CHAPTER FOUR

THE LEGAL FRAMEWORK OF THE CO-OPERATIVE MOVEMENT IN

KENYA

Learning Objectives
By the end of this chapter the learner should be able to:
i) Trace the development of the cooperative societies legal framework since 1966
ii) Discuss the role of government in co-operative development
iii) Explain the role of co-operatives in social economic development
iv) Explain the benefits of forming co-operative organizations

4.0 Introduction
The legal framework of the co-operative movement in Kenya can be trace from
Cap. 490 of the Laws of Kenya, of 1966, Co-operative Societies Act, No. 12 of 1997and
Co-operative Societies Act, No. 12 of 1997 as amended in 2004 which is the current law
under which cooperatives operate in Kenya.

4.1 Cap. 490 of the Laws of Kenya, of 1966

The Co-operative movement in Kenya was governed by the Co-operative
Societies Act (Cap. 490 of the Laws of Kenya, of 1966) which came into force on 31 st
December, 1966 and as revised in 1972. Kenya’s economy was state-controlled and
regulated; a position which was quite understandable given the country’s level and state
of development and the government’s commitment to fast socio-economic development
using all available channels.
One of the major concerns of the government during the 60s and even today has
been how to inject developmental impetus within the rural areas, especially in the
agricultural sector where the majority of the farmers are at best at subsistence level and at
worst, peasants.
Some of the provisions of Cap 490, and the rules made thereunder, however run
counter to co-operative principles. For example, under section 9, the Commissioner may
require Primary Societies to join and form co-operative unions or a primary society to
join a co-operative union. And such an action is founded on what the commissioner
considers desirable for the efficient functioning of the co-operative movement. Such
powers deprived the societies and their members of their freedom to co-operate with
others of their own choice, which was inconsistent with the co-operative principle of co-
operation among cooperatives.
Some of the highlights of Cap.490, 1966 include:
i) Society may enter into contracts with their members to dispose of all or part
of their agricultural produce section 30(1).
ii) Penalty for violation of the societies’ by laws is Ksh. 500.00.
iii) Societies have first charge over the assets of indebted members
iv) The monopoly enjoyed compelling non members of a co-operative society
to sell through the society, if such society controls 60% of a certain produce
ensured a captive market.
v) The charge over the assets for the members lasted for one year
vi) If the societies were to charge their property, they had to seek the approval
of the Commissioner
vii) Societies are supposed to send Annual returns to the Commissioner (Section
24)
viii) The committee members’ duties were contained in the co-operative societies
rules 1969 i.e. Rule 34 (6).
ix) Before charging the societies properties, the Commissioner’s consent must
be sought and obtained first
x) Under Section 77 (1) the Commissioner had power to impose surcharge.
94.
xi) All Co-operative disputes were supposed to be referred to the Commissioner
for arbitration under section 80(1).
xii) After an inquiry under Section 61 of the Act, if the Commissioner “is
satisfied.” he may remove the committee from office and replace it with a
Commission to run the society. This had been abused on many occasions
e.g. people with no co-operative background have often been appointed to
run societies and their performance has been very poor
 xiii) It is the duty of the Commissioner to approve salaries, honoraria of
societies’ officers.
xiv) Societies can only employ graded staff with the Commissioner’s consent.
xv) Under the Act and Rules, the Commissioner had absolute powers in the day
to day running of the affairs of the registered co-operative societies.
xvi) Under this Act, the co-operative principles were not enumerated.

