Where do bonds fit into your organization?

As it is industrywide; 

-  Liquidity is a priority concern for SACCOs, thus many limit their investment options. 

-  Financial investment income from stocks and placements in other SACCOs has been underwhelming. 

-  Inflation hits cash and cash equivalents hardest. 

-  Some industry sectors were so adversely affected by COVID-19 & Russia-Ukraine that many SACCO members were late on loan payments. 

-  Loan appetite has driven SACCOs to borrow externally making saccos liable to more interest costs. 

Bonds are a great mitigating asset against the aforementioned challenges as discussed in this brief write-up:

Are fixed Income assets illiquid compared to other assets?

Out of the 3.74 trillion outstanding in government bonds, the weekly turnover approximates to over ~0.27% or 10 billion worth of bonds. Out of the 2 trillion equity market capitalization, the weekly turnover approximates ~1 billion or 0.06%. This very loose comparison goes to show that the bond market isn’t illiquid.

Do bonds create an upside for SACCO’s financial investments?

Bonds will guarantee a stable cash flow to your financial investment portfolio. While stocks can be highly profitable, they are more volatile – so much so that bonds are often used to hedge against the volatility of stocks. To demonstrate the downside risk of stock volatility; consider the year ended 2022 when the NSE All Share index was down 23.42%. Assuming a 1-year T-bill had taken the place of such an index portfolio it would have earned over 9%.  

Through 2021 the SACCOs industry over-allocated equities at 22.75% and under-allocated fixed-income investments at approximately 12%. Unsurprisingly, SACCO's financial investments generated a meager proportion of total income at approximately 8.37%. It is no wonder that despite high industry growth, financial investments declined sharply, especially for DT-SACCOs.

Fixed Income Assets are your best bet against inflation:

As it is, the biggest headache among Kenyan investors is inflation. Inflation is currently 8.98% while the lowest-earning fixed-income security, the 91-day T-bill is earning 9.538%. Bonds are designed to earn above inflation hence why they earn at rates well above those of deposits and savings accounts.

Coupon payments can be designed to match outflows:

Bond portfolio laddering entails matching coupon streams and maturities with expected outflows such as withdrawals, interest expenses on borrowings, shortfalls in remittances, and late loan payments.  

The auction is free of charge for you; you pay neither us nor the CBK to bid. On the other hand, the CBK pays us for introducing participants – all you need to do is include our agent number on your application form (or just use our attached application form). 

This 17-year bond (IFB1/2023/17) is tax-exempt. We (and the industry consensus) recommend you bid between 14% & 14.35% for the reason that you want to maximize your yield without the CBK rejecting your bid. 

This bond can be resold in the secondary market at your convenience. It goes without saying, it is advisable to hold it for at least 6 months until you receive your first coupon payment.


Bonds for the future inter-SACCO repo market:

In the coming inter-SACCO lending/repos market, bond ownership will be critical to accessing liquidity. The collateral needed for Repo deals will necessarily be government bonds, which are widely considered low-risk throughout the banking industry. What this means is that if a SACCO wants to borrow from another SACCO for its short-term liquidity needs such as working capital, it will need to provide bonds as collateral.  

In view of this coming repo market, SACCOs that do not hold government bonds should consider doing so as they will be an interest-earning reserve for future short-term liquidity.