I Took a Ksh500K Sacco Loan and Did Not Pay Any Interest

Two years ago I was reading Rich Dad Poor Dad by Robert Kiyosaki, where Kiyosaki wrote about the concept of using debt as tools for acquiring assets, particularly real estate and investments. This strategy, which he calls leveraging, intrigued me. 

Kiyosaki defines leveraging as investing funds from external sources to make money using other people’s money. This method greatly increases your control over more and larger assets and investments. 

For example, Ksh200,000 of your own money may only buy a small piece of land in the countryside worth Ksh200,000. But using that as a down payment for land or an apartment worth Ksh2,000,000 allows you to control a more valuable asset that could generate significant rental income.

I had always been excited about leveraging, but my credit limit didn’t allow me to qualify for a mortgage. So I put those plans on hold until I came across a way to leverage my savings for passive income. 

While researching how wealthy people continuously grow their wealth, I discovered a new opportunity: borrowing against my Sacco deposit to invest in Treasury bonds, and turning my small savings into a growing source of passive income.

Read Also: 5 Reasons to Join a Sacco in 2024

Why I Chose Treasury Bonds for My Sacco Loan Investment 

Once I had done enough research and made up my mind, I turned to my Sacco, where I had accumulated slightly over Ksh600,000 in Sacco deposits. 

My loan officer explained that with a co-signer, I could qualify for up to three times my deposits. The first reason I chose a Sacco loan for this adventure was the high credit limit. However, I wanted to minimise my risk exposure and secure more favourable terms on my loan. 

Rather than taking the maximum amount, I chose to borrow Ksh500,000, a decision that allowed me to keep my financial obligations within comfortable limits while still achieving my goals. 

Secondly, since I wasn't leaving the Sacco nor liquidating my deposit, my Sacco deposit of Ksh600,000 would continue earning interest at 13% per annum during the loan tenure.

Thirdly, I leveraged the good relationship I had with my Sacco and qualified for an affordable loan with an interest rate of 1% per month, or about 12% per year, on a reducing balance. This meant that as I repaid the loan, the interest charged would decrease each month, making it cheaper over time compared to loans with flat rate interest. 

Additionally, my interest rate was fixed. This ensured I eliminated the risk of interest rate rising above the bond’s return and effectively leading to losses. 

Finally, the loan came with favourable repayment terms, as I was able to negotiate for a two years tenure. 

One important aspect of this strategy is that the bond’s biannual interest payments did not align with my monthly Sacco loan repayments. However, I viewed this as a forced-saving strategy. My monthly repayment was essentially me saving my disposable income instead of spending it. So, I was confident in my ability to repay the loan.

I figured that when the bond matures, the loan will be fully repaid, and I can reinvest the principal. For example, I could take the initial Ksh500,000 and deposit it in my Sacco account to increase my credit limit. This could allow me to comfortably borrow over Ksh1,000,000 and invest in another bond. 

Read Also: 3 Types of Accounts to Know When Saving in a Sacco

Investing in Treasury Bonds 

Once I applied for the loan and got the funds, I looked for a suitable Treasury bond to invest in. 

In July, the Central Bank of Kenya (CBK) was offering great rates, and I invested the Ksh500,000 I borrowed from the Sacco into Treasury Bonds Tap Sale Issue No. FXD1/2023/002, which had a two-year maturity period. 

The bond offered an attractive return of 16.9723% per annum on the bond’s face value, distributed semi-annually over the bond's payment schedule.

The bond's return of 16.9723% was higher than the 12% per annum I was paying on the loan. This meant that I could profit from borrowing from my Sacco to invest in Treasury bonds—my returns exceeded the borrowing costs. ‍

Read Also: Cost of Loans: Flat Rate vs. Reducing Balance Method

Leveraging for Passive Income

Now, let’s break down the numbers. 

The Sacco loan had an interest rate of 12% per year on a reducing balance. I borrowed Ksh500,000 and had to repay it over two years. My monthly repayment was Ksh23,537 which covered both the principal and interest. This meant that the total amount I will repay the Sacco is Ksh564,888. ‍

Meanwhile, the Treasury bond I invested Ksh500,000 in offered an interest rate of 16.9723% per annum. The annual interest payment is based on the initial investment of Ksh500,000 will be KshKsh84,861.50.

Since the interest is paid semi-annually, the annual interest will be split into two payments. Each payment will be Ksh42,430.75. Over the 2-year maturity period, I will receive 4 semi-annual payments (2 payments per year). 

Therefore, the total interest I will receive over the entire period will be Ksh42,430.75 × 4 = Ksh169,723. 

The total amount I will make from this investment will be the sum of the total interest earned and my initial investment. So, by the end of the 2-year period, I will have made Ksh169,723 in interest from Ksh500,000 investment, bringing my total to Ksh669,723.‍

Over the 2-year period, I repaid a total of Ksh564,888 to the Sacco, covering both principal and interest. At the same time, my Treasury bond investment earned Ksh169,723 in interest, bringing my total return to Ksh669,723. 

After repaying the loan, my net profit from this strategy amounts to Ksh669,723 - Ksh564,888 = Ksh104,835.

Read Also: Frequently Asked Questions About Saccos in Kenya

The Magic Of Leveraging 

In June, before borrowing from my Sacco to invest in treasury bonds, my deposits stood at Ksh600,000, earning 13% annual interest. If I reinvested these dividends at the end of the first year to compound my returns, by the end of the second year, I would have Ksh766,140, with returns totaling Ksh166,140.

However, by leveraging my deposits and borrowing to invest in treasury bonds, I’m set to earn an additional Ksh104,835 from that investment. This means that instead of just making Ksh166,140, I’ll now earn Ksh270,975 at the end of the second year.

But leveraging allows me to earn even more. 

For example, at the end of the first year, I can borrow Ksh250,000 against my treasury bond and invest in treasury bills. Assuming I secure a loan at 13% per annum and buy a 364-day treasury bill with a 15.7% interest rate, I can make an extra Ksh6,750 after repaying the loan. This brings my expected returns from Ksh270,975 to Ksh277,725.