How To Turn Your Savings Into Investments

There are various ways in which you can turn regular savings into a revenue generating avenue. 

Granted, if one chooses to have their savings at banks that offer the highest interest rates in Kenya (peaking at 8%), a steady but consistent amount will accrue over time. Moreso if the bank employs the compound interest system. 

Note that you have to account for inflation in visualising the actual value your money has gained. With annual inflation rate for 2020 having been at about 5.3%, then the actual value gained for a savings account giving 8% interest rate would be 2.7%.

However, a chat with most personal bankers and one quickly realises that there are countless low-risk ways to grow one’s savings.

It is important to note that aside from banks, millions of Kenyans have been using informal, community-based savings to channel their savings into productive investments. 

Commonly referred to as chamas, these committees stemmed as a survival mechanism during the harsh economic times experienced in the late 80s and early 90s.

Some of these chamas have since grown into financial institutions in their own right aimed at empowering their members by offering an array of investment opportunities.

From investing in stocks, to prime real estate, chamas set a precedent proving that savings need not only earn via the normal interest rates.

A study conducted by the Poverty Action Lab between 2009 and 2013 titled ‘Interest Rate Subsidies and Savings Behavior in Kenya’ found that temporary financial incentives to save can generate sustained changes in savings and investment behavior, and that these changes can translate into impacts on income in the long-run.

Low-Risk Investment Opportunities in Kenya – Government Securities

It is an open secret that Government securities are regarded as risk-free investments as payment is guaranteed by the State.

These can either be in the form of Treasury Bills or Treasury Bonds.

Treasury bills are a short-term investment, with maturities of 91 days, 182 days and 364 days, while bonds are medium- to long-term investments, with a maturity period that can range from one year to 30 years. 

Treasury bills are sold at a discount and herein lies the money-making opportunity.

If you invest in a 182-day bill, you will pay less than the bill’s face value, however, after the maturity period you receive the full face value.

According to the Central Bank of Kenya, one needs to invest a minimum of Ksh /00,000 when it comes to Treasury Bills.

This figure drops to Ksh 50,000 when it comes to Treasury Bonds. Additional investments have to be in multiples of Ksh50,000.

When you invest in bonds you are basically loaning money to the government which earns interest.

With most bonds, you will receive interest payments every six months throughout the specified period of time.

At the end of that period, you then receive the face value amount that you invested. The National Treasury occasionally issues tax-exempt infrastructure bonds, a very attractive investment opportunity.

Infrastructure bonds are used by the government for specified infrastructure projects. These bonds typically see a lot of market interest because returns from them are tax exempt.

If you hold a bank account at a local commercial bank, you can invest directly through the Central Bank thereby avoiding any additional fees that come with brokers.

Step-By-Step Guide to Invest in Treasury Bonds In Kenya

Open a  Central Depository System (CDS) Account: This type of account is free to open. It’s how the Central Bank keeps track of who holds which government securities.

You need to hold a bank account with a Kenyan commercial bank in order for you to be able to open a CDS account. You can then go ahead and collect a mandate card from the Central Bank at any of its branches.

You are required to provide contact information and personal account details.

You’ll also need to have to have two signatories from your commercial bank sign the mandate card to verify the information you’ve provided.

When submitting your mandate card, you also need to submit a passport-sized photograph of yourself, which has to be certified and stamped by a representative from your commercial bank, as well as a clear copy of your National Identity Card, passport or alien certificate.

Once you have your CDS account, you can then invest in both Treasury bills and bonds.

When you are ready to invest, you should begin monitoring the upcoming bond prospectuses available on the Central Bank website.

The bond prospectus will include the dates of the bond’s sale period. You must submit your application form to the Central Bank’s head office or one of its branches by 2pm on the Tuesday of the last week of the bond’s sale period.

Once fully invested you will receive interest payment semiannually in your commercial bank account throughout the tenure of the bond. 

On maturity, you will then receive the last interest amount and the face value of the Bond.

However, most investors choose to rollover their security into a new forthcoming issue to grow their money even more. 

In such instances, you have to complete the application form giving rollover instructions and submit it to the Central Bank, before closure of the period of sale for that bond. 

In the next article we shall look into how you can use your savings to invest in shares and how the stock market works.

Lucrative returns in the Nairobi Stock Exchange (NSE) have birthed countless millionaires, but high rewards emerge from high risks more often than not.

All in all, there are various investment opportunities that could boost your savings in both the long and short-term.