Any conscious Kenyan investor would want to expand their investment portfolio by learning how to invest in treasury bills and bonds in Kenya. Serious investors are known to make a ready investment in treasuring bills and bonds (Also known as government securities) due to their higher returns and security (Kenyan Government has never been reported to fail to repay investors or default). Investing in Kenyan Government Treasury bills and Bonds means you are loaning the government your money for a certain period of time at an interest. You may be asking yourself how do I start investing in treasury bills and bonds in Kenya? Gladly, this post is what this is all about.
What are Treasury bills and bonds?
Before getting detailed knowledge on ways which one would invest in government Treasury bills and bonds it is very imperative to know its meaning and get familiar with what you are investing in.
Government Securities are tradeable instruments issued by the central government or state governments. Such securities are short term(91 days, 182 days, or 364 days — called treasury bills — with original maturities of less than one year plan of maturity or long term one called Government bonds or dated securities which have with them original maturity of one year or more (some going up to even 12years).
The government securities are used for domestic borrowing or more specifically for borrowing that is denominated in the domestic currency i.e Kenyan shillings. In practical terms, treasury securities may be regarded as paper assets that are created by the government. By issuing the securities, the government exchanges the paper assets for cash from the people, institutions, or agencies who are regarded as investors.
How do I earn from investing in government Treasury bills and Bonds in Kenya?
When the borrowing period expires, the government returns the money borrowed together with interest earned to the investors. Payment is usually made to the investors’ respective commercial bank accounts subject to applicable taxes.
How to invest in Government of Kenya Treasury bill and Bonds
There are two ways one can follow in order to invest in Treasury bills and Bonds in Kenya
Through commercial banks. Commercial banks are authorized agents for CBK. This route is less hands-on but one will have to pay processing fees to commercial banks
Direct investment: an individual or company can undertake all the processes themselves. The major processes are as follows:
Open a CDS account: To invest in government treasury bills and bonds in Kenya you must have a CDS account. This can be done at any Central Bank of Kenya offices in Major towns, Kisumu, Eldoret, Nakuru, Mombasa, and Kisii. Individuals are required to submit a mandate card (form), ID copy, and colored passport.
Decide how to invest: Are you buying treasury bills or bonds? Major local daily papers (Nation, Standard, Star, People Daily) normally run pages of the available securities on their business pages.
Complete and submit application forms: in these forms, you are required to provide your contact information, CDC account, your normal bank account number to receive your payments, the issue number of the Bond or Bill you are buying, their face value, and have the form submitted by 2 pm on the auction day which is either Wednesday or Thursday.
Check the results. You need to contact the central bank to confirm the state of your application and how much you need to pay
Payment: Once your bid is successful you must make the payment by 2 pm the next Monday immediately after the auction. Failing to make a payment can result in you getting barred from participating in future securities. So do not spoil your future chances. Once payment is done, you are through, sit back and wait for your returns to hit your bank account at the specified period.
Examples of government securities
So much is entailed in Government Securities and a new investor not familiar with such investment might be happy to meet a few or more examples of government securities some of which are federally issued securities including the treasury bills, treasury notes, treasury bonds, infrastructural bonds, and savings bonds. Municipal bonds are debt obligations issued by state and local governments, and they are usually issued to fund very special projects and are often tax-exempt.
Having the interest to invest in the government securities one will be more than anticipated to know features of the type of investment He or she will be involved in. Features of Government Securities include Issuing Authority, Government Securities and Stock Market. Government Securities and the Commercial Banks. Issue Price. Government Securities and Rate of Interest. Tax Exemption.
A serious investor will check for the types of government securities that exist and if he or she will be comfortable in making an investment. If you’re interested in investing in such low-risk products, there are many types of government securities in Kenya for you to choose from. They can broadly be classified into four categories, namely Treasury Bills (T-bills), Cash Management Bills (CMBs), dated G-Secs, and State Development Loans (SDLs).
What is required for one to start investing in government securities in Kenya?
If you’re interested in investing in government securities you must have a bank account with a commercial bank in Kenya, and you must open a CDS account with the Central Bank. Kenyans and foreign investors who meet these qualifications are free to invest in government securities directly with the Central Bank. Having a bank account and more so trading with the CBK makes it very secure and reduces the risks on the securities. However, you might not be completely tied to the CBK for your investment to work for those who do not wish to open a CDS account with the Central Bank can still invest by opening a client account with their commercial bank, which will invest on their behalf. However, while opening a CDS account is free, commercial banks typically have fees associated with client accounts.
