Buying and selling of shares on the Nairobi Securities Exchange (NSE) is one of the most popular modes of investing in Kenya.
But apart from investing in stocks, there are numerous other investment products you can go for that will earn you money. These include treasury bills, which are also known as T-Bills, and treasury bonds.
Unpacking T-Bills
Treasury bills are short term debts that are issued by the government in order to raise money. Under the investment rules set by the Central Bank of Kenya (CBK), you can invest in the 91-day T-bill, the 182-day T-bill or the 364-day T-bill. These T-bills are sold by the CBK weekly. The CBK can either accept or reject bids from investors. T-bills are usually sold at a discount and redeemed at the amount that must be repaid at maturity, also known as par value.
“This means that investors choose the amount that they will receive when the bill matures, or the face value of the bill. They then pay less than that amount when purchasing it,” says a CBK note.
For example, if the value of the T-bill you invest in is Sh100,000, you will pay Sh90,000 but will receive Sh100,000 upon maturity. Bear in mind that the maturity period you choose to invest in will largely influence the amount of discount you get on the value of your T-bill.
Investing in T-bills
Kenyans living in and outside the country, and non-Kenyan citizens, are all eligible to invest in T-bills. To start investing, you will need to have a Central Depository and Settlement (CDS) account with the CBK. Non-Kenyans living in the country are required to directly open the CDS account with the CBK.
Non-Kenyans who don’t live in the country can only invest in T-bills as nominees of a local commercial or investment bank, or stock broker. When investing in T-bills, you can either buy directly from the CBK or through licensed investment banks and agencies such as stockbrokers.
T-bills are a good investment option for investors who do not like taking risks. They are also a suitable option for those looking to invest for the short term. This is because they yield fruit within three, six and 12 months.
With T-bills, the likelihood of losing money is low. You can only lose your money if the government defaults on repayment. In essence, by investing in T-bills, you will be loaning the government your money. It is important to bear in mind that T-bills are not traded in secondary markets such as the NSE shares’ platform, but they can serve as collateral when you are seeking a bank loan.
T-bills’ return on investment
Treasury bills are priced in such a manner that they offer interests to investors that are above the national inflation rate. When looking to invest in T-bills, the lowest amount you should have is Sh100,000 while the highest amount you can invest is Sh20 million. Any amount above the minimum Sh100,000 is required to be in multiples of Sh50,000.
Once your T-bills mature in a three, six or one-year period, the CBK will electronically remit the face value of your maturing bills to you. You do not always have to redeem your returns. Instead, you may choose to carry over your portfolio into a new upcoming T-bill issue.
To facilitate the rolling-over of your T-bills, you will be required to fill out an application form authorising this action, and then submit it at the CBK before the pre-auction deadline.
What are Government Bonds?
Bonds are methods used by the government to borrow money in local currency. They gain maturity after between one and 30 years. The price of a bond is determined by the period of maturity.
You loan the government your money, and the government pays you a fixed interest for the agreed duration of time. If you don’t sell your bond investment in the secondary market, and wait till it matures, you will receive the full interest you were entitled to when buying the bond.
Risk level
Bonds are considered stable and do not overly expose investors to losses. However, since they trade on the NSE, investors can gain or lose money based on their time of purchase and the prices on offer.
If your purpose is to get sustainable income and you have a good amount of cash lying idle in your bank account, you can invest in government bonds. Government bonds are risk-free and are a sustainable source of income.
“For example, if you have Sh5 million in the bank, and you invest it in government bonds at a coupon rate of 13 per cent, you will be getting a monthly income of Sh54,000 without taxes,” says Michael David, a financial and investment coach at MoneySense.
Bonds are also a good option for investors who are afraid of taking big risks. “I am risk averse and I like to spread my investments. I am not the person to have money sitting idle in my bank account. My biggest reward has been on stocks and bond purchases.
They have very minimal risk even when the country ratings drop,” says Vincent Kamau is a Nairobi-based independent financial specialist involved in performing management accounting and analysis, internal audit, forensic audit, and compliance.
“I realised that if I save Sh5,000 every month in my bank account, I will have saved Sh60,000 by the end of the year. But, if I buy bonds worth the same amount, I will have Sh66,000.”
Minimum investment
The minimum amount you can invest varies. There’s a minimum of Sh50,000, with additional values in multiples of Sh50,000. However, if the government is borrowing to fund infrastructure projects, the minimum required is usually Sh100,000.
Corporate bonds
Apart from bonds issued directly by the CBK, corporates in the private sector can also be licensed to issue bonds under the corporate bond market segment. For example, in June this year, Family Bank received approval from the Capital Markets Authority to raise Sh4 billion through the corporate bond market.
This bond offered a maturity of 5.5 years at a fixed rate of 13 per cent per year. To invest in this bond, investors were required to apply for a minimum subscription of Sh100,000. Those with more money were required to add on their minimum investment in multiples of Sh. 100,000.
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