COOPERATIVE DEVELOPMENT IN KENYA

AUGUSTUS MUTEMI*

Salient provisions of the 1996 Policy Framework Paper on Economic Reforms that are

pertinent to cooperative societies

The policy framework paper outlines in its introductory paragraph that its aim was to suggest

initiatives that would enable the government to reduce unemployment and poverty in the

country. As such, one of the things that the government was to do was to ensure that the

economy grew at a rate of 6% every year for1 several years until it stabilized. Furthermore, the

government was to ensure that most of social structures aimed at reducing poverty and

unemployment were targeted at the poor.

This paper will discuss the salient features of the reform paper that specifically target cooperative

societies as a way of minimizing state control and therefore make them more autonomous and

liberal. This would ensure that most of the bureaucracies that characterize state-controlled

organizations do not affect them.

To start with, paragraph 8 of the paper stated that the government had started a process of

privatizing over 211 state-owned corporations, a process that would see the government

divesting its holdings in over 100 firms among which were tea factories whose ownership would

then be vested to farmers2. Vesting ownership of tea factories to farmers instead of the state

would be an important step towards the right direction since farmers would then be free to form

*The author is a renowned researcher, currently finalizing training as a lawyer at The University
of Nairobi. See more of his writings at https://uonbi.academia.edu/MutemiMutemi/Papers
2
Kenya Economic Reforms for 1996-1998, Policy Framework Paper. Prepared by the Government of Kenya in
collaboration with the IMF and the World Bank
associations that would enable them fight poverty and also reduce unemployment. The

government would also reduce its holdings in more than six other major organizations for

example the Kenya Airways and in so doing increase individual members’ ownership in the

organizations.

The paper also stated that the government would embark on a mission that would see it creating

conducive environment for job creation. This would be done by liberalizing economic markets,

creating macroeconomic conditions suitable for trade and commerce, and eliminating corruption.

This, according to the paper, was to be done by ensuring that the government moved away from

direct participation in economic activities and instead providing a suitable environment for the

development of the private sector. This was also to be achieved by making use of strategies that

are environmentally friendly and which encourage labour using growth3.

In a nutshell, the policy paper had the effect of liberalizing the economic market by keeping the

economy free from government interference and instead opening it up for the private sector to

invest resources. The government was to reduce most of the tariffs so that members of the

private sector could invest without many restrictions. By opening up such sectors as maize

marketing and establishment of a competitive seed industry, members of the private sector would

feel free to engage in productive agricultural activities and afterwards form cooperatives. The

government would later deal with disputes by establishing industrial courts in major towns to

deal with disputes that arose as people interacted with each other in the market and work place.

The nature of cooperative movement in Kenya before 1996

3
Ibid

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In the years preceding 1996, cooperative movement in Kenya was fundamentally characterized

by close association with and control of the state. This could be attributed to the fact that the first

cooperative society in the country was established in 1908 by the colonial government and

therefore this historical background could have impacted largely on the cooperatives in the

country4. The colonial government was the sole decision maker and manager of everything that

happened in the country and therefore borrowing a lot from this background, cooperatives

inherited this state control even after the colonial government left the country in 1963.

Cooperative societies that were formed during the colonial era in Kenya were meant to serve the

interests of white settlers and not Africans. In fact, the resultant legislation was too draconian for

the ordinary African who was not even allowed to join them5. It therefore followed that unlike

the mainstream cooperative societies that exist in present Kenya and even in other countries,

cooperative societies of that time were formed by the government for the purpose of serving the

interests of white settlers.

At independence, the new government also viewed cooperatives as mechanisms for achieving its

ends rather than those of the members. This time round, the state sought to use co-operatives as

instruments for promoting economic development in the country, especially in the rural areas. It

had, therefore, to ensure the emergence of strong, viable and efficient co-operatives by directing

the formation and management of these organizations from above. This state-controlled

4
Delgado, C. C. (1997). Smallholder Diary under Transaction Costs in East Africa . World Development, Vol. 25,
No. 5, pp. 779-794.

5
Develtere P., H. E. (2005). The Emergence of Multilevel Governance in Kenya. LIRGIAD Project Working Paper
No.7. Catholic University of Leuven. (Available at www.hiva.be/docs/nl/).

3|Page
promotion of co-operative development was formalized by the introduction of a single legal

framework for all types of cooperatives in 1966 via The Co-operative Societies Act, Cap. 490.

With the formulation of the Co-operative Societies Rules in 1969 that stipulated the operational

procedures for all co-operatives, the law gave the Commissioner for Co-operative Development

overbearing powers in the registration and management of co-operatives (Develtere P., Hertogen

E. & Wanyama F., 2005). Besides giving the Commissioner power to register, amalgamate and

deregister co-operatives, he/she had to approve annual budgets of co-operatives; authorize

borrowing and expenditure; audit their accounts; monitor financial performance; and could even

replace elected co-operative societies’ officials by management commissions at his/her pleasure.

