Savings and Credit Cooperative Societies (SACCOs) typically calculate dividends on a pro-rata basis, meaning that each monthly contribution from a member earns interest. Pro rata calculation involves determining the proportionate allocation of a fixed amount. Understanding how to calculate this figure can help you understand your dividend payments better.
Pro rata is a calculation that determines the fair distribution of a fixed amount. These calculations are common for issuing dividends and rebates. It is a process where whatever is being allocated will be distributed in equal proportions, meaning that every contribution made earns interest according to the month deposited.
For example, if you deposit Ksh 10,000 from January to December and your SACCO pays annual dividends at the rate of 13%, you will earn Ksh1,300 in January, Ksh1,191 in February, and so on. The calculation for January will earn 10,000*13/100*12/12=1,300, February 13/100*10,000*11/12=1,191 and March 10,000*13/100*10/12=1,083.
The sum of a member’s earnings from the opening balance and monthly contributions from January to December gives a member’s Gross Dividend. A gross dividend of less than 5% withholding tax results in a net dividend.
The Dividend percentage, 13% in this illustration, is usually declared during the Members’ Annual General Meeting (AGM). This figure may increase or decrease depending on the SACCO’s financial performance in the previous year.
Most SACCO members have had questions about how their dividends and rebates are calculated, owing to the complex calculations that are usually not explained at the AGMs.
Since the pro-rata method does not use a flat rate, it ensures equity, as a member who joins a SACCO in November and makes a big deposit will earn dividends for the month, and a member who has been contributing since January earns for all the months.
The pro-rata calculation method, apart from only paying interest from the opening balance, ensures that a member also gains interest from every amount deducted for all the months throughout the year.
In banking, pro-rating also refers to the practice of applying interest rates to different time frames. If the interest rate was 12% per annum, you could pro-rate this number to 1% monthly (12%/12 months).
In insurance, pro rata is used to determine risk based on the time the insurance policy is in effect. It may also be used to describe proportional liability when more than one person is responsible for a loss or accident.
The calculation of the return premium of a cancelled insurance policy is often done using a cancellation method called pro-rata. First, a return premium factor is calculated by taking the number of days remaining in the policy period divided by the number of total days of the policy.
Interest rebates on member deposits are computed based on the weighted average/pro-rata basis, depending on how long the funds were held by the SACCO during the previous financial year.
For the purposes of dividend computation, the year starts in January and ends in December of every year.
