Capping and suspending withdrawals

A society can manage its capital liquidity in a number of ways. It has the powers to set terms and conditions for the withdrawal of share capital in its rules, e.g. rules that require members to give a set notice period, from one week to one year, of their request to withdraw some or all of their capital; rules that cap the total amount of share capital that can be withdrawn in any one financial year; and rules that allow the society to discount the value of its share capital. In addition, a society can adopt a rule which gives the management committee the power to suspend withdrawals. This rule is mandatory if the society is to present its share capital as an asset on its balance sheet.

Whichever method of providing for liquidity is used, the society will need to establish cash balances capable of meeting requests for withdrawal. These cash balances should be sufficient to meet the forecast share capital churn rates, which in turn will depend on the approach to liquidity taken by the society.

Most new societies will defer making provisions for liquidity by suspending the withdrawal of share capital for an initial period of up to three years. Suspension can be justified on the grounds that the investment activity will take time to get established and become profitable. However, there are drawbacks to suspending withdrawals. It may deter people from joining the society and making an initial investment and will also delay the society’s progress towards making an open offer.