Since the commissioner was appointed by the appointed by the president, this made sure that the

state controlled all the affairs of the cooperative societies. State control was enhanced by

international donors to the cooperative movement who preferred to work through the

government. In the 1966 “Cooperatives (Developing Countries) Recommendation No. 127”, the

ILO called for governments to develop a comprehensive and planned cooperative development

strategy in which one central body would be the instrument for implementing a policy of aid and

encouragement to cooperatives. Subsequently, donors to the cooperative movement in Kenya

like the Nordic cooperative movements as well as the American and Canadian credit union

movements, linked up with the cooperative sector through the government’s ministry of

cooperative development.6

By the end of the 1980s, cooperative development in Kenya had been effectively arrested by the

state, such that these organizations could hardly survive without state and donor support. A

member-based, member-controlled and self-reliant co-operative movement guided by

6
Hedlund, H. (1992), Coffee, Co-operatives and Agriculture: An Anthropological
Study of a Coffee Co-operative in Kenya, Oxford University Press, Nairobi.

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internationally acclaimed cooperative principles and ideals had disappeared. Members’

participation and control had significantly reduced. As the country plunged into the era of

economic liberalization in the early 1990s, many observers and analysts feared that cooperatives

would not withstand the market competition as then constituted.

The nature of cooperative societies in Kenya after the Policy Framework Paper of1996

As stated earlier, the essence of the 1996 Policy Framework Paper on economic Development

was to liberalize the economy and make the private sector a key player in the economy of the

country. As such, government role was merely regulatory and facilitation. After the

promulgation of the policy paper, there arose a new dimension of viewing cooperative societies

not only in Kenya but the whole of Africa (Birchall, 2004).

The new economic environment required government withdrawal from the cooperative sector in

order to facilitate the growth of commercially autonomous and member-based cooperative

organizations. To this end, the government had to adopt a policy of liberalizing the cooperative

sector. Subsequently, the government published Sessional Paper No. 6 of 1997 on

“Cooperatives in a Liberalized Economic Environment” to provide the new policy

framework for the necessary reforms. The role of the government was redefined from controlling

to regulatory and facilitative in nature (Delgado, 1997). The main duties of the Ministry of

Cooperative Development were confined to (a) registration and liquidation of cooperative

societies; (b) enforcement of the Cooperative Societies Act; (c) formulation of cooperative

policy; (d) advisory and creation of a conducive environment for cooperative growth and

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development; (e) registration of cooperative audits; and (f) carrying out of inquiries,

investigations and inspections7.

This new policy obviously required significant changes in the legal framework of cooperatives.

Consequently, the 1966 Cooperative Societies Act was repealed and replaced by the Cooperative

Societies Act, No. 12 of 1997. Like Sessional Paper No. 6 of 1997, the new Cooperative

Societies Act served to reduce the involvement of the government in the day-to-day management

of cooperatives. A very liberal law, it granted cooperatives “internal self-rule” from the previous

state controls by transferring the management duties in cooperatives from the Commissioner for

Cooperative Development to the members through their duly elected management committees.

The effect of this was that the principles of cooperative societies like voluntary and open

membership; democratic member control; member economic participation; autonomy and

independence; education, training and information; cooperation among cooperatives; and

concern for community were formally incorporated in the policy.8

This was a new era in the development of cooperative societies because they were no longer

required to seek the permission of the Commissioner to invest, spend or borrow. They were now

free to borrow against part or the whole of their properties if their by-laws allowed, provided the

annual general meeting approved such borrowing. Like other business entities, co-operatives

were mandated to hire and fire graded staff without the Commissioner’s consent.

The immediate negative impacts of the liberalization of cooperative societies

Whereas cooperative movement liberalization market a new and welcome era in the development

of cooperative societies in the country contrary to the colonial state controlled cooperative

7
Manyara, M. K. (2003), The Development of Co-operative Law and Policy in Kenya,
Nairobi.
8
Manyara, M. K. (2004), Co-operative Law in Kenya, Nairobi

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societies, most of the cooperative societies were not ready for this new era and were therefore

got by surprise. This meant that they needed time to adjust to the new system and at the midst of

this adjustment was the loophole for them to commit the wrongs.9

The exit of the government as the main regulator and supervisor of cooperative societies left the

system without a regulatory mechanism to play the role that the government had previously

played. Consequently, the immediate impact on cooperatives was mainly negative. The newly

acquired freedom was dangerously abused by elected leaders to the detriment of many

cooperative societies. Cases of corruption; gross mismanagement by officials; theft of

cooperative resources; split of viable cooperatives into small uneconomic units; failure to

surrender members’ deposits to cooperatives (particularly SACCOs) by employers; failure to

hold elections in cooperatives; favouritism in hiring and dismissal of staff; refusal to vacate

office after being duly voted out by cooperative officials; conflict of interest among cooperative

officials; endless litigations; unauthorized cooperative investments; and illegal payments to the

management committees were increasingly reported in many cooperatives.

