Fundamentals of Cooperatives Management

A cooperative is an autonomous association of persons who voluntarily unite to meet their common economic, social and cultural needs through a jointly owned and democratically controlled enterprise. Under the Cooperatives Act, 2074, it is based on cooperative values and principles, and its members are both owners and users.

Four types of cooperatives in Nepal:

• Savings and credit cooperatives (SACCOs)
• Agricultural cooperatives
• Dairy cooperatives
• Multipurpose cooperatives

Other types include consumer, health, tea, coffee, vegetable, energy, communication and labour cooperatives.

Types of meeting held by cooperatives:

• Annual general meeting (AGM): held once a year for all members.
• Special general meeting: called for urgent matters, such as amending by-laws.
• Board of directors (board committee) meeting: held regularly to manage operations.
• Account (audit) committee and other sub-committee meetings: for supervision and specific tasks such as loan and education.

A multipurpose cooperative is a cooperative that carries out more than one economic activity for its members at the same time. For example, it may provide savings and credit services, sell agricultural inputs and consumer goods, and market members' products, all under a single organisation.

Structure of cooperative regulation in Nepal:

• Constitution of Nepal: recognises cooperatives as one of the three pillars of the economy.
• Cooperatives Act, 2074, and Cooperative Rules, 2075: the main legal framework.
• Federal level: the Ministry (Department) of Cooperatives, the National Cooperative Regulatory Authority, and the National Cooperative Development Board.
• Provincial level: the provincial ministries and cooperative registrars.
• Local level: the local governments register and regulate cooperatives operating within their area.
• Cooperative directives issued by the regulator, and self-regulation through the union and federation.

Types of cooperative accounting ledger:

• General ledger: accounts for assets, liabilities, capital, income and expenses.
• Members' share ledger: share capital of each member.
• Savings (deposit) ledger: deposits and withdrawals of each member.
• Loan ledger: loan disbursements, interest and repayments by borrower.
• Subsidiary ledgers: such as the interest ledger, the fixed asset ledger and the debtors/creditors ledger.

Cooperatives must keep provisions against possible loan losses based on the classification of loans by overdue period. Under the directives, the usual rates are:

• Good (pass) loans: 1%
• Watchlist or substandard (overdue about 3 to 6 months): 25%
• Doubtful (6 to 12 months): 50%
• Loss (over 12 months): 100%

The provision is charged to profit and shown as a loan loss provision reserve. The exact rates and the periods follow the latest directive of the regulator.

Loan products of multipurpose cooperatives:

• Agriculture and livestock loans
• Small business and trade loans
• Housing and land loans
• Consumer or emergency loans
• Education and foreign employment loans
• Loans against members' savings or shares, and loans for seasonal needs

Agency conflict in cooperatives is a conflict of interest between the members (owners, the principals) and the board or the managers (agents) who run the cooperative on their behalf. It arises when the managers pursue personal benefits, such as favouring relatives in lending or excessive allowances, instead of the members' interest.

A personal guarantee in a cooperative is a written promise by a person (the guarantor), usually another member, to repay a member's loan if the borrower defaults. The cooperative can then recover from the guarantor's personal assets. It is used when the borrower offers no collateral, or as additional security.

The internationally accepted cooperative principles (International Cooperative Alliance, 1995 and reaffirmed in 2015) are:

1. Voluntary and open membership: open to all persons who can use the services and accept responsibilities, without discrimination of gender, social, racial, political or religious grounds.
2. Democratic member control: members actively set policies, and each has an equal vote (one member, one vote).
3. Member economic participation: members contribute equitably to the capital and control it democratically. Surplus is allocated to reserves, to members in proportion to transactions, and to other approved activities.
4. Autonomy and independence: cooperatives are self-help organisations controlled by members, even when they agree with governments or raise outside capital.
5. Education, training and information: cooperatives train members, elected representatives and employees, and inform the public.
6. Cooperation among cooperatives: they work together through local, national and international structures.
7. Concern for community: they work for the sustainable development of their communities.

History of the cooperative movement in Nepal

• Beginning (1950s): the first cooperative, the Bakhan Credit Cooperative Society, was started in Chitwan in 1956 (2013 BS) to resettle flood- and earthquake-affected families. The Department of Cooperatives was set up in 1953.
• Cooperative Act 1959 (2016 BS): the first law passed, and cooperatives expanded as an instrument of rural credit.
• 1960s-1970s: state-led development with the Land Reform programme, the Sajha (cooperative) institutions and the Agricultural Development Bank (1967); the Sajha Society Act, 1964 was enacted.
• 1980s: the Cooperative Societies Act and the Sajha movement continued but were heavily state controlled.
• 1992 (2048 BS) Cooperative Act: following restoration of democracy in 1990, the Act liberalised the sector, and cooperatives grew quickly in number.
• After 2000s: the National Cooperative Federation and various unions were established; savings and credit cooperatives expanded widely.
• Constitution of Nepal 2015: recognised cooperatives as one of the three pillars of the national economy.
• Cooperatives Act 2074 (2017): adopted in the federal structure, with the three-tier regulation (federal, provincial and local).