Mostly the government securities are allowed for the big entities because of risks and other reasons. Raising a question as to who is free to invest majorly commercial banks, corporate entities and pension schemes are some of the largest investors in government securities, individuals can also invest directly through the Central Bank. Asking whether the government is good for investment yes, they are. Bonds provide income, but face risk from low-interest rates. Bonds are seen as a safe haven for investors. While government bonds such as Kenyan Treasury and municipal bonds provide income to investors such as retirees, these assets face interest rate risk when the CBK lowers rates for an extended period.
According to the Central Bank of Kenya, Upon investment in a Treasury Bond, the Investor will receive interest payment semiannually in their commercial bank account as indicated on the CDS account throughout the tenor of the Bond. On maturity, the investor will receive the last interest amount and the face value of the Bond. Alternatively, Investors may choose to rollover their security into a new forthcoming issue and in this case, they have to complete the application form giving rollover instructions and submit it to Central Bank, before the closure of the period of sale for that bond. The maturity date of the maturing security (investment) and the value date of the new bond MUST match for the rollover instruction to be successful. The Bank, therefore, does not remit face value into investor’s account but rather sends only refunds amounts generated from new investment”.
Advantages of investing in Government Securities
Just as any investment government securities have risks but very low, minor, or not at all. Since governments run on taxes to pay for services offered and to set up public infrastructure development projects like roads. Sometimes, however, taxes collected are not enough and the government is forced to borrow either from donor funding, development banks, other countries but also from the public in form of government securities. In Kenya, the National Treasury offers two types of government securities: Treasury bills (T-Bills) and Treasury bonds (T-Bonds). Investors who buy these securities are loaning money to the government, which promises to repay those investors after a specified period of time, called maturity.
Treasury Bills vs Bonds
As explained by a quote in trying to expound on the two types of securities offered in Kenya for investment
Treasury bills are a short-term investment, with maturities of 91 days, 182 days, and 364 days. This means that if you invest money in a Treasury bill, you will receive that money back within three months, six months, or one year, depending on the bill you choose.
Investors make money on Treasury bills because they are sold at a discount. For example, if you invest in a 91-day Treasury bill, you will pay less than the bill’s face value, but after 91 days you will receive the full face value. If you’d like to purchase a Treasury bill, you must invest a minimum of Ksh100,000.
Treasury bonds are medium- to long-term investments, and their maturity can range from one year to 30 years. There are many different types of Treasury bonds, but their basic operations are similar.
Investors buying Treasury bonds are loaning the government money for a specified period of time, which is the bond’s maturity. With most bonds, investors will receive interest payments every six months throughout that period of time, and at the end of that period, they receive the face value amount that they invested.”
Here are the advantages of investing in government securities:
- It offers secure investment as it is issued by the Government of Kenya
- It offers liquidity. In the case you require part/ whole of your capital investment, you can sell the bond to other investors.
- Guaranteed earnings. The interest rates earned on an annual basis are market-determined and paid out semi-annually making them a fixed source of income.
- Bonds provide a higher return than term deposits for a similar tenor.
- Bonds pay out regular coupon (interest) income to Investors by the terms of the bond contract.
- The price of the bond can appreciate above the initial purchase price and allow investors to enjoy capital gains.
- Investors can access a loan facility and use the Bond as collateral.
Therefore, with all the facts and intelligence on the government securities the investors may decide if it’s actually a better deal or not to venture into the securities. Investors have made larger margins of profits just getting to the government securities. The only thought or possible limitations are just the facts that the bonds investments (G-SEC) have fixed rates which some investors may not be okay with.
The margin of profits in any investment is majorly determined by the type of investment and the input initial capital. An investor has to be smart for he or she to gain hugely or fairly on the securities investments (G-Sec). The type of bond an investor will invest on will determine the percentage of profits that will accrue at the end of the maturity period. The other possible limitations of the government securities are when an individual investor needs the cash or in case of an emergency, the investor is limited to access the cash that he or she might have invested that is the main reason why the government had initially given the platform to major entities which will always be comfortable with the investment.
Government securities are the easiest and one of the most secured type of investment for investors who are new or are looking for a secured platform to invest in. The government will always be the safest platform of investment. Investors are always encouraged to use the treasury bills and bond calculator on the CBK website to determine the maturity and returns on their investment. Once they have invested this calculator allows you to determine what your payment would be based on face values and interest rates that you input. You can use it to determine what your returns would be at various interest rates or, if you would like to enter a competitive bid, to determine what interest rate you should submit to CBK to yield a certain return.