The Dividend Puzzle in Kenyan Saving And Credit Cooperative Societies(SACCOs)

The payment of dividends by Savings and Credit Cooperative Societies (SACCOs) in Kenya is an intriguing phenomenon that reflects a mix of economic theories, member expectations, and regulatory frameworks. SACCOs in Kenya have consistently demonstrated the importance of dividends as a mechanism to reward member contributions and foster loyalty. Data from the SACCO Societies Regulatory Authority (SASRA) highlights a consistent trend of dividend payouts among licensed SACCOs, with some leading institutions disbursing returns as high as 15% of members’ deposits annually. For instance, in 2023, Kenyan SACCOs collectively paid out dividends amounting to billions of shillings, reflecting their profitability and commitment to member satisfaction.

Despite these impressive figures, questions persist about the sustainability and efficiency of such payouts, especially given the trade-offs between immediate distributions and reinvestment in growth initiatives. The "dividend puzzle," first coined by Fischer Black, questions why companies (or SACCOs, in this context) pay dividends despite alternative, potentially more efficient ways of distributing value to shareholders or members. In this article, I explore the dividend puzzle concerning SACCOs in Kenya, leveraging dividend theories and a critical analysis of the advantages and disadvantages of dividend payouts.

Dividend Theories and Their Application to SACCOs

1. The Bird-in-the-Hand Theory: This theory, proposed by Myron Gordon and John Lintner, suggests that investors prefer the certainty of dividend payments over the potential capital gains from retained earnings. In the context of Kenyan SACCOs, members often view dividends as a tangible return on their investments and contributions. Given that SACCO members are typically drawn from middle- to low-income brackets, the predictability and immediacy of dividend payouts align with their financial priorities.
2. Modigliani-Miller Dividend Irrelevance Theory: Franco Modigliani and Merton Miller posited that in perfect capital markets, dividend policies do not affect the value of a firm. However, SACCOs operate in a less-than-perfect market influenced by taxation, transaction costs, and member behavior. For instance, dividends may be viewed as a signal of financial health and sound management, thus affecting member trust and potential capital contributions.
3. Signaling Theory: According to this theory, dividends serve as a signal to the market about a firm's financial stability and prospects. In Kenyan SACCOs, consistent dividend payouts are often interpreted as evidence of robust financial management and profitability, which can attract new members and retain existing ones.
4. Agency Theory: Agency theory addresses the potential conflicts between managers and shareholders. In SACCOs, where members are both contributors and beneficiaries, dividend payouts can mitigate agency problems by ensuring that excess funds are returned to members rather than being potentially mismanaged.

Advantages of Dividend Payouts for SACCOs

1. Member Satisfaction and Loyalty: Regular dividend payments enhance member trust and loyalty. For SACCO members, particularly those from lower-income brackets, dividends represent a tangible and immediate reward for their contributions. This fosters a deeper sense of ownership and participation, motivating members to maintain their savings and engagement with the SACCO. Over time, this loyalty can translate into a more stable membership base and consistent capital inflow.
2. Signal of Financial Stability: A history of consistent dividend payouts serves as a public demonstration of SACCO’s financial health and managerial competence. Members and potential contributors often interpret such payouts as proof of effective financial management and profitability. This signaling effect can attract new members who are looking for reliable institutions to save with, thereby strengthening SACCO’s financial base.
3. Encourages Savings and Participation: Dividend payouts act as an incentive for members to increase their savings. The higher the contributions, the larger the dividends members are likely to receive. This encourages members to save more diligently, leading to an expanded capital base for the SACCO. Additionally, higher member participation fosters a collective commitment to the SACCO’s growth and success.
4. Regulatory Compliance: In Kenya, SACCOs are governed by the SACCO Societies Regulatory Authority (SASRA), which sets stringent financial standards. Dividend payouts are often seen as a reflection of compliance with these standards, demonstrating that the SACCO maintains adequate reserves, meets liquidity requirements, and operates within the bounds of financial prudence. This compliance builds credibility with members and regulators alike, ensuring sustained operational stability.