Major problems faced by cooperatives in Nepal:

• Weak governance: domination by a few directors, misuse of funds, and lack of transparency.
• Poor regulation and supervision: overlapping responsibilities between the federal, provincial and local levels, and weak monitoring.
• Misuse of deposits and loan defaults: high non-performing loans and fraud, with some cooperatives collapsing and members losing savings.
• Lack of capital and professional management: limited funds, untrained managers and board members.
• Political interference and unhealthy competition among cooperatives.
• Weak accounting and auditing, and failure to publish reports.
• Limited member participation and low awareness of cooperative principles.
• Inadequate use of technology and deposit insurance or protection.
• Deviation from objectives: operating like banks, with high interest rates and concentration on lending rather than production.

Prospects of cooperatives in Nepal

• Constitutional recognition as one of the three pillars of the economy offers legal and political support.
• Financial inclusion: they reach rural and remote areas where banks are absent, and can continue to be a main source of micro credit.
• Agriculture and rural development: a large share of the population depends on farming, so agricultural, dairy and processing cooperatives can raise productivity, market access and income.
• Employment and entrepreneurship: cooperatives can create jobs and support women and marginalised groups.
• Capital mobilisation: they collect domestic savings that can be used for local investment, including hydropower and tourism.
• Technology: digital systems and core software can improve transparency and efficiency.
• Stronger regulation: the new Act, the regulatory authority and the supervision of the federal, provincial and local levels can build trust.
• Remittance mobilisation: remittance income can be channelled to productive use.

With good governance, professional management and strict regulation, cooperatives can contribute greatly to inclusive growth.

Financial statements are important in cooperatives because they:

• Show the financial position and performance: the balance sheet, income statement, cash flow statement and notes show the cooperative's assets, liabilities, capital, income and surplus.
• Ensure transparency and accountability: the board and managers show how members' money is used, which reduces fraud and misuse.
• Help members and the AGM: members use them to approve the surplus distribution (dividend, patronage refund and reserves) and to elect leaders.
• Support decision-making: the management uses them for planning, budgeting, interest-rate setting and loan policy.
• Assist regulators and auditors: they are the basis for supervision, audit and PEARLS-type monitoring.
• Build trust for outside parties: banks, federations and other lenders use them to assess the creditworthiness of the cooperative.
• Meet legal requirements: the Act requires proper accounts and an annual audit.

Cooperative directives are the rules issued under the Cooperatives Act, 2074, by the regulatory authorities to regulate the daily operations of the cooperatives. The major ones are:

• Savings and credit directive: limits on lending to members (for example against single borrower limits and share capital), the interest spread, and the conditions for accepting deposits.
• Loan classification and loan loss provisioning directive: classifies loans by overdue period and requires provisioning (about 1% to 100%).
• Reserve and fund directive: requires allocation of the annual surplus to the reserve fund, cooperative promotion fund and other funds.
• Liquidity and capital adequacy directive: minimum liquid assets and capital requirements.
• Governance and ethics directive: qualifications and duties of board members, meeting and conflict-of-interest rules, and member rights.
• Accounting, audit and reporting directive: standard formats for accounts, audit and publication.
• Anti-money laundering and KYC directive: customer identification and reporting of suspicious transactions.
• Directive on merger, dissolution and supervision.

Federal structure of cooperatives in Nepal

Under the Constitution of Nepal 2015, cooperatives are a concurrent subject among federal, provincial and local governments, and the Cooperatives Act, 2074 sets a three-tier structure.

• Primary cooperatives: the base level, formed by individuals at the local level (ward, municipality) to serve members directly, e.g. SACCOs, dairy and agriculture cooperatives.
• Central cooperatives (unions): formed by at least 25 primary cooperatives of the same type at the district, provincial and national level; they provide services to the primaries.
• Federation: the national organisation of cooperatives (such as the National Cooperative Federation of Nepal), representing the whole movement, advocating policy and providing training and services.

Regulatory structure:

• Federal: the Ministry of Land Management, Cooperatives and Poverty Alleviation, the Department of Cooperatives, and the National Cooperative Regulatory Authority (for large cooperatives of national scope).
• Provincial: the provincial ministry and registrar for multi-municipality cooperatives in a province.
• Local: the municipality and rural municipality register, regulate and monitor cooperatives within their area.

