Government bonds are financial tools that the government uses to raise funds. They are usually floated in the market regularly for investment. Hence, this article will focus on how to invest in Kenya government bonds.

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Due to the lucrative returns from these bonds, they have become a top choice for some investors. Every Kenyan has the opportunity to invest in bonds. However, the bond market remains dominated by large institutions with the majority of retail investors shying away.

How do the Government/Treasury bonds work?

Government bonds in Kenya are some of the most lucrative financial investment options in the market. They are issued monthly by the government through the central bank. In simple terms, investing in treasury bonds is loaning the government that later returns the funds with an interest.

Majority of government bonds investors are the financial institutions (banks, insurances), foreign investors, and wealthy individuals. The uptake of bonds by the average Kenyans remains low.

 This is because a majority of the Kenyans don’t understand the product and capital limits remain out of reach by the majority. In this article, I will help you understand the bonds investment process and its benefits.

Bond tenor

Government bonds are also known as treasury bonds are medium to long-term investment options. They run between 1 year to 30 years and have a fixed return rate. Fixed return rate investments allow predictability as the interest is fixed.

Normally, bonds are put on auction monthly through the Central Bank of Kenya (CBK). The minimum amount required to invest in government bonds is 100,000 Kenyan shillings.

Benefits of Investing in government bonds

Ø  Low Risk

Every investment carries a certain level of risk. However, investing in government has minimal risk in comparison to other investment options such as the stock and forex. This is because the government has the continuity element making it hard to default on its debt obligations.

Ø  High returns

Government bonds offer highly competitive returns to investors. In some cases, the returns can be as high as 12%. This is higher than most other investment options offer.

As an investor, your job is to ensure you take the assets that offer the best returns with minimal returns. This makes treasure bond among the top in this list. However, the interest rates depend on the market forces and could fluctuate depending on the issue.

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Ø  Regular and timely interest payment

The interest from the government bond investment is paid half-yearly. Hence, you receive the payment twice a year. This ensures there is a continuous steady flow of income to the investor and is key to cash flow management.

Consistency also brings predictability and helps in planning purposes. Upon maturity of the bond tenure, the principal amount is paid in full.

Ø  Availability

The auctioning of government bonds is done monthly. Hence, the investment opportunity existence Is guaranteed. Trading of bonds also happens on the securities market enabling you to cash in or purchase on the need to need basis

Ø  Tax exemption

Some bonds such as those meant to fund infrastructure projects normally receive the tax exemption. These are known as infrastructure bonds.

Tax exemption is a great incentive that ensures investors are making more returns in comparison to the normal bonds that attract taxation. Normally, infrastructure bonds are the most sought-after bonds. As an investor, you should keep yourself up to date to avoid missing their issue.

Ø  Collateral

The bond certificate can be used as collateral to access funding in the various financial institutions. This allows the holders to access credit without having to liquidate their investments.

Normally, the lender discounts the bond to a certain percentage and times the credit facility to its maturity. As an example, in case the bond tenure is 5 years, then the funding cannot exceed 5 years.

Ø  Rollover capability

Bondholders usually have the option of rolling over upon maturity. The process is simple and ensures continuity. To roll over, you need to fill in the necessary documents to facilitate contract renewal.  To ensure timely renewal, you should always initiate this process before maturity.

In case maturity happens before renewal; the bond is normally liquidated as per the existing contract.

How to invest in Kenyan government bonds

To invest in treasury bonds, there are various requirements you need to fulfill for eligibility. Below are some of the requirements for investing in treasury bonds.

  • A CDS Account

A CDS (Central Depository Account) is an account offered by the central bank of Kenya to facilitate investment in government bonds. It is also a requirement if you want to trade in other financial assets such as shares in the Nairobi Securities Exchange.

Opening a CDS account with the Central bank is free. However, you can also open it through authorized institutions such as brokers and investment banks at a fee. CDS account.

Please note that you need a valid Kenyan bank account to open a CDS account. This is where bond transactions happen. Upon maturity or during interest payment, the funds are moved from the CDS account to the personal bank account.

  • Capital

This is the number of funds you require to purchase the bond. The minimum requirement to invest in these bonds is 100,000 shillings. However, there is no maximum. The limit is determined by the bond value.

Bidding for the bond does not guarantee automatic acceptance due to factors such as over-subscription, especially for those bonds with a lot of demand such as the infrastructure bond.

Types of Government bonds

Government bonds are divided into three categories as per the below breakdown

  • Fixed coupon rates

These are bonds that have a fixed interest rate. The rates do not during the timeline of the bond. If a bond sells at 10%, then it will remain so until it matures.

  • Zero-Coupon bonds

These are bonds that sell at a discount and do not attract interest payments. In most instances, zero-coupon bonds are short-term.

  • Infrastructure bonds

Bonds are issued with the sole purpose of funding infrastructure projects. They are the most attractive bonds as they attract tax exemption.

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M-Akiba is the new type of government retail bond targeting low-income earners. These are people who have traditionally been left out of this market due to some limitations such as lack of awareness and high capital requirements.

This exclusion has driven the government of Kenya to launch a retail bond that Kenyans can access with little capital

Below are some characteristics of the M-Akiba retail bond

  • Its trading happens via the mobile phone using the existing mobile money platforms such as M-PESA and Airtel money.
  • Has a minimum bid amount is 3,000 shillings
  • Attracts a 10% interest rate
  • It is an infrastructure bond
  • It is tax-free.

One of the key advantages of M-Akiba is the low capital requirements. Kenyans can invest with as little as 3,000 shillings in comparison to the traditional bond that requires a minimum investment of 100,000 shillings.

Investment using the mobile phone has also made it easier and more efficient for those investors unable to visit the government offices or do manual processes such as opening a CDS account.

Another key benefit of M-AKIBA is that it also functions as a savings enabler. Being a developing country, Kenya has a low savings culture. Hence it was in the government’s interest to develop a product that would counter this. M-Akiba is the right product as it not only allows savings but also offers lucrative returns on them.

Though it is still new, its uptake has been successful. M-Akiba.

Challenges if Investing in the Government Bonds

  • Little awareness of the Product

There is little awareness of the product with a majority of Kenyans making the product exclusive to a minority of retail investors and large institutions. This limits inclusivity by ensuring its benefits only reach a few.

However, the government is striving to address this through innovation by launching alternatives such as the M-AKIBA.

  • Risk of default

Although it is rare for the government to default, it is also not impossible. There have been cases of struggling governments that default on their financial obligation. Default exposes investors to potential losses.

  • High capital requirements

Traditional investing in government bonds requires a minimum of 100,000 shillings. This amount is high limiting most of the low-income earners. A group that comprises the majority of Kenyans.

Although the government is striving to lower this threshold, these barriers are still dominant and could continue for a long time in the future.

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Conclusion on How to Invest in Kenya Government Bonds

The bond market remains an attractive investment option to the majority of financial investors. However, it is still out of reach to the majority of Kenyans. This is due to factors such as little awareness and limitations in capital requirements.

However, current innovations such as M-Akiba are expected to increase awareness and interest by retail investors. I believe the above explanation will give you some awareness on how to invest in Kenya government bonds.

The interest rates offered in this market are lucrative and competitive hence I suggest you give it a try.


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