Disadvantages of Dividend Payouts for SACCOs

1. Reduced Retained Earnings: Paying out dividends reduces the amount of capital that can be retained for reinvestment or expansion. For SACCOs, this means fewer funds to develop new financial products, enhance technological systems, or expand outreach programs. Over time, this could lead to stagnation, making it difficult for SACCO to compete in an increasingly dynamic financial sector. Additionally, the reduced retained earnings can weaken SACCO’s resilience against unexpected financial shocks.
2. Potential Cash Flow Strain: SACCOs prioritizing high dividend payouts might face liquidity challenges, especially during economic downturns or periods of high loan defaults. Cash flow strain can hinder the SACCO’s ability to meet operational costs, offer loans to members, or comply with regulatory reserve requirements. This could exacerbate financial instability, creating a vicious cycle of reduced member confidence and declining capital contributions..
3. Member Expectations: Consistent dividend payouts can create unrealistic member expectations. Over time, members may come to view dividends as guaranteed, rather than contingent on the SACCO’s financial performance. If SACCO encounters financial difficulties and is unable to pay dividends, this could lead to dissatisfaction, reduced member engagement, and even withdrawals. Managing these expectations requires clear communication and education on the factors influencing dividend policies.
4. Opportunity Cost: Funds allocated for dividends could be redirected toward other productive ventures. For instance, SACCOs could use these funds to develop innovative financial products tailored to member needs, invest in digital platforms to enhance service delivery or expand their geographical footprint to reach underserved populations. By focusing on short-term payouts, SACCOs might miss opportunities for long-term growth and member value creation.

The Balancing Act: Optimal Dividend Policy

For SACCOs in Kenya, crafting an optimal dividend policy requires balancing immediate member benefits with long-term sustainability. Key considerations include:

1. Regulatory Requirements: SACCOs must comply with SASRA’s stipulations, including maintaining sufficient reserves and ensuring liquidity. These regulatory frameworks ensure that SACCOs remain financially sound and capable of meeting their obligations to members. Adhering to such requirements safeguards against excessive payouts that might compromise operational stability.
2. Member Preferences: Understanding the demographic and financial needs of members is crucial. For example, SACCOs serving rural communities may prioritise higher dividends to meet the immediate cash needs of members who rely heavily on such payouts for daily expenses. Conversely, urban SACCOs might focus on retaining more earnings to cater to members interested in long-term growth and innovative financial solutions.
3. Financial Performance: Dividend policies must align with SACCO’s profitability and cash flow position. A performance-linked dividend policy, where payouts fluctuate based on SACCO’s earnings, can help manage member expectations while preserving financial health. Such an approach provides transparency and ensures that dividends are only distributed when financially feasible.
4. Strategic Goals: SACCOs with growth ambitions may retain a higher proportion of earnings to reinvest in technology, infrastructure, or new products. For instance, investing in digital platforms can improve service delivery, enhance member experiences, and attract tech-savvy younger members. While this might result in lower dividends in the short term, the long-term benefits of a stronger, more competitive SACCO can far outweigh the immediate trade-offs.

Conclusion

The dividend puzzle in Kenyan SACCOs underscores the complexity of financial decision-making in cooperative societies. Dividends play a dual role: they enhance member satisfaction and signal financial stability but also pose challenges such as reduced retained earnings and potential liquidity strains. SACCOs must navigate these dynamics carefully by leveraging dividend theories, regulatory guidance, and member engagement.

A well-balanced dividend policy tailored to the SACCO's financial position, member needs, and strategic aspirations is essential. While prioritizing immediate payouts may build short-term trust, a forward-thinking approach that emphasizes sustainable growth and innovation will secure SACCO’s long-term resilience and competitiveness. Ultimately, SACCOs that strike this balance are best positioned to thrive in Kenya’s evolving financial landscape.