Cooperative societies were believed to have originated from Europe before they spread to other part of the world (Babatund, Fakayode, Olorunsanya & Gentry, 2007). According to Altman (2009), cooperatives have evolved signi?cantly over the last 200 years and are of increasing importance to economies and societies throughout the world irrespective of their level of socioeconomic development. Yet, cooperatives, generally speaking, are peripheral to contemporary scholarly analyses. Moreover, they are treated as inefficient and relatively ineffective organizational types whose presence is typically transient and of some importance in times of crises and to marginal socioeconomic participants. Even those with a sympathetic eye consider cooperatives to be of marginal importance.
Currently, cooperatives are recognized as an important instrument for socioeconomic improvement of the community. This importance is recognized in their definition, which considers cooperatives to be:
“An autonomous association of people united voluntarily to meet their common economic, social and cultural needs and aspirations through jointly-owned and democratically-controlled enterprises” (ILO 2002).
A cooperative is a group of individuals of limited means who voluntarily unite to achieve common predetermined objectives. The goals are pursued through the democratically agreed organization and contribution to attaining the needed capital base. Each of the SACCO members assumes a fair share of the risks that are imminent in the business (Sharma, 2003; Altman, 2009). Levi, Y. and Bar-Nes, D. (1999) also emphasized on arguments for cooperatives depend heavily on assumptions about people’s willingness to participate in them. Sometimes it is assumed that, just because they are cooperatives, this form of organization will attract the time, energy and commitment of members.
Cooperative societies are widely spread organization in developing countries, they are known for strong commitment of, as well as participation in the decision making of their members (Haan, 2003). These societies mobilize local savings and administer credit to members, thereby encouraging thrift and entrepreneurial activity. When first started, credit unions use relatively unsophisticated administrative practices, so that the costs are very small and most interest income from loans may either be distributed to the members or reinvested in the credit union within a capitalization program. Consequently, they can be set up in poor communities, where access to means of secure savings and to credit at non-exploitative terms is of greatest importance (UNDESA, 1999).
According toAimé and Mbabazi(1989) the first Savings and Credit Cooperative were established in mid-19th Century, mainly in Germany by two men considered as the founding fathers of the credit cooperative movements: Herman Schultze-Delitsche, who established a credit cooperative for minor artisans and the urban middle classes, and FreidrichReifeisen, the founder of the rural credit. After consume cooperatives, the savings and credit cooperatives are the common type of cooperatives to be found in the modern world, including the Third world (Munyiri, 2006).
Saving and credit cooperative is currently enjoying wider acceptance as an anti-poverty strategy all over the developing world. They undoubtedly opened great opportunity for many poor people who could otherwise have no chance to access capital for business activities set they are not without their own in built problems (Kifle, 2011).
Furthermore, saving and credit cooperative have become instrumental in creating common forum to fight social and economic backwardness by allowing mass participation in development. Therefore, they are considered as one way of accelerating the social and economic development for families, community and the entire nation.
According to Emana (2009), modern forms of cooperatives were first introduced in Ethiopia in 1960. Aredo (1993) also said that, cooperatives in Ethiopia have recent origins. The oldest ones were established in the late 1960s, and they grew very slowly until 1978. One reason behind such slow growth was the political and social instability that followed the 1974 uprising. The new cooperative movement in Ethiopia was triggered by reforms made to the socio-political system. During the socialist government (the Derg regime), cooperatives were formed to assist in the implementation of the Government’s policy of collective ownership of properties. Under this system, cooperatives were forced to operate in line with socialist principles, which meant that production and marketing of produce were undertaken through collective mechanisms. Membership to a cooperative was also compulsory, which contravened the basic cooperative principle of voluntarily participation (Emana, 2009).
As a type of saving and credit cooperatives, employees’ savings and credit associations (ESCAs) for purpose of savings and credit in Ethiopia started at the work place where by employees save certain percentages of their income which gives them the entitlement to borrow money for reasons they consider important to raise the living standards of their household. In most cases these include the buying of fixed assets like house, car, machinery to start business, higher education, marriage, medication of family members, and others) (Kolcha, 2014).
ESCAs have been in operation in Ethiopia for more than half a century. They were categorized under Savings and credit co-operatives (SACCOs) are designated as semi-formal financial institutions (Kolcha, 2014). According to Tesfamariam (2015), the employees of Ethiopian Airlines pioneered establishment of SACCOs in Ethiopia in 1964. From 1964-1973, there were 28 SACCOs and these societies formed their own national apex body known as Ethiopian Thrift and Cooperative Societies Ltd (ENTACCS). At that time, the apex had 28 SACCO with 6,247 members and savings amounting to USD 627,752 and was a member of the Africa confederation of Cooperative Savings and Credit Association (ACCOSCA).
They are established with in governmental organizations and private businesses, and play a significant role in mobilizing deposit and in allowing employees access to loans at a cheap rate. Their deposit collection and loan recoveries are integrated to each organizations payroll system, hence reducing administrative costs. The fact that they are protected by operational rules of organizations reduces their credit risk because an employee cannot default as long as they earn salary every month. In the event of default, loans are recovered from earnings of 3 guarantors who work in the same organization. ESCAs also participate in the investment market by buying shares of different financial and non-financial firms in the country.
The ESCAs, as potential sources of savings in the country, need serious study. The existing literature highly limited to only few studies on farmers unions and other agricultural related cooperatives. Similarly, the government also highly attempted to expand union and farmers cooperatives on the rural areas of the country while very little attention is given to ESCAs. Based on this reality it is necessary to assess over all operation, especially socio economic role, of ESCAs existing in Ethiopia, particularly in Addis Ababa.
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