Is M-Akiba a convenient savings vehicle for low income Kenyans, or is it Treasury’s attempt to acquire a cheap source of funding?

A man uses his M-Pesa account in Nairobi PHOTO: NOOR KHAMIS/REUTERS
A man uses his M-Pesa account in Nairobi PHOTO: NOOR KHAMIS/REUTERS

Kenya’s Treasury introduced a new tax-free government bond aimed at the country’s 23 Million mobile money users. The initiative dubbed M-Akiba has been hailed as a technological novelty being the first ever bond sold exclusively on a mobile platform.

Some analysts however have questioned the the wisdom behind the initiative at a time when the government is struggling to pay its debt, having exhausted most of its borrowing options on the international market.

According to the Daily Nation, the five year infrastructure bond will have individuals bid with as little as Sh3,000 and a maximum Sh140,000 for the income tax free bond. The Bond will go on the market on October 21st at a rate to be determined by Treasury and the Central Bank.

The Treasury maintains that the objective of M-Akiba is to enhance the savings culture amongst Kenyans who significantly lag behind compared to Uganda and Rwanda. Nairobi Securities Exchange Chairman Eddy Njoroge adds that M-Akiba is in line with NSE’s strategy of enhancing retail financial inclusivity in the bond market currently dominated by institutional investors.

The real savings from M-Akiba may however be for the Kenyan Government in the wake of waning interest in its Sovereign Bonds. Less than a year ago, Kenya raised $2 billion from international investors significantly increasing its ballooning Debt to GDP ratio thus further diminishing its credit-rating standings to international lenders.

Finance Cabinet Secretary Henry Rotich said to the Financial Times that, “Our strategy is to get cheap sources of funds so we’re looking at all answers for funding.” He further admitted that the country is trying to raise Sh220 Billion before the end of 2015.

The Treasury appears to have found their cheap source of funds within the Domestic Market. Analysts are projecting interest rates much lower than the current market rate for government bonds that’s ranging from 14% to 19%. Rose Mambo, the Chief Executive of Central Depository and Settlement Corporation said that the M-Akiba bond needs only to offer a rate higher than 6.31% that fixed deposits currently pay.

M-Akiba is an addition to the many uses mobile cash has in the financial life of Kenyans. It’s however important for potential investors to familiarize with the product beyond the ABC’s of features, costs/benefits and potential risks. M-Akiba investors must know the intricacies of trading bonds, especially the transaction fees that mobile money service M-Pesa will more than likely charge.

Treasury Bonds at their most basic are medium to long term debt instruments issued by the government to raise money in local currency. Features defining bonds include the issuer, its intended purpose, interest rate structure and period of maturity (1-30 years).

M-Akiba bonds have a 5 year maturity period and are intended for infrastructure projects. The interest rates are yet to be determined but are projected to be above 6.31% as noted earlier. The minimum required to purchase them is Sh3,000 and the maximum is Sh140,000.

The elephant in the room potential M-Akiba investors must be wary of is INFLATION-RISK. When inflation rate exceeds the bond’s nominal interest, the bondholder experiences what is referred to as ‘Negative Real Interest’. Nominal interest is the interest quoted on your financial statements. Real interest takes inflation into account reflecting the true value an investor gets.

Real interest is calculated by subtracting the Inflation Rate from Nominal Interest Rate. Let us assume Mr. Waiguru purchases a one year bond worth Ksh100,000 at a nominal interest of 5% in Jan 2014, Let’s also assume that 2014 experienced an average inflation of 6%. Using the formula (Real Interest = Nominal Interest – Inflation), Calculate Mr. Waiguru’s Real Interest Rate?

SOLUTION: Real interest is {[5% (Nom Int) – 6% (Inflation)]} = -1% (Real Interest).

The negative interest reflects that Mr. Waiguru lost 1% of his purchasing power.

In Jan 2015, Mr. Waiguru will collect (100,000 + 5,000)  = 105,000 with his 5% interest. With an inflation rate of 6% in 2014, goods that costed 100,000 in Jan 2014 are now worth (100,000 + 6,000) = 106,000. Mr. Njoroge will therefore be short Ksh1,000 trying to purchase the same goods in Jan 2015, hence the -1% Real Interest.

Over the past 5 years, data from the Kenya National Bureau of Statistics indicates an inflation of slightly under 7%. While Treasury has not set the rate for M-Akiba Bonds, The Chief Executive of the Central Depository and Settlement Corporation Ms Rose Mambo says that the Treasury only needs to offer a rate slightly higher than the 6.31% that fixed deposits currently pay in Kenya.

Investors in the fixed interest M-Akiba bonds will be shielded from fluctuations in market interest rates that normally affect fixed deposits. They will benefit when market rates decrease but lose out when the market rate exceed their fixed bond rate.

Bottom Line is for potential investors to seek financial counsel and exercise due diligence before committing their funds for 5 years. Investors further need to make an assessment on whether they’re looking to make money, save money, or if they are simply looking to hedge against other higher risk investments within their portfolio.

Government Officials revealed that the M-Akiba prospectus is set to be released earliest on October 16th for paper that will go on sale on the 21st. The Kenyan Globe will do a follow up shortly after, and make a candid assessment on the investment worth of M-Akiba Bonds.

For further detail on this story, visit Quartz and The Business Daily

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