The reason for placing your money for the short term is:-
- To be able to get hold of your money quickly (Be liquid).
- Retain your money’s value (no volatility).
- Not lose your money (through bankruptcy).
- Make some interest (even if small).
Equities and property are not appropriate for short term investments.
Their price could fall just when you need your money.
In addition, it may be difficult to get hold of your money when you need it.
Kenya- Options for Placing your Money for the Short Term:-
Cash
Benefits- Immediate over the counter or ATM access for current accounts.
You know what money you have in your account. This value will not increase or decrease of its own accord.
Down side- Low or zero return on investment.
Volatility- None
Risk:
Bank failure- Higher interest rate than a top tier bank, ask yourself why.
A bank in trouble will often have to pay a higher rate to intice depositors.
If you want a high proportion of your wealth in cash, most of the money should be in a number of top tier financial institution.
To check the credit rating of a bank Google search for (google) ‘What is the credit rating of xyz Bank?’
Currency- Consider having the money in the currency of the product you wish to purchase. You are not, then, exposed to changes in the value of currencies.
For example: you need to bring money from UK to buy a car in Kenya.
You have GBP10,000 in a bank.
The British pound devalues.
You will be able to get FEWER Kenya shillings for the GBP10,000 after the devaluation than you could before the devaluation.
How to open a bank account:-
Personal visit to a bank with documents that will usually include
-identification document,
-evidence of income,
-and evidence of where you live.
Requirements change so contact the bank prior to your visit.
Hassle-
Obtaining the bank required documents.
Dealing with the document side will be much easier a second time.
Time it takes-
Once you have the documents your bank account should be opened nearly immediately.
Side note
Trying to deal with the documents that financial institutions need can be a nightmare. Accept that these documentary requirements are permanent.
It is a waste of emotional energy to get grumpy.
They are to do with international money laundering and terrorist financing.
File your documents (hard and soft copy) away in an orderly manor so that you know where you can find them the next time round.
Bank Deposit Notes
A bank may offer to hold your money for a minimum period (e.g. 6 months) and you will earn a higher interest rate than in an ordinary savings account.
For large amounts of money the interest can be negotiated between you and the bank.
Benefits-
-Easy access within a relatively short period of time, depending upon the structure of the deposit note.
-The final value is already known to you when you initially invest- i.e capital + interest earned.
-The interest earned is usually more than interest earned from current and savings accounts.
-You may be able to access your money earlier than the maturity date, but you may lose you accumulated interest.
Down side- Expect a lower return, over the long term, than investments in equities and property.
Volatility- None
Risk- Bank failure
How to go about it:-
Visit a bank with documents that will include identification document, evidence of income, and evidence of where you live. Requirements change so contact the bank prior to your visit.
Hassle: Obtaining all the KYC documents. Note Side note above.
Time it takes: Once you have the documents your bank account should be opened nearly immediately.
Kenya Government Treasury Bills
The Kenya government , through the Central Bank, borrows money to run the country, pay for projects and pay back debt etc.
People lend to the Kenya government in expectation of a return for their money.
Treasury Bills (T Bills) are used for short term borrowing.
The choice of investment periods for the T Bill are 90 day, 182 day, and 364 day. -For longer periods you can invest through the Central Bank to buy Treasury Bonds.
Individuals are able to benefit from short term lending to the government by opening an account at the Central Bank.
For many people this is a good option for holding money for the short term.
Jack- An example:
Jack has 950,000/- to invest in a 6 month T Bill that is giving an unusually high return of 10%.
Jack goes to the Central Bank of Kenya WEB site- https://www.centralbank.go.ke/
On the HOME page he scrolls down to a box under ‘Treasury Bills and Bonds’ labelled ‘On Offer’ He clicks T Bills.
At the bottom of this page is a calculator.
Using the calculator on Central Bank T Bill WEB page, and using last weeks interest rate, he calculates that he must pay 960,000/- to obtain a face value of 1,000,000/-.
He fills in the application form for ‘Face Value’ KSh1,000,000.
( click ‘Application forms for Treasury Bills & Treasury Bonds‘ for the application form).
He drops it in the T Bill box at the Central Bank of Kenya. (On the left as you enter tha bank- ask someone), and before Thursday afternoon.
After the auction (Monday) he sends approximately this. Do not send money before this date or it will be sent back to you.
