Consumers Association of Penang

Giving voice to the little people...since 1970

Co-ops heading for trouble again?

5.9 Million Members and RM38 Billion Assets in Malaysian Cooperatives

Cooperatives have been in the country since 1922. In 2006 we had about 5,000 cooperatives with 5.9 million members and total assets of RM38.3 billion. That is a lot of assets and a lot of people involved, both of which give rise to concerns about the cooperative movement.

Firstly, are the cooperatives heading for trouble again? The Malaysian cooperative movement has had a long scandalous history of mismanagement, criminal breach of trust and fraud.

We are troubled by news reports about alleged hanky panky going on in Angkatan Koperasi Kebangsaan Malaysia (ANGKASA), the country’s apex cooperative.

Also worrisome is that the Malay Officers Cooperative Credit and Investment Society (MOCCIS), one of the country’s oldest cooperatives, was found to be insolvent in 2008. Then there are the complaints that we have received against other cooperatives.

Secondly, many cooperatives are pauperising their members instead of improving their lives. Members who are mainly from the working class end up with hardly any money left after loan deductions are made from their salaries.

The problems associated with cooperatives are not new. However, the Government and many cooperatives do not seem to have learned from the lessons of their past mistakes. How bad are the problems faced by cooperatives and what needs to be done?

Trouble Brewing?

The history of cooperatives has been littered with stories of cooperatives that got into trouble and of subsequent bailouts by the Government. In the 1980s there were the scandals involving the 24 deposit- taking cooperatives and the Central Cooperative Bank. In the 1970s, it was Bank Rakyat.
In 2005, the then Deputy Entrepreneur Development and Cooperatives Minister Datuk Khamsiyah Yeop revealed that the Government had to allocate RM1 billion to bail out cooperatives in trouble (NST, 27.10.05).

Are taxpayers going to have to bail out the cooperatives again? The signs are that all is not well with the cooperative movement. For example :

-- The National Rubber Smallholders Co-operative (Narsco) is said to be in debt of more than RM20 million and finding it difficult to meet its obligations. Narsco chairman had blamed the mounting debts on the previous management’s lack of accounting knowledge, questionable decisions and fluctuating rubber prices (Sun, 29.7.09).

-- A hawker lodged a police report claiming that he was duped of RM20,000 by a Kuala Lumpur based cooperative which operates a seaweed planting business in Sabah. He became suspicious after the cooperative failed to pay him the guaranteed returns which was about RM5,000 every 3 months for 30 years. He invested RM25,000 and received a RM5,000 “dividend” and after that there was no more news (Star, 23.7.09).

-- News reports indicate that there is hanky panky going on at Angkatan Koperasi Kebangsaan Malaysia (ANGKASA). This apex cooperative handles RM7.3 billion a year through direct deduction of salaries for loan payments.

Its former President has voiced his disappointment that investigations into the alleged misappropriation of funds involving transactions worth RM20 million a day had yet to be completed. According to him a member who applies for a RM60,000 loan only gets RM30,000 to RM40,000. He questioned where the rest of the money has gone to (Bernama, 8.1.09).

A cooperative consultant has also raised concern about the goings on in ANGKASA and questioned the legitimacy of its latest annual general meeting (Malaysiakini, 6.3.09).

-- In December 2008, the Government froze the accounts of 3 cooperatives believed to have duped more than 5,000 members into investing about RM80 million in illegal get-rich-quick schemes. The 3 cooperatives were Koperasi Taqwa Malaysia Berhad (Kotaqwa), Koperasi Ushahawan Malaysia Berhad (KUMB) and Koperasi Birr Berhad (Birr). Their schemes offered lucrative returns of between 8 and 12% per month on investments. A few other cooperatives are believed to be running similar schemes. 

Members could invest as much as they wanted and were told that the cooperatives would implement projects such as cow rearing, seaweed planting, deep sea fishing and supply of consumer items (NST, 18.12.08).

l In February 2008, the Malaysian Cooperative Commission (SKM) appointed a company to take over the running of one of the country’s established cooperatives — namely the Malay Officers Cooperative Credit and Investment Society (MOCCIS) as it was technically insolvent.
l In the early 2000s, the Government quietly helped cooperatives which were badly affected by the stock market crash of 1997. The Government is said to have given RM172 million in soft loans to 7 cooperatives (2 of which were major ones) in order to help them continue as going concerns (Malaysian Business, 16.4.04).
At CAP, we have come across disturbing cases involving cooperatives :

-- Cooperative members who could not withdraw their investments as the cooperatives did not have the money to pay them. 

-- One member found that almost RM2, 000 of the RM9,000 loan that he applied for had been given to a company that he had no knowledge of.

