights, Privileges, and Duties of Cooperatives and Members

Rights and Privileges of a Registered Cooperative Society:

 Body Corporate: Upon registration, a cooperative becomes a body corporate with

perpetual succession, meaning it can own property, sue, and be sued in its own name.
 Limited Liability: Generally, the liability of members is limited to the amount of their
share capital.
 Charge over Members' Produce/Assets: The society may have a first charge over the
produce, shares, or other assets of members indebted to it (as per its by-laws and the Act).
 Exemption from Stamp Duty: In some jurisdictions, cooperatives may enjoy
exemptions from certain taxes or duties.
  Power to make By-laws: Authority to establish internal rules for its governance and
operations.
 Common Seal: The right to have a common seal.

Rights of Members:

 Voting Rights: One member, one vote, regardless of the number of shares held
(democratic control).
 Right to Participate: To attend and vote at general meetings, elect and be elected to the
committee of management.
 Right to Information: To inspect the books and accounts of the society (subject to
reasonable restrictions) and receive annual reports.
 Right to Share in Surplus/Dividend/Bonus: To receive a share of the society's
surplus/profits as declared by the general meeting, often linked to the volume of business
transacted with the society (bonus) or share capital (dividend).
 Right to Withdraw: To withdraw from membership as per the by-laws.
 Right to Nominate: To nominate a person to whom their share or interest in the society
shall be transferred upon their death.
 Access to Services: To utilize the services provided by the cooperative.

Duties of Members:

 Abide by By-laws: To comply with the Co-operative Societies Act, Rules, and the
society's by-laws.
 Attend Meetings: To attend general meetings and participate in decision-making.
 Pay Share Capital: To pay their subscribed share capital.
 Transact Business: To transact the agreed-upon business with the society (e.g., deliver
produce, utilize services).
 Repay Loans: To repay any loans obtained from the society as per the terms.
 Contribute to Capital: To contribute to the capital of the society as required.

Duties of the Cooperative Society:

 Maintain Accounts: To keep proper books of accounts as prescribed by the

Commissioner.
 Hold Meetings: To hold annual general meetings and other special general meetings as
required.
 Submit Returns: To submit annual audited accounts and other required returns to the
Commissioner.
 Promote Member Education: To provide education and training to its members.
 Adhere to Principles: To operate in accordance with cooperative principles.
 Manage Funds Prudently: To ensure proper investment and application of its funds,
including maintaining a reserve fund.
 Honour Obligations: To honour its commitments to members, creditors, and other
stakeholders.
Amalgamation, Division, and Dissolution

These are processes that affect the legal existence and structure of cooperative societies.

Amalgamation:

 This involves two or more cooperative societies combining to form a single new
cooperative society.
 Procedure (Kenya):
1. Preliminary Resolution: Each amalgamating society must pass a special
resolution (preliminary resolution) signifying its intent to amalgamate.
2. Notice: This preliminary resolution must be sent to all members, creditors, and
other interested parties of each society, giving them an opportunity to object or
demand payment of their claims.
3. Secondary Resolution: Not less than three months after the preliminary
resolution, a further special general meeting of each amalgamating society is held
to consider the preliminary resolution and any objections/demands received. A
secondary resolution is passed to confirm the amalgamation, addressing any
objections or providing for the payment of dissenting members' share capital and
creditors' claims.
4. Registration: The Commissioner, if satisfied that the process complies with the
Act, registers the new amalgamated society and its by-laws.
5. Consequences: Upon registration, the original amalgamating societies are
dissolved, their registrations are cancelled, and all their assets and liabilities vest
in the new amalgamated society. Remaining members become members of the
new society.

Division:

 This involves a single cooperative society dividing into two or more new cooperative
societies.
 Procedure (Kenya): The process is similar to amalgamation, involving preliminary and
secondary special resolutions by the existing society, notification to members and
creditors, and addressing any objections.
 Registration: The Commissioner, if satisfied, registers the new societies and their by-
laws.
 Consequences: The original society stands dissolved, and its assets and liabilities are
apportioned among the newly formed societies as specified in the resolution.

Dissolution (Liquidation/Winding Up):

 This is the process by which a cooperative society ceases to exist legally. It can occur
through various means:
1. By Order of the Commissioner:
 Lack of Members: If the number of members falls below the statutory
minimum (e.g., 10).
  Cessation of Business: If the society ceases to operate.
 Contravention of Act/Rules: If the society is operating in contravention
of the law or its by-laws.
 Ineffectiveness: If the Commissioner believes the society is not operating
effectively or fulfilling its objectives.
 Inquiry/Inspection: Following an inquiry or inspection that reveals
serious irregularities or insolvency.
2. Voluntary Dissolution: When the members themselves resolve to dissolve the
society (e.g., at a general meeting, often due to achieving its objectives or a
decision to cease operations).
3. By Court Order: In some rare cases, a court may order the winding up of a
cooperative.
 Process of Liquidation:

o Appointment of Liquidator: When a cooperative is dissolved, a liquidator is

appointed (by the Commissioner or by members/court) to wind up its affairs.
o Asset Realization: The liquidator takes control of the society's assets.
o Debt Payment: Debts are paid off in a statutory order of priority.
o Distribution of Surplus: Any remaining surplus assets are distributed to
members according to the by-laws or the Act.
o Cancellation of Registration: Once the liquidation process is complete and
approved by the Commissioner, the society's registration is cancelled, and it
legally ceases to exist.