(Central Bank may sms you with the exact amount required.)
If he has over paid he will have the excess amount sent back to his bank account.
At the end of the 6 months he will receive back 1,000,000/- after tax if the interest rate of the day was 10%.
The amount an investor earns will depend upon the interest rate of the day.
At the end of the 6 months Jack decides that he wants to reinvest the 1,000,000/-.
A new application is made prior to the maturity date of his first T Bill- (by dropping the application in the same box at Central Bank.)
Note there is a provision for reinvesting the maturing T Bill on the Application Form.
The money is then reinvested (rolled over) for the next period.
Note: It is worth while ensuring you are up to date with Central Bank requirements at the time of investing.
The characteristics of buying T bills is as follows:
Benefits:
-Upside
- Relatively safe.
- Usually a better return than a bank.
- Tax on the T Bill is 15%, less than income tax for those employed.
- Longer term infrastructure bond can be tax free.
- There is no volatility of returns. You know you will receive the Face Value. In Jack’s case, in the above example, this would initially have been KSh1,000,000.
– Down Side:
- The investment process is considerably more cumbersome than a bank. With experience, though, this can be managed. There seems to be no easy mechanism for bidding for a T Bill issue from your computer. A hard copy application dropped into a box in the Central Bank seems to be surest way of getting invested.
- In an emergency you are not able to access your money.
Risk:
-Relatively low depending on the country’s credit rating.
However Ghana defaulted on much of its external debt in December 2022.
Kenya and Nigeria amongst others are in March 2023 considered at risk of default.
Local Gebt:
Governments generally pay their local currency debt.
If the country defaults, however, they could restructure their debt. The interest earned may be reduced and the length of time you need to keep your money with the governement extended.
It is also possible that you get only some of the money you have invested in government bonds (capital) returned to you. e.g. KSh60 out of every KSh100 invested.
Default:
The ramification of a default can be severe resulting in a financial crisis as domestic savers and international investors flee. The currency could crash, domestic and government expenditure be reduced with resulting social and political dislocation.
We hope that lessons have been learnt from other countries that have defaulted.
How to go about setting up an account:-
A personal visit to the Central Bank is required. Take with you documents that include your identification, evidence of income, evidence of where you live, and information of the bank account that is in your name. It may take a visit or two to the CBK to set everything up.
You will end up with a CDS Portfolio number and a Virtual account number for future use.
How to go about buying a T Bill once you have the account:- (See Jack- An example above)
The application form needs to be filled in. This form is then dropped into the T Bill box in the CBK hall. (It may be wise to ask for assistance for the first time) This must be done before 2pm on the Thursday. Payment must NOT be in your CBK account before this or the money gets sent back to your account. Money must be in by the following Monday.
Calculation:
The CBK calculator is on the T Bill section, at the bottom of the page, of the Central Bank of Kenya WEB. This will help you work out what you need to pay to obtain a given Face Value if paid a given interest rate.
Hassle:
A personal visit is required to the CBK to register. They are particular about the data and there should be no mistakes on the application form.
The initial purchase requires a personal bank transfer to CBK. From that point the money from the maturing bond can be rolled into a new bond.
Each new purchase of a T Bill requires a hard copy of the application to be dropped into the T Bill application box. (This can be done by a messenger).
There is no ‘sure way’ electronic (by e mail etc) of putting in a bid for the T Bill. The hard copy process seems necessary to ensure CBK receives your application.
Money can be transferred to your CBK account via the internet.
On the whole the system is workable until there is a glitch. Then it can be very frustrating.
Time it takes:
Once you have all your paper work in place it doesn’t take much more than a number of working days to open the account.
Summary for Short Term Savings/Investments
- Place your money where you can get at it. For example in a bank rather than your friend’s new business start-up.
- Money from a bank or T Bill, you will have the Capital plus interest when you expect your money.
- Use a reputable financial institution. You will lose most of your money if a bank or company goes broke.
Do take note of the following:
- Inflation- Leave your money for too long in a low interest account and your money will be eaten up by inflation.
- Savings in foreign currencies carry a currency risk and a currency opportunity.
Long Term Investing and Risk- an Introduction
Important: This information on this WEB site ALONE should not be used to make investment decisions. Investing is particularly personal and is dependent upon your circumstances. You are strongly advised to take independent expert advice before deciding whether to/ or whether not to invest your money.