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last update: December 25th 2003

ORISSA STATE COOPERATIVE BANK LTD.
BHUBANESWAR - 751001

DO. No. _____________
Dated 17th Feb. 2000

S. N. Tripathi
Managing Director

 

Dear Sri Subrahmnyam,

 

Kindly recall our discussion regarding a brief resume about my visit to Israel. I am trying to recollect some pieces of wisdom at the International Institute of Histadrut, Israel. This may be published in the NAFSCOB Bulletin for wide circulation.

Yours sincerely,

(S.N. Tripathi)

 

To

Sri B. Subrahmnyam
Executive Director,
NAFSCOB, Mumbai.

Memo No.15763 /dt. 17-2-2000

Copy along with copy of enclosure communicated to Mr. Zvi Galor,
Academic Director, International Institute of Histadrut, Beit Berl, Kfar Saba ? 44905, Israel for kind information.

 

MANAGING DIRECTOR

 

Dear Subu

 

I am sending herewith a copy of my note prepared for my bank. I have shared this concept with many peoples and all have appreciated this new concept of share = to fixed assets divided by no of members. Details are in article.

For information
Surendra Nath Tripathi

An alternative view of Cooperatives of India

By Surendra Nath Tripathi
Managing Director
Orissa State Cooperative Bank, Bhubaneswar
India

 

WHAT IS A COOPERATIVE?

 

A cooperative is an association of persons united voluntarily to meet their common economic, social and cultural needs and assistance through jointly owned and democratically controlled enterprise. The above definition of cooperatives accepted under International Cooperative Alliances appears to have been modified by the new approach to provide best possible services (NOT HIGHEST) at a lowest (NOT CHEAPEST) possible cost. Mr. Zvi Galor, the Academic Director of the Institute of the Histadrut, Israel, whom I happen to meet, is a staunch advocate of the above concept. He has made distinction between SAVING AND CREDIT cooperatives and CREDIT AND SAVING cooperatives. The saving and credit cooperative are those societies where members save their money and cooperative is able to allocate credit to its members mostly out of this savings. The credit and savings cooperative are those, which provides loan to their members by borrowing money from external sources even from non-members.

1. OWNERSHIP OF COOPERATIVES

We all believe in equal ownership of members in cooperatives as all members are one and equal irrespective of their value of share. This is neither feasible nor practicable. How can a member with ONE SHARE OF Rs 100/ can be equal to a member like State Govt. with a Share of Rs 2000 lakhs? Unequal member cannot become equal and some shall continue to be more than equal is unless they are really equal. They can become equal only if value of each share is not only the same and equal but by definition no member can hold more than one share. The share of the members should express the real value of fixed assets of the cooperative. Each member should have only one share and value of the share should be decided by purely mathematical principles. The value of share of a cooperative must be equal to the real cost of fixed assets divided by No. members.

Value of share = Value of fixed assets

Number of members

 

This concept can bring success to the cooperatives, as this will ensure democratic functioning of cooperatives including management. This will encourage non-members to become members of the cooperatives as the value of share will not be nominal value on the other hand it will have linked to the market value of fixed assets divided among the No. of members.

Today the ASSETS i.e. own fund, buildings and other assets of many cooperatives in India do not belong to the members. Fore example OSCB has own fund of Rs. 83.84 crores whereas the value of share capital is only Rs. 24.55 crores which belong to 691 members/organizations including State Government. Theoretically on liquidation of cooperatives, members are expected to get the real value of the share which never happens.

 

2. MEMBERSHIP

Another major exception is the cooperative sector is inclusion of new members. Since value of one share of cooperatives is divided by the above principle, their bylaws or direction of any institution outside the cooperative can no decide his market value of the share price. For example if a society consisting of Rs.10,000/-. If 10 more members are added i.e. the membership exceeds 20, the value of share of each person will be reduced to Rs.5000/-. The new members will contribute to the share capital @ Rs.10,000/- and Rs.5000/- collected so from 10 additional member will be repaid back to the old 10 members. This brings equity and equality and participation of all members.

