Demutualization, Member Transactions and Financial Performance of Co- operatives in Kenya

Abstract

As a reaction to competitive pressures, co-operative enterprises have relaxed their residual claim restrictions resulting in the emergence of innovative organizational forms. Cooperatives have adopted the hybrid model of demutualization to adapt to these pressures. Demutualization alters member income rights, which stem from member transactions, resulting in re-assignment of the residual claim on income generated between stakeholders. This has an implication on firm performance and organization structure. A question that arises is whether co-operative ownership structure is a decisive determinant of financial performance. We therefore investigate the influence of demutualization on the relationship between member transactions and financial performance. Using the time-series, cross-section design, we analyzed data from holding co-operatives in Kenya spanning 20 years (1998-2017). Our findings indicate there is a negative and significant relationship between member transactions and financial performance of co-operatives in Kenya and that demutualization had a positive but not significant effect on this relationship. We conclude that as far as these organizations continue to pursue a double bottom line, soon there may be no relation between member reward and member transactions as envisioned in the co-operative finance principle. Recommendations include the establishment of a secondary market for co-operative securities to enable inter-co-operative share trade that adheres to the international co-operative identity principles.