Surplus distribution and financing sources in Maltese co-operatives : an evaluation

Abstract

The main objective of the study was to analyse the situation in local co-operatives regarding surplus distribution and financing, in particular to identify the financing sources and surplus distribution tools used in local co-operatives, to assess the awareness in the movement about each, to identify the key players and factors involved in the decision and finally, to examine the adequacy of financing. Apart from the review of literature, research included data collected from the cooperatives' financial statements, semi-structured interviews with twelve co-operative representatives and with five local experts in the field, and an in-depth discussion with a well-known international co-operative expert, Profs. H. Munkner. The mostly used financing sources were, to a large extent short-term finance, mainly creditors, and undistributed surplus. Both sources are relatively the cheapest and most convenient, in particularly in terms of risk, security and repayment terms. To a lesser extent, statutory reserve funds and share capital were only moderately used, while all other financing sources, especially borrowed capital, are sparsely used or not used at all. As to surplus distribution tools, in general, their use is very limited with regards to dividends and patronage refund. Bonus shares and bonus certificates were practically inexistent. It seems that the policy adopted by most local co-operatives is to retain all or most of the surplus, in order to help in financing their co-operative. The widespread and continuous use of this option, unless members enjoy other tangible benefits from the cooperative, may have negative implications on competitiveness, member promotion and economic participation, and co-operative development. In part, this study attributes these problems to the low level of awareness and knowledge on financing and surplus distribution in the movement, lack of professional management in local co-operatives, the absence of long-term plans and entrepreneurial vision. In conclusion, although most local co-operatives seem to have adequate funds to finance current operations, the study highlighted the need for local co-operatives to create more stable and permanent capital to finance long-term asset investment necessary for future growth. Finally, the study makes a number of inter-related recommendations directed at increasing members' participation in financing; increasing members' transactions or business with the co-operative; making better use of specific reserve funds, bank facilities and cooperation between co-operatives; encouraging better use of surplus distribution and finally, stressing the need for more education, professional management and support.