The re-emergence of government control and regulation

These negative impacts of liberalization of the cooperative movement were to be short-lived. The

general negative impact of liberalization on the majority of the cooperatives compelled the

government to intervene with a new legal framework. The Cooperative Societies Act of 1997

was amended through the Cooperative Societies (Amendment) Act of 2004.10 The main content

of the amended Act was to enforce state regulation of the cooperative movement through the

9
Owango, M., Lukuyu, B., Staal, S. J., Kenyanjui, M., Njubi, D. and Thorpe, W. (1998),
“Dairy Co-operatives and Policy Reform in Kenya: Effects of Livestock Service
and Milk Market Liberalization”, Food Policy, Vol.23, No.2, pp. 173-185.
10
Republic of Kenya (2004b), The Co-operative Societies Rules, 2004, Government
Printer, Nairobi.

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Commissioner for Cooperative Development. Though the independence of the Commissioner

from politics was improved by making him an appointee of the Public Service Commission of

Kenya rather than the Minister for Cooperative Development, his/her power over cooperatives

was increased (Kenya, 2004).

For instance, the Commissioner has to approve a list of auditors from which cooperatives can

appoint their auditors at the annual general meeting; he/she may convene a special general

meeting of a cooperative which he may chair, directing the matters to be discussed; the

Commissioner may suspend from duty any management committee member charged in a court

of law with an offence involving fraud or dishonesty pending the determination of the matter;

he/she can dissolve the management committee of a cooperative that, in his/her opinion, is not

performing its duties properly and appoint an interim committee for a period not exceeding

ninety days; the Commissioner can call for elections in any cooperative society; he/she can

attend meetings of cooperatives and require every cooperative to send to him/her at a proper

time, the notice and agenda for every meeting and all minutes and communications of the

meeting; and the Commissioner may also require that cooperatives update their bye-laws.

The new regulations were however not meant to reintroduce state control of cooperative

societies. They were introduced to guard against the mismanagement of cooperative societies as

a result of the liberalization movement of the 1990s which removed state control from

cooperative societies. The regulations limit state interference to registration of the societies,

creation of a cooperative society policy and the requisite legal framework necessary for the

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management and development of cooperative societies and advancement of the cooperative

movement.11

Registration of cooperatives continues to be the main role of the Commissioner for Cooperative

Development. The requirements and procedure for registering cooperatives have been spelt out

in the revised Cooperative Societies Rules of 2004, which also outline the operational procedures

of all cooperative societies in Kenya. Application for registration of a cooperative is made on a

prescribed form that is obtained from the Commissioner’s office in Nairobi. The application fee

is five hundred Kenya shillings while the registration fee is three thousand Kenya shillings.

These fees are generally affordable for cooperatives and the registration process is fair given that

applicants have the right to appeal against a refusal to register. The significance of registration

for pre-cooperatives is that the cooperative movement in Kenya was founded on the basis of

legislation that provides for the legal existence of cooperatives. Consequently, all cooperatives

are required to conform to the existing cooperative law in the country.

The successes of liberalization of cooperative societies from state control: The case of

Githunguri Dairy Farmers Cooperative Society

This paper has already noted that some cooperative societies were adversely affected by the

liberalization process that saw the state exit the regulation and supervision of cooperative

societies in the late 1990s. Other cooperative societies however took this as an advantage and

picked on a high gear to reach great heights. A case in point is the Githunguri Dairy Farmers

Cooperative Society which was formed in 1961 through state initiatives (Wanyama, 2007). Its

membership now stands at 12,000 from the initial 31. Its initial activity of collecting milk from

11
Mudibo, E.K. (2005), “Highlights of the SACCO movement and current trends in the
Kenya Union of Savings and Credit Co-operatives (KUSCCO)’, KUSCCO,
Nairobi.

9|Page
members to sell to Kenya Cooperative Creameries (KCC) has blossomed since the completion of

its own modern milk processing plant in 2004. It collects and processes about 80,000 litres of

milk daily, up from 25,000 litres in 1999. It has eighteen vehicles for transporting milk from 41

collection centres in Githunguri Division of Kiambu District to its plant in Githunguri town12.

