Are you a part of a Ponzi scheme or a member of a cooperative society? This is a question you must ask yourself over and over again, and to make certain what the answer is. If you’re a member of a cooperative – any cooperative as that – or you’re about to join one in a time soon, this question is especially for you so much so you don’t lose all your life savings in a swindling cesspit paraded as a cooperative.
Cooperative societies exist everywhere today
Today, cooperative societies are ubiquitous. You will agree with me that they are pervasive in our society nowadays. If you work as a salary earner, there’s a possibility of a staff cooperative society in your place of work. There are cooperative societies in various churches today fostered by many a church members. In places of businesses and among market women, cooperative societies also exist to cater in unique ways for their members’ welfare.
There are even individuals who are members of more than one cooperative society. Some might be members of their staff cooperative societies at their various places of work and also join the ones in their churches or other religious places. An average market woman might be a member of a market cooperative association and at the same time a member of similar cooperative societies in another domain entirely. A worker might be a member of a staff cooperative at work while also a member of a housing cooperative society in his/her community.
Benefits of being a member of a cooperative society
Cooperative society provides a safe haven for participating members to save towards their retirement. Some organizations don’t have policy for gratuity payment to their retiring workers, and in this regard, a staff cooperative society in such an organization ensures that employees who are members have a platform for saving towards when they are either retired or fired – whichever comes earlier!
A cooperative society is a source of cheap finance for most people. It’s not only cheap in term of interest rate but also, it’s easily accessible for an average individual. A member can easily finance the purchase of household and domestic electronic items such as television, washing machine and generator at a reduced interest rate. A cooperative society often facilitates the finance of such purchases for their members from reputable distributors. This has on many occasions helped struggling members on meager income without hope of financing such acquisition to obtain them.
In the same vein, some cooperative societies operate commodity stores and shops for the sale of household consumables. Often times, members not only buy from these stores at comparatively cheaper prices but also on credit. Cooperative societies could facilitate this for their members because they leverage on the pool of fund from members’ contributions to buy in bulk directly from big distributors or manufacturers. And since most cooperative societies are not overly driven by profit, the markup on each store item sold to members is lower comparatively to other stores. Many indigent homes have been helped through these noble arrangements.
Moreover, cooperative societies afford members the opportunity of loans at cheaper interest rates comparatively to other sources. Members could obtain loans to finance the education of their wards given the expensive nature of education in today’s Nigeria relative to the earning of an average household. Funds could also be obtained easily and cheaply to finance a housing project and so on. In time of emergency, a cooperative society often constitutes a place to run to for a quick loan to ameliorate the emergency situation.
Why Ponzi scheme allegory?
But despite all these noble benefits that an average member enjoys in a cooperative society; why a Ponzi scheme allegory?
Despite the pervasiveness of cooperatives in our societies and their often touted benefits, you – as either an existing or a prospective member – must be wary so that you won’t regret later. Apart from all the benefits enlisted above, primarily, for most people, cooperative societies constitute a safe haven for saving towards when they retire or are fired. And given this personal objective of an average member, care must be taken to ensure that the cooperative society you’re a member of doesn’t go bankrupt before time such that your hard-earned money doesn’t go down the drains. You wouldn’t want it become a Ponzi scheme where for the desire of immediate benefits you put your investment in a vehicle that collapses in no time at all.
According to Investopedia.com a Ponzi scheme is “a fraudulent investing scam promising high rates of return with little risk to investors”. It’s an investing scam that generates returns for earlier investors with money taken from later investors. But a cooperative, on the other hand is a voluntary association of people with common objectives that formed an enterprise as a vehicle for the actualization of their common economic, social, and cultural needs and goals.
Given the definitions above, from the perspective of an average individual, money put in a cooperative society as a member comes with little or no risk. But when a cooperative society is not well managed, or where those saddled with the management are neither honest nor transparent, then it may descend into a swirl pool of a Ponzi scheme and all your life savings – represented by the balance of your contribution to date less any indebtedness – in it could go down the drain.