 

3. MANAGEMENT

The Cost of Management (COM) of the society should be based on the actual Cost of Management excluding contribution to be made for purchase of fixed assets like land, buildings, etc. The management of the society by the officials could be on contractual basis where the employees of the cooperatives engaged by the Board of Directors of the society are paid a fixed wage or pays salary plus incentive on each unit of service to the members. In a consumer society the value of sale price of the members should be equal to purchase price plus Cost of Management without any provision of additional profit. Similarly, in Producers cooperatives the purchase price to the members should be equal to highest market price minus Cost of Management. This will enable the members to get the best possible service at the lowest possible price.

 

4. RESERVE

The Israel concept of cooperatives totally based on creation of reserves in meeting the so-called unforeseen situation. The reserves are generally created out of surplus. The surplus means the society is charging to its participating members not only the cost price of a particular service but a little more than that. For example if the costs of deposit is 11% and Cost of Management is 2% , the members receiving loan from the credit cooperatives should not be charged more than (11+2) 13%. Similarly, in Producers Societies, if the sale price of Potato is Rs. 1000/- per qtl. And Cost of Management is Rs.200/- for transaction the members should not be paid less than Rs.1000/- -Rs.200/-) =rs.800/ per qtl. Any reduction in payment to the members or any higher collection from the participating members for creation of reserves for any purpose necessarily means the members are not getting the best possible services at lowest possible price.

In other words the participating members are punished by being charged higher to create an assets which does not belong to them or has not been created by equal participation of all members. This brings inequality and in the process there is a problem of non-participation of members. Less you participate less you contribute to the reserves. Less you contribute to the reserves, less you are the owner. Hence passive or no-association with the cooperatives is becoming the order of the day.

Another argument generally given for creation of reserves is to meet the unforeseen situation. For example, non-recovery of loans or deferred payment of dividend to the members. The argument given in Israel is that why should a participating member contribute to the reserves which is to be used against the bade debt not paid by another member or to be paid as a dividend later which will be reduce in its real market value due to inflation. This is again a premium on non-participation. The phenomenon of reserve fund prompts cooperatives to generate more profit by charging more than the operational cost to the members and pay income tax to the Government. This means that the profit is not distributed to the members and is accumulated in reserve fund i.e. a good money of members is forced to become bad money due to inflation even if the same is repaid back to the members later. An active member in the process gets punished and pays more to the reserve fund.

 

5. FEDERATION

The role of the Federation has been re-looked by the above experiment and is expected to charge market price for their services rendered to their primary users are being charged higher for the services rendered to them in comparison to the market situation as well as through cooperatives. The primary should play the role of Federation and become members of the Federation based on the policy of give and take. Here also concept of equal share holding should be encouraged. Pricing policy being practiced by many cooperatives aims at creation of profit. The generation of profit or any cooperative generates surplus are originally not distributed among the members on equal basis but often they are supposed to wait for the next AGB meeting which takes place during the next 3-6 months. By that time, there is erosion of real value of their money; the net result is continuous erosion of real value. Similar is the case of interest rate being offered to the members on deposits. The cooperatives must serve the members at the competitive price without creation of profit or surplus. This means that in an saving and credit cooperative, the policy should be to offer members on their fixed deposit and interest rate which would be competitive and higher than other financial institutions.

 

6. HISTORY

Credit cooperatives were founded in Israel in the 20th century. These cooperatives were called credit funds and were founded when JEWS came to Palestine at the end of 19th century from Eastern Europe. This concept of cooperatives is very much nearer to the establishment of Community Village i.e. Kibbutz. Kibbutz is closely-knit egalitarian community based on common ownership of means of production where all confer together take decision by majority. It is almost 100 years ago a small group of people from Eastern Group, inspired by social ideas set up the first KIBBUTZ on the shore of Galilee. The above kibbutz was based on the cooperative discussed above. Now Kibbutz is diversifying towards Dairy and other high tech industry areas in addition to modern high tech agriculture.

 

7. FACTORS OF PRODUCTION

Cooperatives are economic institutions. They are not formed to distribute social charity like Rotary Clubs etc. Any cooperative which assist its members towards production, market or supply of input should look into the triangle of production i.e. Credit+Input+Marketing. The Credit cooperatives are free to convert themselves into Commercial Banks and create fixed assets by making enough profit as soon as they loose their cooperative character. In view of fiscal sector reforms undertaken by many developing countries who are converting their affectionate economy with no or low subsidy the cooperatives can emerge an instrument of development process. It appears that the time has come to take a re-look over the cooperatives in India to enable real members to join the cooperatives.

 

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