-- A borrower who applied for a personal loan discovered that he had ended up with a loan to purchase jewellery. 

-- Members discover that they have unknowingly been made guarantors for strangers’ loans. 

An audit survey carried out by Bank Negara had revealed that the cooperatives faced problems like poor financial performance and cash flow, poor administration and not abiding by the relevant laws.

This is not surprising considering that the Cooperative Development Department (JPK) has been doing a very poor job of supervising the cooperatives. Early last year it was replaced by the Malaysian Cooperative Commission (SKM).

Pauperising Members

What is the point of having cooperatives when they only make members poorer by luring them into debt or investing in doubtful schemes?
In encouraging debt, ANGKASA plays an important role as it provides salary deductions for cooperative members to pay their loans and for other payments like monthly cooperative subscriptions. Since ANGKASA eliminates the problem of non-payment of loans, it makes members ideal borrowers for lenders.

As stated in the website of RCE Capital Bhd (whose subsidiary, RCE Marketing Sdn Bhd, provides loans to cooperatives to give to their members), “The automated repayment mode on top of the low employment turnover rates in this particular customer base provide a low-risk operating environment for RCE Marketing, thus allowing it to enjoy lower delinquency rates.”

Thus because ANGKASA is such an efficient debt collector it becomes very easy for civil servants to sign up for loans. Some take up so many that they end up with little or no income after the deductions on their salaries. In order to survive these, borrowers are than forced to turn to loan sharks.
ANGKASA gets paid by the cooperatives for carrying out the salary deductions and the cooperatives get their commission for arranging the loans.

In one case the cooperative deducted 19% of the loan approved as cost. No wonder cooperatives want their members to take up loans.

That borrowers end up with a mere pittance or no income speaks badly of ANGKASA and the cooperatives which give the loans. How come so many members could exceed the maximum 60% limit on salary deductions imposed by the Public Services Department ? Then again 60% is too high as how can a family survive if all they have is RM400 left out of the RM1,000 salary?

Apart from loans there are members who end up poorer because their cooperatives’ investment schemes failed. This raises the question of whether the cooperatives carry out any research before investing in the schemes or whether the schemes were genuine in the first place.

Tough Measures Needed to Regulate Cooperatives

If the former Cooperative Development Department (JPK) had been diligently supervising the cooperatives, then it would have been able to stop the rot in the cooperatives and protect the members.

In the 1980s, during the 24 deposit-taking cooperative scandal we had pointed out that the JPK was doing a terrible job in supervising the cooperatives. This is because at the height of the scandal it was revealed that the cooperative Koperasi Belia Bersatu Bhd (KOSATU) had been collecting deposits illegally for 10 years. How could the JPK have not known about it or done anything to stop it for 10 years?

The fact that cooperatives continue to get into financial trouble means that the JPK has not cleaned up its act. It is right that the SKM took over from JPK.

But will the SKM do a better job than the SPK? It is still too early to tell, but we fervently hope so for the cooperative members’ sake.

We had also during the 24 deposit-taking fiasco called for Bank Negara’s involvement in the overall supervision of the cooperatives. At least Bank Negara and the Finance Ministry are now part of the MCC.

Not surprisingly, there are cooperatives unhappy with the SKM and the new Securities Commission Act 2007. So much so that 2 cooperatives are suing the government (and a few others) over the Act.

The cooperatives are unhappy with Section 42 of the Act, which calls for the setting up of the Central Liquidity Fund and Section 43 which involves the setting up of the Cooperative Deposit Account.

Under the Central Liquidity Fund, the SKM may require any co-operative to contribute a certain sum to the Fund.

Under the Co-operative Deposit Account, all co-operative societies shall deposit their funds not immediately needed for operations or investments into the Cooperative Deposit Account.

Naturally some cooperatives will be unhappy about the loss of use of these funds but there is a definite need for greater control over cooperative funds to ensure that they are not being misused.

We believe that tough action needs to be taken against the cooperatives in order to protect members whose trust in their cooperatives have been abused long enough .

Conclusion

Many things are not right with many cooperatives and it is time that SKM acted firmly against them.

SKM must investigate the cooperatives to find out why so many of them get into trouble. If malpractices are discovered, those responsible must be brought to court.

The schemes that the cooperatives come up with must get the approval of SKM before they can be offered to their members. It is not good enough for SKM to say that it can only act against cooperatives which have gone against the Cooperative Societies Act or its Regulations. By then the members will have lost their money.

Lastly, let members who want loans get them only from the cooperative banks and not through their own cooperatives. The cooperative banks will be more professional in their dealings . It will spare the borrowers from shocks like a personal loan turning out to be a loan for a consumer product, or unexpected deductions from the loan amount. It is also likely that the loans will be cheaper as well.