The Legal Beagle: Do You Want To Have A Successful Chama? You Need To Think About These Legal Issues

Chama finances. Image from

Most of us have answered to the call and allure of joining and beginning a chama. We have heard all of the success stories, chamas that begun and within a few years become a million shillings business. Unfortunately, this success story is not replicated and different chamas have differing levels of success or longevity.

Some of the common problems that plague groups of this nature are brought about a lack of trust/trustworthiness (or too much), change in circumstances of some of the members or other conflicts that have been allowed to fester and grow under the surface.

Before you start a chama you have to consider how it shall be registered. There are two possible ways to register. The decision on how to register is largely decided by what the stated purpose of the collective is.

If your purpose is to have a social group, a merry go round, or a group that does not plan to have common investments, then the best method of registration is as a self-help group through the Ministry of Gender, Children and Social Development. Prior to registration, the group shall need to come up with a basic constitution or by-laws that shall govern it. The chama should also have an agreed objective and purpose to the group. Once this is done, you can come up with a name for your self-help group.

However, lately many chamas have decided to register as limited liability companies. A limited liability company is always a good option where the intended group wishes to invest together. By opting to register a company, the social group shall now be governed by the rules and regulations in the Companies Act and their Articles of Association.

Regardless of how the Chama is registered, the problems stated earlier will plague any well-meaning group if measures are not put in place to protect the members.

The first problem that most Chamas are plagued with is the lack of trust or trustworthiness. Suffice it to say, at the inception of the group most members have a certain level of trust in each other. They are united towards a common goal and are interested in working together to further the goal. However, when money is involved in any venture the issue of trust shall always arise. Most chamas have measures to safeguard their contributions. This may include having numerous signatories to an account and only investing upon reaching a consensus.

These are good measures to have in your group, and if you are not doing so, my advice is that you can start implementing them immediately. Another important measure that each Chama should implement is to thoroughly vet any investments that you are entering into. In this regard, many Chamas invest in either purchasing property, shares or stock in companies.

In order to protect your contributions, it is imperative that you do a complete due diligence. This may include doing searches, inspecting documents and making inquiries into the validity of proposed purchase or investment.

It is also important to ensure that your accounts are audited every year and the audited accounts are made available to all members to query of scrutinize the same. This will ensure that your officials are accountable to the other members of the Chama.

If you are registered as a self-help group and you decide to purchase property, do note that when it comes to time for registering that property it shall be registered in the names of the individual member who shall hold it in trust on behalf of the other members.

The second common problem that plagues Chamas is effective conflict resolution. When members of a Chama are in a conflict it could easily lead to the abandonment or dissolution of the company. Conflict in Chamas shall always arise as it is impossible to have all members having consensus always. How you handle the conflict could be the difference between success or failure of the venture.

Due to the nature of the organization, it is advisable that Chamas seek Alternative Dispute Resolution methods to resolve their conflicts. In particular, you may find that methods like Mediation, Conciliation and Negotiation are particularly helpful to resolving conflict as they encourage the parties to maintain and grow their relationship once the conflict has been resolved.

Successful Chamas should always have an agreed method of conflict resolution and agreed regulations that will allow members to engage with each other positively.

Finally, many Chamas often find themselves in a situation where after operating for a period of time, some members do not wish to proceed or are experiencing a change of circumstance and so are unable to continue with the proposed contributions.

This usually causes a lot of conflicts between the parties especially if some or all members are no longer interested in proceeding with the Chama. In Kenya, the Constitution guarantees us freedom of association. This means that if you are not willing to continue in a Chama, no one can force you to remain as part of one.

It is true that a number of Chamas have bylaws that regulate the exit of a member or members for whatever reason. The reality is, if you have registered your Chama as a limited liability company you shall have to take further steps to remove the member as a Shareholder and Director of the company. This requires the engagement of a corporate lawyer who shall prepare the necessary documentation to effect the changes in the shareholding of the company.

Unfortunately, it is possible that despite all of the best efforts, the decision is made to disband the Chama. It is important that this is done in accordance with the law, to avoid numerous penalties under the law.

In this case, the Chama shall need to seek counsel from a corporate lawyer on the process of voluntary winding up. It is important to note that all property held by the Chama at that point shall need to be transferred out of the company to individual members. The company shall also need to ensure that it has filed all of the returns required under law, being tax returns, and annual returns filed with the Companies registry.

Wherever your Chama journey leads you, ensure that you engage with a professional who would be able to guide you appropriately.

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