Financial Weakness and Inadequate Capital

4. Financial Weakness and Inadequate Capital

A co-operative can serve its members only if it has adequate funds. Financial weakness — shortage of capital and poor financial health — is one of the most common and crippling challenges before the sector.

A co-operative's capital comes mainly from its own members: share capital, deposits and savings, together with reserves built out of surplus and loans from co-operative and other banks. Several factors keep this capital small and weak:

Causes of financial weakness:

• Low share capital. Most members are people of small means who can subscribe only small amounts, so the share capital base is thin.
• Limited return on capital. By the principle of member economic participation, return on capital is deliberately limited; this is correct in spirit but makes it harder to attract large investment.
• Over-dependence on borrowings and government help. Many societies rely heavily on outside loans and government aid rather than building their own capital, which leaves them fragile and dependent.
• Poor recovery of loans (mounting overdues). In credit societies especially, loans given out are not repaid on time. These growing overdues lock up the society's funds, so it cannot lend again or meet its own obligations — a very serious problem in the co-operative credit structure.
• Losses and eroded reserves. Inefficient or corrupt working leads to losses that eat into reserves, weakening the society further.

Consequences. A financially weak society cannot expand, cannot modernise, cannot offer competitive services, and in the worst case cannot even repay its depositors — shaking public confidence in the whole movement. …