Cooperative management

Cooperative management is the process of planning, organising, directing, controlling and coordinating the resources and activities of a cooperative, by elected representatives (board) and professional staff, to meet the economic and social needs of its members in line with the cooperative principles. Unlike a profit-seeking business, the aim is member service and democratic control. The main parts are:

• General assembly: the supreme body of members.
• Board of directors: formulates policy and supervises.
• Account/audit committee: supervises finances.
• Manager and staff: carry out day-to-day operations.

Types of cooperatives in Nepal

The Cooperatives Act classifies cooperatives by their objectives, and the common types are:

1. Savings and credit cooperatives: mobilise members' savings and lend to members. They are the largest in number.
2. Agricultural cooperatives: support farmers with inputs, credit, storage and marketing.
3. Dairy cooperatives: collect and market milk and run chilling and processing centres.
4. Multipurpose cooperatives: provide several services, such as savings and credit and the supply of consumer goods.
5. Consumer cooperatives: supply goods to members at reasonable prices (Sajha).
6. Tea, coffee, vegetable and fruit cooperatives: production and marketing of specific crops.
7. Health cooperatives: provide health services.
8. Energy cooperatives: for example, small hydropower or biogas.
9. Communication, labour, tourism and transport cooperatives: and other types formed for the needs of their members.

PEARLS is a set of financial ratios and a monitoring system developed by the World Council of Credit Unions (WOCCU) to evaluate the financial soundness of savings and credit cooperatives. The letters stand for Protection, Effective financial structure, Asset quality, Rates of return and costs, Liquidity, and Signs of growth.

P - Protection It measures whether the cooperative is protected against loan losses and against loss of members' savings. Typical ratios: provision for loan losses against delinquent loans (100% for loans overdue more than 12 months, 35% for 1-12 months) and the provision for investment losses. Importance: the cooperative can absorb losses without hurting members' deposits.

E - Effective financial structure It examines the composition of assets, liabilities and capital. Goals include: net loans at 70-80% of total assets, liquid investments up to 10-20%, savings deposits as 70-80% of assets, external credit up to 5% and institutional capital of at least 10%. Importance: a sound structure supports growth, earnings and safety, and reduces the dependence on outside funds.

A - Asset quality It measures the non-earning assets and the delinquent loans. Targets: loan delinquency below 5%, non-earning assets below 7% of total assets. Importance: weak asset quality reduces income and threatens solvency, so this ratio gives early warning of default problems.

R - Rates of return and costs It examines the yield on loans and investments, the cost of funds (savings interest and dividends) and operating expense ratios (for example, operating expenses below about 5% of average assets), and the gross margin. Importance: ensures that earnings are enough to pay competitive returns to members and build reserves.

L - Liquidity It measures the ability to meet withdrawals and loan demand. Typical target: liquid assets (less short-term payables) at least 15% of savings deposits. Importance: poor liquidity can cause a run on the cooperative and loss of trust.

S - Signs of growth It tracks the growth in membership, loans, savings, shares, institutional capital and total assets (compared with inflation). Importance: shows whether the cooperative is expanding in a healthy way and maintaining the real value of its capital.

Together, PEARLS provides a standard tool for management, members and regulators to monitor performance, and detect problems early.

Cooperatives are member-owned, democratically controlled organisations based on self-help and mutual aid. In Nepal they play an important role in the following areas.

Women empowerment

• Give women access to savings, credit and membership, and reduce their dependence on moneylenders and male family members.
• Provide leadership opportunities, since the Cooperative Act requires women's representation on the board; many women's cooperatives are run by women.
• Increase women's decision-making power in the household and community, and their self-confidence and skills.

Poverty reduction

• Offer affordable credit and savings services to the poor, rural and marginalised people who are excluded by banks.
• Create employment and income through agriculture, dairy, small industries and marketing.
• Provide inputs, fair prices and insurance, thereby raising income and living standard.

Resource mobilisation

• Collect small savings and share capital from members and convert them into productive local investment.
• Keep local capital within the community and reduce its flow to cities, supporting local development.
• Attract support from the government, NGOs and donors, and mobilise members' labour, land and skills.

Community awareness

• Conduct training and education on financial literacy, health, sanitation, environment and cooperative values.
• Promote collective action, social unity, democratic practice and transparency among members.
• Support schools, health camps and social welfare activities from their social funds.

Entrepreneurship development

• Provide start-up and working capital to small entrepreneurs, especially women and youth.
• Offer business training, technical advice and market linkage (collective marketing, processing, branding).
• Reduce the risk of starting a business through group guarantee and shared resources, which helps create micro and small enterprises.

Overall, cooperatives are a pillar of Nepal's three-pillar economy (public, private and cooperative) and promote inclusive and sustainable development.

