How Sacco dividends and rebates work

Have you ever wondered how Sacco’s dividends and rebates operate? Let us break it down together.

Dividends and Rebates are the returns you get as a Sacco member. They are paid out after an annual general meeting (AGM), which is held at different times depending on the Sacco, and are typically predetermined for the year based on the quantity of your investment.

But before we jump into it, let us take a trip down memory lane.

In the pre-independence era, Saccos began as farmer-based cooperatives such as the Coffee Union and KCC. Many others were established upon Kenya’s independence, which paved the way for the 1966 founding of the Cooperative Bank of Kenya.

Today, there are over 300 registered in Kenya spanning various sectors of the economy. While most are tied directly to a sector, many allow membership to anyone seeking to invest in them.

I’m sure you’re wondering how Saccos generate income, and these are some of the ways:

Interest on loans: They provide loans at a lower interest rate than commercial banks, and the interest on these loans helps them make money.

Penalties for failure to comply: They penalise members who don’t fulfil their financial commitments.

Investment in low-risk ventures: To diversify their sources of income, they make investments in real estate and government securities.

Fees for services: They charge membership or subscriptions, and other services that are essential to their business.

When you join a Sacco, you purchase shares, which are known as share capital, and you make regular monthly savings, both of which will affect your dividend and rebate earnings, respectively. These earnings come from the money that a Sacco makes. The money left after Sacco expenses are covered is allocated to members as dividends and rebates, based on their investment.

So, what’s the difference between dividends and rebates?

Annual dividends are based on your share capital in the Sacco. Share capital is a long-term non-withdrawable investment. Depending on the Sacco’s financial performance, you receive dividends on the share capital at a rate, typically, of between 5 per cent and 15 per cent.

The dividends are calculated by multiplying a member’s total number of shares by the dividend rate approved at the AGM minus a 5 per cent withholding tax. For instance, if a member has KSh100,000 worth of shares and the approved dividend rate is 10 per cent, the dividend they get is KSh9,500.

On the other hand, your savings earn interest and this is what is known as rebates. These returns are paid at a rate that is declared during the AGM and act as an incentive for people to keep increasing their savings.

The calculation for rebates is different from that of dividends. For most Saccos, rebates are calculated based on the member’s average deposit balance during the financial year.

Let’s use five scenarios where members contribute KSh120,000 that year, and the Sacco has declared a 10% rebate on deposits.

Scenario 1: Existing member with a starting balance of KSh120,000 (made the previous year.) At the end of the year after contributing Sh10,000 a month, this member will have deposited KSh240,000. The Sacco will start by calculating the average balance by adding up all the monthly balances and dividing them by 12. This gives us KSh185,000. They then apply the rebate rate, and this member’s rebates for the year are KSh18,500, which is also subject to the 5 per cent withholding tax.

Scenario 2: New member whose starting balance is zero at the beginning of the year, who has KSh120,000 at the end of the year. The first step is to calculate the average balance: KSh780,000 divided by 12 equals KSh65,000. Applying the rebate rate, this member gets a rebate of KSh6,500 before tax.

Scenario 3: Existing member with a starting balance of KSh120,000 (made the previous year) who, instead of contributing monthly, decided to pay a lump sum for the year in November. This member will have deposited KSh240,000. To calculate his rebate, the Sacco gets the total of balances by multiplying the KSh120,000 by 10 (Jan to Oct) plus KSh240,000 by 2 (Nov and Dec). The Average balance in this case is KSh140,000, and applying the 10 per cent, the member gets a KSh140,000 rebate before tax.

Scenario 4: A new member makes a lump sum of KSh120,000 in January and doesn’t make any other contribution in the year. Their total balance is KSh1,440,00 and the average becomes KSh120,000, making their rebate KSh12,000 before tax.

Scenario 5: A new member fails to make any contribution until November when they make a lump sum of KSh120,000. Their sum of balances would be KSh240,000, giving them a rebate of KSh2,000.

Even though each scenario saved KSh120,000, the rebates differ dramatically. The key lesson is that the longer your money stays in the Sacco during the year, the higher your rebate.

Your dividends and rebates are usually available for withdrawal after the AGM. However, most Saccos encourage members to reinvest their earnings, sometimes with a plough-back incentive of 1 to 3 per cent. Members who do this end up increasing their savings and look at the possibility of higher earnings the following year.

So, what can affect your Sacco earnings?

1. Economic Conditions: Sacco earnings and dividend rates may be impacted by Kenya’s GDP growth, inflation, and interest rates. They contribute about 30% of Kenya’s GDP and are crucial to the nation’s economic development and poverty alleviation.

2. Share Capital (Your Shareholding): The dividends paid are determined by the number of shares you own, meaning members with higher share capital earn more.

3. Operational Expenses: After a Sacco deducts its operational costs, the remaining surplus is what gets shared as dividends and rebates.

To ensure you maximise on your returns, you can: Keep or grow your investment, participate in Sacco activities and make sure loan payments are made on time to indirectly boost profitability, and lastly, to learn about dividend trends and the Sacco’s financial situation, regularly review annual reports.