The plant produces four main branded products that are sold in Nairobi: packed fresh milk,

yoghurt, ghee and butter. Besides this activity, the cooperative also provides productive services

to its members. These include artificial insemination, extension services and animal feeds in its

31 stores that straddle its area of operation. These services are made available to members on

credit that is recovered from the sale of their milk. These activities have seen tremendous

improvement in milk production by members, to which the cooperative has responded by

offering competitive prices and paying promptly for members’ produce to further motivate them

while at the same time buying all the milk. It sells some of the milk to other processors in

Nairobi (Wanyama, 2007). The turnover of the cooperative in 2005 was over one billion Kenya

shillings, with a share capital of over 100 million Kenya shillings.

The expansive activities of the cooperative are taken care of by a staff of about 300 employees

who are recruited on the basis of an employment policy. Whereas the lower level staff is

recruited from within the division, management staff is sought nationally and appointed on the

basis of professional qualifications. It is significant that unionsable employees have formed a

trade union, which has entered a collective bargaining agreement (CBA) with the cooperative.

This is increasingly enabling the cooperative to attract and retain staff compared with the era of

state control when there was no employment policy but the discretion of the Commissioner of

12
International Co-operative Alliance (ICA), (2002), Status of Agricultural Marketing
Co-operatives in Kenya, ICA-ROECSA, Nairobi

10 | P a g e
Cooperative Development.13 As already alluded to, the success of this cooperative was attributed

to the proper management system put in place by a management committee that took office only

in 1999.

From the foregoing, cooperative societies in Kenya have had the following advantages:

1. Easy to form:

The formation of a cooperative society is very simple as compared to the formation of any other

form of business organizations. Any ten adults can join together and form a cooperative society.

The procedure involves in the registration of a cooperative society is very simple and easy. No

legal formalities are required for the formation of cooperative society.

2. No obstruction for membership:

Unless and otherwise specifically debarred, the membership of cooperative society is open to

everybody. Nobody is obstructed to join on the basis of religion, caste, creed, sex and colour etc.

A person can become a member of a society at any time he likes and can leave the society when

he does not like to continue as member.

3. Limited liability:

In most cases, the liabilities of the members of the society are limited to the extent of capital

contributed by them. Hence, they are relieved from the fear of attachment of their private

property, in case of the society suffers financial losses.

4. Service motive:

13
Ibid

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In Cooperative society members are provided with better good and services at reasonable prices.

The society also provides financial help to its members at the concessional rates. It assists in

setting up production units and marketing of produces c small business houses so also small

farmers for their agricultural products.

5. Democratic management:

The cooperative society is managed by the elected members from and among themselves. Every

member has equal rights through its single vote but can take active part in' the formulation of the

policies of the society. Thus all members are equally important for the society.

6. Stability and continuity:

A cooperative society cannot be dissolved by the death insolvency, lunacy, and permanent

incapability of the members. Therefore, it has stable life are continues to exist for a longer

period. It has got separate legal existence. New members may join and old members may quit the

society but society continues to function unless are otherwise all members unanimously decided

to close the same.

7. Economic operations:

The operation carried on by the cooperative society economical due to the eliminations of

middlemen. The services of middlemen are provided by the members of the society with the

minimum cost. In the case of cooperative society, the recurring and non-recurring expenses are

very less. Further, the economies of scale-ma production or purchase, automatically reduces the

procurement price of the goods, thereby minimizes the selling price.

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8. Surplus shared by the members:

The society sells goods to its members on a nominal profit. In some cases, the society sells goods

to outsiders. This profit is utilized for meeting the day-to-day administration cost of the society.

The procedure for distribution of profit that some portion of the surplus is spent for the welfare

of the members, some portion kept reserve whereas the balance shared among the members as

dividend on the basis of these purchases.

9. State patronage:

Government provides special assistance to the societies to enable them to achieve their

objectives successfully. Therefore, the societies are given financial loans at lower rates.

Government also extends many types of subsidies to cooperative societies strengthening their

financial stability and sustainable growth in future.

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 Bibliography
Birchall, J. (2004). Co-operatives and the Millennium Development Goals. ILO.

Delgado, C. C. (1997). Smallholder Diary under Transaction Costs in East Africa . World

Development, Vol. 25, No. 5, pp. 779-794.

Develtere P., H. E. (2005). The Emergence of Multilevel Governance in Kenya. LIRGIAD

Project Working Paper No.7. Catholic University of Leuven. (Available at

www.hiva.be/docs/nl/).

Kenya, R. o. (2004). (2004a), The Co-operative Societies (Amendment) Act.

Wanyama, F. O. (2007). THE IMPACT OF LIBERALIZATION ON THE COOPERATIVE

MOVEMENT IN KENYA . School of Development and Strategic Studies, Maseno

University.

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