Financing By Co-operatives In Malaysia: Frequently Asked Questions

Financing By Co-operatives In Malaysia: Frequently Asked Questions

Introduction

Thinking of starting a co-operative in Malaysia to offer financing solutions but unsure where to begin? This article covers the basics of co-operatives in Malaysia, answering common questions to guide you in making an informed decision.

To start, it’s important to understand what a co-operative actually is and how it can serve your goals. A co-operative is simply an association of persons who unite voluntarily to meet a common economic, social and/or cultural goal. In Malaysia, it is a body corporate established and governed by the Co-operative Societies Act 1993 (“the Act”).

Under the Act, a co-operative is given a wide range of benefits and support by the law, due to its benefits to the economy and community alike. Today, in Malaysia, successful co-operatives like Co-op Bank Pertama and Bank Kerjasama Rakyat Malaysia Berhad have become key players in the financial sector. They offer a range of financial services contributing to the economic growth of the nation.

Let’s take a closer look at some of the most frequently asked questions surrounding co-operatives in Malaysia.

Frequently Asked Questions

 

  1. How Does A Co-operative Operate?

Firstly, a co-operative needs to be registered by the Malaysia Co-operative Societies Commission (“SKM”)[1] for it to be recognised and receive the privileges under the Act. Without registration, the co-operative is deemed to be void.

A co-operative also must comprise of the following:

  • By-laws: These are the written rules that bind the co-operative and the members.[2] Upon registration, it is required to submit the proposed by-laws to SKM before being officially registered as a co-operative under the Act.[3]
  • Board: Similar to companies, a co-operative has a governing body that manages the affairs of the co-operative[4] which consists of not less than three and not more than fifteen members duly appointed at the annual general meeting.[5]
  • Members: A member of a co-operative can be a person or another co-operative itself,[6] and officially registered as a member under Section 15 of the Act. Similar to companies under the Companies Act 2016, a member also must hold shares in the co-operative.[7] The minimum number of shares of a member is prescribed in the by-laws.[8]When registering a co-operative, the minimum number of members required is twenty (20).[9] The co-operative is also free to include more members after the registration of the co-operative.[10]
  • Internal Audit Committee: The Board is responsible for establishing an Internal Audit Committee consisting of not less than two and not more than five members duly appointed by the Board.[11]

 

  1. Why Start A Co-operative? What Are The Benefits?

One of the most significant benefits is the ability to secure funding while retaining democratic control over the organization. Unlike traditional companies where control is often proportional to the amount of capital invested, co-operatives operate on a one-member, one-vote principle.[12] This ensures that all members have an equal say in decision-making processes, fostering a sense of ownership and accountability among the co-operative’s members.

Furthermore, when it comes to credit facilities and financing, a key benefit is that a co-operative does not need to register as a moneylender under the Moneylenders Act to provide loans and credit services to its members.[13] This exemption is significant because it eliminates the need for substantial upfront capital of not less than RM2,000,000[14] and reduces regulatory restrictions often generally associated with moneylending businesses.

 

  1. What Are The Principles Of A Co-operative?

To fully appreciate the idea of co-operatives, it is essential to understand its roots. Facing poor working conditions and low wages in 1844, a group of 28 artisans known as the Rochdale Pioneers in England pooled their own resources to access affordable goods and improve their economic situation. The co-operative was a success and gained huge traction.

From the pioneering efforts in Rochdale emerged seven fundamental principles that set the foundation for modern co-operatives we know today, which are: open and voluntary membership, democratic member control (one member, one vote), member economic participation, autonomy and independence, education and training, cooperation among co-operative society, and concern for community. These principles are explicitly recognised by the Act.[15]

 

  1. What Activities Can Be Run By A Co-operative?

 

Co-operatives in Malaysia have the flexibility to engage in a wide range of business activities, similar to other types of business entities. Nevertheless, according to the Malaysian Co-Operative Policy 2023,[16] co-operatives are encouraged to venture into sectors such as hospitality, food and beverages, manufacturing, transportation, healthcare, financial services, business services, agriculture, and retail.

 

  1. What Are The Limitations Of A Co-operative?

Unlike traditional companies, co-operatives may find it challenging to attract equity investors. This is because investors are often less interested in purchasing shares when they cannot obtain control rights proportional to their investment. In a co-operative, each member’s vote is counted only once.[17] This one-member, one-vote can deter investors seeking greater influence.

Furthermore, non-members or external investors cannot buy shares.[18] Additionally, even a member can only purchase or subscribe to a maximum of 20% of the total shares.[19]

Additionally, co-operatives are prohibited from giving loans to non-members.[20] This restriction confines the co-operative’s financing services exclusively to its members, which can limit the growth and reach of its credit facilities.

 

  1. How To Register A Co-operative?

To register a co-operative in Malaysia, it requires a minimum of 20 individual persons.[21] Additionally, draft by-laws must be proposed,[22] an inaugural general meeting must be held with at least 10 attendees,[23] and the application form from the First Schedule of the Co-operative Societies Rules 2010 must be completed.[24]

The registration fee is RM100, as outlined in the First Schedule of the Co-operative (Fees) Regulations 2010.

When submitting the application it should be accompanied with:[25]

  • Three copies of the proposed by-laws.
  • One copy of the minutes from the inaugural general meeting, signed by at least 10 attendees.