Various writers and researchers have attributed some factors for the success of any cooperative society: innovativeness and adaptability, adequate planning, skilled management, effective communication, common member interest and networking with other cooperatives. But a cursory look will reveal that these are just functions that are within the areas of authority of any cooperative society’s management to perform for its success and survival.
Therefore, succinctly put, a cooperative society thrives on good management and financial prudency. The management of any cooperative just like any organization requires tact and there’s the need for an avid knowledge of finance on the part of those saddled with such responsibility. It demands not only their prudency, financial knowledge but also honesty and transparency. But where the management of a cooperative society becomes unscrupulous or lacks the requisite management skills or the combination of all these, then it could be on a freefall toward bankruptcy, and for you, it becomes a Ponzi scheme.
Financial objectives for the success of any cooperative society
You should understand that just like any financial institution, running a cooperative society requires striking a balance between the financial objectives of liquidity, solvency and profitability. These mixed with a dose of transparency and honesty on the part of those at the helms of affairs should guarantee the continued success and survival of the association. Every organization also strives to meet all these three financial objectives. But financial organizations mostly strive to reach equilibrium amongst all these three objectives.
Liquidity in a layman’s language is simply the availability of cash. It implies the present ability of an organization or individual in meeting its short term cash requirements or needs.
Just like every other business organization, a cooperative society must ensure that it has the ability and cash to meet its short term debt obligations. For instance, businesses and individuals have obligations that fall due and require payment within the period of one day to twelve months which must be met as such, and as at when due. The obligations of businesses in the short period include payment of salaries and wages, payment of suppliers for materials purchased and services enjoyed, and so on.
In the same vein, cooperative societies must meet its obligations such as advancing loans to all eligible members – eligible in the sense that their loan requests comply with the requirements contained in the association’s byelaw. If there’s a commodity shop, staff salaries must also be paid. Other obligations include payments to suppliers of goods and electronic items, and payments for some other miscellaneous items. All these require continuous availability of cash.
Solvency is similar to liquidity but contrarily it relates to the capacity of an organization to meet its long term obligations, and how to ensure there’s enough cash to meet them when they fall due. Some debts and obligations fall due after twelve months. It’s this type of obligations that creates solvency objective for a cooperative.
It’s important to note that the ultimate survival of the cooperative depends on meeting this objective. Sometimes, for a staff cooperative society, employees of the company may be retrenched en masse and therefore, they all must be paid the balance of the sum on their contribution-loan accounts. For this, a cooperative society must have plans in place to meet this obligation.
Profitability is as it sounds. This financial objective implies the capacity to make a return on the financial activities of the cooperative. Profit is the excess of the income of the association over its expenses during a particular period of time usually a year. Profitability is the least important financial objective among the lot for any cooperative society. Most cooperative societies are not formed with profit motive but rather the motive for most cooperative formation is the satisfaction of members’ welfare and common goals.
Either covertly or overtly these are basically the main financial objectives every cooperative must strive to achieve while ensuring the paramount of members’ welfare and shared goals in the process. But as mentioned earlier, every cooperative must strike a balance between these financial objectives just like any financial institution to be able to meet its members’ common goals and objectives.
Ironically, the ability of the cooperative to satisfy its members’ welfare and common goals depends majorly on its solvency and liquidity capacity. ‘Money answers all things’ so says the Holy Writ.
Money is also the lifeblood of any business organization. A highly liquid organization is far more preferable to a highly profitable one with heavy liquidity challenges. This is even truer for a cooperative society where the objectives of profitability ranked lower to the objective of members’ welfare. Members’ welfare is the dominant goal of an average cooperative society, and to meet it, liquidity is an important financial objective that must be met. That’s, the availability of cash as at when required.
