Influence of Demutualization on the Relationship Between Member Economic Participation and Financial Performance of Co-Operatives in Kenya.

Abstract

When facing capital constraints and in the absence of member equity injections, cooperatives are pressured to either take on more debt, demutualize or sell to investor owned firms so as to maintain their financial performance. Demutualization alters the capital structure, member control and income rights. The third international co operative principle of Member Economic Participation; calls for members to be the sole contributors and democratic controllers of a co-operative’s capital and they are to receive limited reward in proportion to their transactions. The Kenyan hybrid model of demutualization, which strikes a balance between non-member capital raising aspects and preserving their co-operative identity, appears to be working although the influence of demutualization on the relationship between member economic participation and financial performance is not clearly known. This focus of this study was to establish the influence of demutualization on the relationship between member economic participation, specifically in terms of member reward, member transactions and member control, and financial performance. These variables were anchored on empirical literature and the resource based view, property right theory, transaction cost theory and agency theory. The target population was the two holding co operatives in Kenya registered by the Ministry of Industry, Trade and Co-operatives as at 2017. Secondary data was obtained from published financial statements and annual shareholder reports of the respective co-operatives for twenty yearsfrom1998to2017 and transformed into unbalanced panels. Time Series Cross Sectional research design was employed in analyzing the unbalanced panel data. Diagnostic tests results indicated that the data was normal, homoscedastic and had no multicollinearity, autocorrelation nor cross sectional dependence problems. Stata 13 software was utilized in analysis of the bivariate and multivariate regressions using the random effects model. The findings of the study revealed that demutualization had; A positive but not significant effect on the relationship between member reward and financial performance; A positive but not significant effect on the relationship between member transactions and financial performance; A negative significant effect on the relationship between member control and financial performance. The overall influence of demutualization was negative but not significant on the relationship between Member Economic Participation and Financial Performance of co-operatives in Kenya. The study recommends a revision of the International Co-operative Alliance principle of ‘Co-operation among Co-operatives’ so that it can be more comprehensive in relation to co-operative capital concept, establishment of a secondary market for co-operative securities to reduce member reward incentive for demutualization. Further, dual registration of co-operatives as also companies should be prohibited.