If the registration is successful, you will receive a Certificate of Registration which serves as conclusive evidence that the co-operative is duly registered under Malaysian law.[26]

 

  1. How To Get Financing For Co-operatives?

Co-operatives can raise funds internally via entrance fees, members’ shares subscriptions, members’ savings, loans from members, and internal donations.[27]

For additional capital, co-operatives may seek external financing but certain restrictions apply. To get loans from non-members or retail banks, the co-operative must acquire approval from the SKM.[28] Furthermore, donations granted by non-members are allowed, except from foreign sources.[29]

 

  1. Can A Co-operative Get Funding From Retail Banks To Provide Financing To Its Members?

Yes, after obtaining approval from SKM, co-operatives can obtain funding from retail banks to provide financing to their members,[30] however, they may not act merely as an agent for the bank in giving out loans.[31] Instead, the co-operative must fully manage and administer the loans themselves, taking responsibility for all loan operations.

The key distinction is that the co-operative must have full control over the financing process, rather than the bank managing the financing. If the bank is responsible for financing management, this arrangement is prohibited.[32]

 

  1. What are the Examples Of Financing That Co-operatives Can Provide To Members?

Co-operatives can provide any kind of financing to their members, whether secured or unsecured, Islamic or conventional, given the generality of the powers provided to it under Section 52(1)(a) of the Act.

Some common examples of financing provided by co-operatives today include personal financing, house and real property financing, corporate financing, small business financing, agricultural financing, and education financing.

 

  1. Can A Co-operative Provide Financing To Non-members?

No, a co-operative may not provide financing to non-members as it is prohibited by the Act.[33] However, Bank Rakyat, a successful financial co-operative in Malaysia can give loans to non-members. This is due to a special privilege provided to it under the Bank Kerjasama Rakyat Malaysia Berhad (Special Provisions) Act 1978.[34]

 

  1. Can a Co-operative Provide Deposit Services?

In addition to offering financing to its members, co-operatives are also authorized to provide deposit services to their members.[35] These services may include savings accounts, fixed deposits, or other types of deposit products that allow members to securely store their funds with the co-operative.

Co-operatives may also provide deposit services to non-members with approval from SKM[36] by filling in the required form.[37]

 

Conclusion

Establishing a co-operative in Malaysia offers a practical pathway for those looking to provide financial solutions within a regulated yet flexible structure. Co-operatives benefit from exemptions that reduce regulatory burdens, such as not requiring a moneylender’s license to offer loans to members.

While there are limitations—like restrictions on external investments and lending only to members—these can be navigated with strategic planning. By adhering to the registration requirements and understanding the co-operative framework, you can effectively leverage this model to achieve your business objectives.

For personalised legal support, please reach out to our Project and Infrastructure practice group led by our Deputy Managing Partner, Mr. Kevin Richard Nathan (kevin@nzchambers.com) or Senior Associate, Ms. Elise Tam elise@nzchambers.com) or Pupil in Chambers, Mr. Alif Mustaqim. We are here to help you navigate this regulatory compliance process.

[1] Subsection 6(1) of the Act.

[2] Subsection 17(1) of the Act.

[3] Subsection 6(2)(a) of the Act.

[4] Section 2 of the Act.

[5] Section 42 of the Act.

[6] Section 2 of the Act.

[7] Section 2 of the Act.

[8] Subsection 50(1)(b) of the Act.

[9] Subsection 5(1)(a) of the Act.

[10] Section 2 of the Act.

[11] Section 42A of the Act.

[12] Section 30 of the Act.

[13] Subsection 2A(1) of the Moneylenders Act 1951.

[14] Senarai Semak Permohonan Lesen Baharu Pemberi Pinjam Wang Di Bawah Akta Pemberi Pinjam Wang 1951 [Akta 400].

[15] Section 2 of the Act.

[16] Dasar Koperasi Malaysia 2030, Kementerian Pembangunan Usahawan dan Koperasi, pp. 71-73. https://angkasa.coop/bm/images/MEDIA/DasarKoperasiMalaysia2023.pdf. Accessed on 26 September 2024.

[17] Section 30 of the Act.

[18] Section 2 of the Act.

[19] Section 33 of the Act.

[20] Subsection 51(1) of the Act.

[21] Subsection 5(1)(a) of the Act.

[22] Subsection 6(2)(a) of the Act.

[23] Subsection 6(2)(b) of the Act.

[24] Subrule 3(1) of the Co-Operative Societies Rules 2010.

[25] Subrule 3(2) of the Co-Operative Societies Rules 2010.

[26] Section 10 of the Act.

[27] Section 50 of the Act.

[28] Subsection 50(1)(e) of the Act.

[29] Subsection 50(1)(g) of the Act.

[30] Subsection 50(1)(e) of the Act.

[31] Item 17-18 of Garis Panduan Mengenai Pengambilan Simpanan Khas dan Deposit atau Penerimaan Pinjaman.

[32] ibid.

[33] Subsection 51(1) of the Act.

[34] cf. Subsection 14(1)(a) of the Bank Kerjasama Rakyat Malaysia Berhad (Special Provisions) Act 1978.

[35] Subsection 52(1) of the Act.

[36] Subsection 50(1)(e) of the Act.

[37] cf. Appendix 1, Garis Panduan Mengenai Pengambilan Simpanan Khas Dan Deposit Atau Penerimaan Pinjaman.