Inside capital formation by members within a cooperative becomes increasingly important to attract ‘outsider’ finance from banks and other moneylenders. Without capitalization – inside mobilization of finance of members – it is hard for any cooperative to become bankable and get a loan. By overlooking the capitalization of the cooperatives, many remain weak, creditworthiness stays low and investment capacity is hardly available. The Federal Cooperative Agency (FCA) of Ethiopia and Agriterra acknowledge this problem and aim to look into ways that can stimulate internal capitalization and self-financing of the cooperatives in Ethiopia.
Agricultural cooperatives have different ways to build internal capital. The self-financing principle is of high importance. When members have trust in their cooperative, they are willing to leave or invest their capital in the cooperative. It is a significant indicator of commitment towards the cooperative, and thus a healthy member base. Around 40% of the financing of the cooperative should be own equity in order to have a healthy balance sheet and gain trust from banks to provide loans for investment and working capital. Different modalities are applied at different cooperatives around the world to maintain or increase the own equity position, such as:
• Shares
• Member account – allowing equity on the names of the members
• Member loan
• Membership fee
• Retained earnings
• Proportional capital return based on transaction level of a member with the cooperative
In Ethiopia, the process of internal capitalization within cooperatives hardly happens. Since capitalization and building own equity is key for coops and unions to become independent and realize sustainable growth, it is important to gain further understanding of what the options can be for Ethiopian unions and cooperatives to build own equity. Issuing shares is one option, but it often happens ad hoc and non-structured. FCA and Agriterra would like to assess how coops and unions can built up capital in a more structured way, for example based on member accounts or proportional contributions based on the transaction level members have with their union.
On April 23 - 24 a workshop session will be organized with FCA, Rural Cooperative Producer Agencies (RCPA), Cooperative Bank of Oromya and several unions to discuss self-financing options, best practices in internal capitalization and jointly pave steps forward for actors involved that
• promote more awareness about the different self-financing modalities.
• stimulate more unions to start capitalization/self-finance processes.
• offer unions more options for internal capitalization.
In order to discover the best practices, good performing unions will be invited to share their experience with the participants. Unions that among others will be invited are Admas, Setit, Wodera union. These unions have recently been involved in processes relating to internal capitalization.