Sources of funding for a cooperative society
Cheap finance and loans to members, financing of electronic items, asset financing/purchase, purchase of consumables and food items in bulk for the benefits of the members and so on presuppose the availability of money. For most cooperatives, the veritable source of finance is basically members’ contributions which can only be improved upon by the admittance of new members with the new injection of contributions this promises; and the encouragement of existing members to increase their contributions to the association.
But sadly, these routes for improved liquidity or cash for the association are fraught with difficulties and sometimes unsustainable. For a staff or worker cooperative society, recruiting new members to the association from the existing pool of the company’s workforce may prove daunting. Some of these workers might have apathy toward the cooperative society which might have been occasioned originally due to one reason or the other. On the other hand, waiting for the recruitment of new workers to get additional members to recruit into the association might result in a hopeless hope.
Alternatively, encouraging existing members of the association to increase their contributions may be a tall order especially if there’s no increase in their existing incomes. Members who might have endured a long wait before obtaining loan or any other form of finance from the society might be disincentivized toward increasing his or her contribution.
Signs of gradual transformation of the cooperative into a Ponzi scheme
When you start enduring a long wait before obtaining loans despite not having an existing liability with the cooperative society; and having fulfilled other requirements for such loans, then there’s a problem of liquidity if this occur persistently. Emergency loan should ordinarily be easy to obtain: the requirements are not stringent or overly unfavourable. Therefore, it shouldn’t take a long wait before it’s given. But if this is otherwise, watch out! It’s a symptom you shouldn’t ignore.
In the same vein, based on the individual cooperative byelaw, the amount of finance that a member can access via emergency loan is often small compared to other forms of loan and therefore the association should be able to accommodate it. But if such proved difficult for your cooperative to advance to you, then you should understand that your association is experiencing liquidity challenges. A scantily filled cooperative stores or shops, and instances where the store endures long periods of no restock of products due to default in paying suppliers and other likes should alert you to the fact that your cooperative’s cash capacity is strained.
Moreover, some members of some cooperative management see the society as a tool for the advancement of their personal goals, sometimes to the detriment of the other members and the cooperative as a whole. They give themselves and their cronies loans, most times beyond the limit imposed by the association byelaw and agreement collectively taken by the members at their various decision making fora.
Some of these executive members could also indulge themselves by suspending the interest they ordinarily should pay on the loans they take. Repayments on some of their loans sometimes lapse and could collusively be written off without the knowledge and approval of the other cooperative members.
At times, they – the cooperative management – give themselves allowances and other largesse without the collective approval of the members. This largesse is often couched as honorarium in the accounts with no explanations. Sometimes, no member bothers to ask questions when they see such items in the accounts of the society.
A lot of this hanky-panky goes on that gradually bleed the finance and liquidity of the association. And eventually, in no distance time, if no diagnostic and remedial actions are taken, the cooperative lapses into a Ponzi scheme, goes bankrupt and members lose their funds.
What you should do to remedy the situation
To help arrest a descent of your cooperative society toward bankruptcy, you must be vigilant and act fast. For the financially savvy members, this problem can be deciphered from computing liquidity and gearing ratios from the figures in the financial statements. But the genuineness and correctness of the ratios are also depended on the truthfulness of the financial statements presented to the members by the management of such cooperatives.
In relation to the above, false and window-dressed financial statements from a dishonest management will not help much in this quest. Therefore, you must also watch out for unethical activities on the part of the management of your cooperative society. Ask questions from other members and probe into the activities of the association keenly.
In consonance with some like-minded members, request that the total contributions vis-à-vis loan balances of all cooperative members be published for the review of all members. Move for an extra-ordinary meeting of the members and jointly move for the appointment of an independent reviewer or an auditor for forensic investigation of the association’s books of accounts to determine the true financial state of the cooperative society.
On your part, if you’re knowledgeable in financial accounting, you can request for the bank statements of all the association’s bank accounts from the management. From these statements, you should be able to reconstruct any doctored financial statements of the association to their ‘true and fair view position’.
Be proactive, your investment in that cooperative society may be lost if no care is taken!