4.2 Co-operative Societies Act, No. 12 of 1997

Then came the 1992 tide of economic liberalization and the bottom of all that the
government had done, and was doing for the co-operative sector, fell off. That was the
beginning of the pressure leading to the need for revision of the legislation to put it in
harmony with the market economy and privatization.
It is generally agreed that the major problems with Cap. 490 hinged on its excessive
regulatory powers and controls over the co-operative movement
In 1995, as the Co-operative Policy was being formulated in Kenya, another study
was going regarding the Co-operative Societies Act, Cap. 490 (1966). This study on the
Co-operative Legislation in Kenya, was commissioned by the then Ministry of Co-
operative Development, Government of Kenya with the objective of reviewing and
analyzing the Co-operative Societies Act, (Cap. 490) of the Laws of Kenya and making
the necessary revisions that would bring the Act in line with the economic liberalization
principles, and provide for independent, member-controlled cooperative movement in
Kenya.
This resulted in Co-operative Societies Act, No. 12 of 1997 some of the highlights of
this Act included:
i) Society may enter into contracts with their members to dispose of all or part of
their agricultural produce section 30(1).
ii) The penalty for violation of the societies’ by laws was Ksh. 5000.00.
iii) Societies have first charge over the assets of indebted members
iv) The monopoly enjoyed compelling non members of a co-operative society to sell
through the society, if such society controls 60% of a certain produce was
removed.
 v) The first charge over the assets for the members to last or subsist for such period
as the loan remains unpaid.
vi) Societies free to charge the whole or part of their properties if their by-laws allow
them to do so, provided the annual general meeting allows.
vii) Societies free to get their own auditors provided that such auditors are
professionally qualified. The audit under Section 25(1) must be prepared in
accordance with generally accepted accounting standards.
viii) The Act introduced a Chapter VII— Management of Cooperative societies
Section 2 7(6) which, requires the committee to be prudent and diligent in their
operations and comply with the Act, rules, by-laws and the directions of the
general meeting. Failure to do so will render the committee jointly and severally
liable for the losses experienced through their negligent acts. Committee members
are therefore agents and should act as such under the principles of the law of
agency and good corporate governance principles.
ix) The Commissioner had power to compel societies to amalgamate; The Registrar
does not have such dictatorial powers.
x) Societies may charge the whole or part of their property if their bylaws approve
and subject to a resolution of the general meeting.
xi) The Registrar may now only inquire into the conduct of a person who has
committed a surchargeable act and report his findings and recommendations to
the annual general meeting who will take action accordingly.
xii) Registrar may carry out an inquiry and then table his findings and
recommendations to the annual general meeting who will take any action they
deem appropriate.
xiii) Under section 89, the society may pay its officers or members such honorarium,
salary, commissions or other payment, as the society may resolve at a general
meeting.
xiv) Like other business entities, societies have the power to hire and fire according to
their by-laws.
xv) The penalty for violation of the provisions of the Act was Ksh. 10,000.00
xvi) The Act empowers the members to be responsible for their own registered co-
operative societies. They should, through their elected committees run their
societies in accordance the internationally accepted co-operative principles i.e.
open and voluntary membership, democratic member control, economic member
participation, autonomy and independence, education, training and information,
co-operation among co-operatives and concern for the community in general.
(Section 4).
xvii) The Act gave a new relationship between societies and the government. The
Commissioner under Section (3) is only responsible for cooperative development
and growth.

4.3 Co-operative Societies Act, No. 12 of 1997 as amended in 2004

Co-operative Societies Act, No. 12 of 1997 was amended in 2004 and is now the
current law under which cooperatives operate in Kenya. Download the Co-operative
Societies Act (Amended), 2004 from the internet and read it.

4.4 Role of Cooperatives in Social Economic Development

i) Co-operatives serve as a means of:
ii) Improving the economic, social and cultural situation of persons of limited
resources and opportunities as well as encouraging their spirit of initiative;
iii) Increasing personal and national capital resources by the encouragement of
thrift, by eliminating usury and sound use of credit;
iv) Contributing to the economy an increased measure of democratic control of
economic activity and of equitable distribution of surplus;
v) Increasing national income, export revenues and employment by a fuller
utilization of resources, for instance in the implementation of systems of
agrarian reform and of land settlement aimed at bringing fresh areas into
productive use and in the development of modern industries, preferably
scattered, processing raw materials;
vi) Improving social conditions and supplementing social services in such fields as
housing and where appropriate health, education and communication;
 vii) Helping to raise the level of general and technical knowledge of their members

