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Risk & limitations of investment in cooperatives

By Babajide Komolafe

Investment in cooperatives is not a bed of roses. It has its risk and limitations, and it is pertinent to have an idea of some of these risks and limitations.

Like in other forms of investment, you can lose your money investing in cooperative. How? The cooperative may invest in risky ventures that would collapse or the cooperative may be defrauded. For example, some cooperatives invest in shares when the stock market was booming. In fact, some provided money to their members to buy shares. This investment went down the drain when the market collapsed. A number of cooperatives never survived the crash.

Also, for cooperatives whose members are employees of a particular company, and their contributions are deducted from their salaries, there has been instances where the employer, though deducted contributions from their salaries, but never remit it to the cooperatives on time. This usually happens when the company is going through financial difficulties. Consequently, the company becomes heavily indebted to the cooperative. Though some of such companies do overcome the financial difficulty and repay the debt, a number of such companies do not survive. They collapse, and the cooperative and its members lose their money.

In the two instances above, the common factor, which is a consequent of the nature of cooperatives, is the issue of management of cooperatives. Though management is a major factor for the success of any business endeavour, the case of cooperatives is unique. They are owner managed, and thus the efficiency of the management is determined by the competence of the owners themselves. Given the fact that most members of cooperatives usually have very limited business acumen and competence, this makes management a major challenge for them. Thus inefficient management is a serious limitation that has occasioned the loss of investment in cooperatives.

Close to this, is the amount of capital available to a cooperative. It is usually small especially at the beginning and also when compared to other businesses. A quoted company like Cadbury has access to funds from various sources, which enables it to raise funds and embark on various lines and scale of businesses. Hence, is able to generate robust profitability and returns for shareholders.

This usually is not always the same for a cooperative, especially during the infancy stage. All that the cooperative has is usually the contributions of members, and this limits its ability to employ competent staff, and embark on some very lucrative business, which requires huge capital. This, in turn, constraints the income of the cooperative and returns to members.

Cooperatives are founded to render services to members. They are not usually driven by returns and profitability. The implication is that they are usually risk averse, and hence would avoid embarking on a risky business venture, no matter how lucrative it looks. Thus, if your investment objective is fantastic returns, cooperative will not be attractive to you.

In fact if you become a member, you will find yourself being critical of the management’s low motivation for returns. You may scheme your way to the board and become the leader. But your appetite for returns might lead the cooperative into very risky businesses that may result into huge losses and eventual collapse of the group.


Disclaimer

Comments expressed here do not reflect the opinions of vanguard newspapers or any employee thereof.