Governance structure of cooperatives in Nepal

Under the Cooperative Act 2074 and the Constitution of Nepal, governance of a cooperative has the following layers.

1. General Assembly: the supreme body, made up of all members. It approves policies, budget, audit report and by-laws, elects the board and decides on matters such as dissolution or merger. Each member has one vote regardless of shares held.
2. Board of Directors (Management Committee): elected by the General Assembly (generally 5 to 11 members, with at least one-third women representation). It implements the decisions of the assembly, makes policies and plans, and is accountable to members.
3. Chairperson and office bearers: the chairperson leads the board and represents the cooperative; the vice-chairperson, secretary and treasurer perform assigned duties.
4. Accounts Committee (Supervision Committee): an elected committee that monitors the board, management and finance, and reports to the assembly.
5. Sub-committees: such as the credit, education and audit committees, and a manager and staff for day-to-day operations.
6. External structure: cooperatives are registered and supervised by the Department of Cooperatives and the Cooperative Registrar; they form unions (district, provincial) and a national federation (NCF), and the National Cooperative Regulatory Authority supervises savings and credit cooperatives.

Why regulation and supervision are essential

• Protects members' savings from misuse, fraud and mismanagement, which has caused collapses of several savings and credit cooperatives.
• Ensures good governance: transparency, accountability, regular elections, audits and compliance with law and cooperative principles.
• Maintains financial discipline: sets limits on loans, liquidity, capital adequacy and provisioning to reduce the risk of failure.
• Builds public trust and confidence, which attracts more savings and encourages growth.
• Prevents misuse of the cooperative name for illegal financial activity and protects small members' rights.
• Protects the financial system since cooperative failures can spread to the wider economy.
• Promotes sustainability and growth by ensuring professional management and a level playing field with other financial institutions.

(a) Main issues and member participation

Summary: Manakamana Multipurpose Cooperative, a new rural cooperative, provides savings and credit, agricultural support and small business finance, especially for women entrepreneurs. It has good potential, but is hindered by low financial literacy among members, weak loan monitoring and difficulty in complying with audit requirements. The executive committee wants to improve governance, financial management and community engagement so that the cooperative can survive in the long term.

Main issues: low financial literacy; poor loan monitoring (risk of default); weak compliance and audit; weak governance and member engagement.

Improving participation and trust (using cooperative principles):

• Voluntary and open membership, and democratic member control: regular general assemblies, free elections, and equal one-member-one-vote.
• Member economic participation: fair interest on savings, patronage refund and dividends.
• Autonomy and independence, and transparency: publish accounts, loan policy and decisions openly.
• Education, training and information: member orientation and capacity building.
• Concern for community: use of surplus for community and women's programmes.
• Honesty, accountability and openness (cooperative values) shown through clear rules and prompt responses to members' concerns.

(b) Strengthening loan repayment and reducing defaults

• Prepare a clear credit policy: assess borrowers (character, capacity, collateral), fix limits and purpose.
• Use group guarantee or social collateral, and take adequate security.
• Monitor use of loans by field visits and keep a computerised record with an early-warning system.
• Fix a flexible repayment schedule that matches the agricultural or business cash flow.
• Follow up quickly on overdue accounts (reminders, rescheduling, legal action) and make loan loss provisions.
• Offer incentives for timely repayment, linked insurance, and diversify the loan portfolio.
• Give business advice and training to borrowers.

(c) Cooperative education and training, and institutional support

• Education and training improve the skills of board members and staff in management, accounting, planning, risk control and governance, which lifts management capacity.
• For members, training on savings, budgeting, borrowing responsibly and use of loans raises financial literacy, repayment discipline and productive use of credit.
• It develops leaders, including women, and improves member participation and loyalty.
• Institutional support: the Department of Cooperatives, cooperative unions and federations, the Cooperative Training Centre, local government, NGOs and development partners can provide training, technical assistance, software, audit support, cheap funds and market links. Networking with unions also gives advice, benchmarking and sharing of good practice.

(d) Impact of the Cooperative Act 2074 and Rules 2075

• They provide the legal framework for registration, membership, structure and powers of the general assembly, board and committees.
• They set rules on capital, reserves, lending limits, accounts and audit, and the use of surplus, which encourages discipline and protects members.
• They require election, women's representation, regular meetings and reporting, so improving governance and transparency.
• They give regulators power to inspect, penalise, and, if needed, dissolve, which protects members but raises the compliance burden for small cooperatives.

Regulatory measures the cooperative should take: register and renew properly; follow by-laws and hold the general assembly and elections on time; keep proper books and have an annual audit by a qualified auditor; maintain the required reserve and liquidity; observe loan and deposit limits and provisioning; submit reports to the regulator; train officers on legal requirements; set up internal control and an audit/supervision committee. This will ensure compliance and sustainability.