4.5 Role of Government in Cooperative Development

i) Formulation and implementation policies under which co-operatives would
receive aid and encouragement, of an economic, financial, technical, legislative
or other character without affecting their independence
ii) Ensure that in elaborating such a policy, regard should be made to economic
and social conditions, to available resources and to the role which co-operatives
can play in the development of the country
iii) Ensure that the policy was integrated in development plans in so far as this is
consistent with the essential features of co-operatives
iv) Keep the policy under review and adopted to change in social and economic
needs and to technological progress
v) Ensure that the existing co-operatives should be associated with the formulation,
and where possible, application of the policy
vi) Advise the co-operative movement to seek collaboration in the formulation and,
where appropriate, application of the policy, of organizations with common
objectives
vii) Associate co-operatives on the same basis
viii) Ensure measures are taken to disseminate knowledge of the principles, methods,
possibilities and limitations of co-operatives as widely as possible among the
peoples.
ix) Ensure that co-operatives are subject to a form of supervision designed to
ensure that they carry on their activities in conformity with the objects for which
they were established and in accordance with the law.
x) Ensure that supervision should preferably be the responsibility of a federation of
co-operatives or of the competent authority.
xi) The adoption of special measures should be encouraged to enable cooperatives,
as enterprises and organizations inspired by solidarity, to respond to their
members’ needs and the needs of society, including those of disadvantaged
groups in order to achieve their social inclusion.
 xii) Establish an institutional framework with the purpose of allowing for the
registration of co-operatives in as rapid, simple, affordable and efficient a
manner as possible.
xiii) Promote policies aimed at allowing the creation of appropriate reserves, part of
which at least could be indivisible, and solidarity funds within co-operatives;
xiv) Provide for the adoption of measures for the oversight of co-operatives, on
terms appropriate to their nature and functions, which respect their autonomy,
and are in accordance with national law and practice, and which are no less
favorable than those applicable to other forms of enterprise and social
organizations;
xv) Encourage the development of co-operatives as autonomous and self- managed
enterprises, particularly in areas where co-operatives have an important role to
play or provide services that are not otherwise provided.
xvi) Develop the technical and vocational skills, entrepreneurial and managerial
abilities, knowledge of business potential, and general economic and social
policy skills, of members, workers and managers, and improve their access to
information and communication technologies;
xvii) Promote education and training in co-operative principles and practices, at all
appropriate levels of the national education and training systems, and in the
wider society;
xviii) Facilitate access of co-operatives to credit;
xix) Facilitate access of co-operative to markets;
xx) Promote the dissemination of information on co-operatives;

4.6 Benefits of Forming Co-operative Organizations

Co-operatives as vehicles for socio-economic development contribute to economic
growth and development in various ways. The major benefits or advantages that are
derived from this association include inter alia;
i) Collection, transportation, processing and marketing of agricultural produce;
Mobilization of savings and channeling the funds to individual members for
specific development projects;
 ii) Support to agricultural production through distribution of farm
inputs;
iii) Dissemination of applied technology of members;
iv) Provision of credit to members for defraying urgent
expenses such as school fees, funerals, hospital bills etc. at
affordable costs;
v) Assisting in income distribution by participation through
enabling large sections of population to engage in various
income generating economic activities;
vi) Creating employment directly through engagements for
various cadre of staff and more importantly, self
employment as farmers and artisans;
vii) A co-operative is an institutional framework through which:
a) Otherwise small economic surplus can be harnessed
by tapping economies of scale
b) Poverty can be alleviated by planning, organizing,
implementing and managing income generating
economic activities
c) Agricultural producers can reap maximum benefits
out of their produce by eliminating middlemen
d) Development funds are channeled to individual members
e) Members can be educated on economic and social
issues affecting them including HIV/AIDS and
SARS
f) Wealth and capital can be created and owned
jointly by large groups of low income earners
g) The national economy can be indigenized as
cooperative members tend to be largely the
indigenous people.
h) Social control mechanisms become an acceptable
substitute for physical assets as collateral for loans.